Composable Finance — a revolution in the DeFi space?
We bring you another in-depth review of an very interesting project that has been a little bit under the radar so far — the Composable Finance and its canary network Picasso. It’s one of the most ambitious projects in the ecosystem and it strives to connect multiple blockchains and their L2 networks into one giant liquidity hub.
We will look into various parts of the network that together comprise its magic
- Mosaic — L2 bridge between projects like Avalanche, Arbitrum or Fantom
- Mural — NFT bridge
- XCVM — a smart router for DeFi users
- Angular Finance — the future of lending on Polkadot
- Whirpool Cash — privacy & yield farming blend together
- Innovative crowdloan approach
But first of all, let’s explain the current status of L2 scaling solutions and how Composable is solving the problems they are currently facing.
Wait, what exactly is a L2 network?
Second layer solutions are starting to take Ethereum world by storm and there is a simple reason for that. The lack of scalability and high transaction fees on the base layer — Ethereum network itself. L2 networks run on top of the base layer (in a similar way to what is Lightning to Bitcoin) and allows for higher transaction throughput (with much lower fees) by using various techniques.
There are currently two main solutions being employed — side chains and rollups.
Side chains are ran next to the main network and thus they are separate blockchains with their own security guaranteed by some form of PoS. Side chain with the biggest traction is currently Polygon (formerly Matic) that can scale up to ~60,000 TPS. This is obviously a huge performance gain and it explains why it’s more and more popular between Ethereum users.
Rollups are tied to the security of the Ethereum (much like Lightning) and they are basically transaction aggregators that allows its users to transact freely (for minimal fees) and only go to the main chain for settlement (where you pay standard ETH gas fee). The advantage of rollups is that they don’t need a separate blockchain and their security is derived from the Ethereum itself.
There are two competing solutions in the space — Optimistic Rollups and zkRollups. Optimistic Rollups are represented with networks like Arbitrum and an example of a zkRollups is zkSync.
All of these projects give users freedom to use their favorite Ethereum applications and tokens (be it Uniswap, Aave or DAI) for minimal fees which is certainly great. However, all these networks are currently separated and you cannot simply go from Arbitrum to Polygon unless you use Ethereum network itself for the transfer and pay an exorbitant fee.
This problem is manifested further in the scattered liquidity — for example we now have instances of Uniswap deployed across various L2 networks and each instance require its own liquidity pools. This leads to the poor user experience since traders are suffering from a higher slippage.
As a final note, we can see that not only blockchains are adopting sharding technology (be it Ethereum 2.0, NEAR or Polkadot itself), decentralized applications themselves are doing the same. That’s why we see multiple instances of Uniswap, SushiSwap and others deployed on multiple chains and layers while each of them still having its liquidity separated and thus fragmenting the entire crypto space.
Enter new era of finance
And this finally bring us to the main feature of Composable Finance — interconnecting all these networks and allow liquidity to flow freely between them. The solution for this problem is called Mosaic and it actually offers even more than simple bridge between the L2 networks.
Mosaic currently connects following EVM-compatible L2 networks — Arbitrum, Polygon, Avalanche, Moonriver, Fantom, Cosmos and zkSync. Just this list alone is fairly impressive but there’s more.
Liquidity providers can now move their LP positions between these chains as well! Imagine you are a yield farmer (and maybe you are :-) ) — wouldn’t it be great to move your entire position from SushiSwap deployed on the Arbitrum to the SushiSwap on the Moonriver with a single click because Moonriver version offers a higher yield now? This is precisely what you can do with Mosaic! Also, Mosaic has a dynamic fee system allowing even cheaper transfers.
In a simple terms, Mosaic will allow DeFi users to easily move their positions between various L2 networks so they can further optimize their yield farming strategies and provide liquidity wherever they expect more profit.
Imagine you have bough a NFT on the Ethereum network and you have found a rich buyer on the Avalanche — currently there’s no way how you could transfer this NFT to the Avalanche and sell it on its native marketplace! This is exactly what’s Mural is solving — and it will be even more important when the GameFi sector fully blossoms. People will be buying various game assets in a form NFTs and they will be able to re-use them or sell them on other chains thanks to the Mural!
Original NFT will be locked on the originating chain and new one with exact same properties and metadata will be created on the receiving chain. And not only that, you NFT will be backed up forever with the help of Aleph, the decentralized storage that can restore your NFT in case anything goes wrong during the transfer.
Users of lending protocols such as Aave know that there are multitude of risks when lending their tokens. One of them is that they are usually exposed to the risk of the entire platform (and volatility of its native token).
Angular allows for creation of totally isolated lending pairs which exposes you to the risk of only the pair itself. Further than that, anyone on the Kusama/Polkadot platform will be able to create its own lending pairs which will only boost the flexibility of the entire ecosystem.
And lastly, this project is developed together with guys from HydraDX/Basilisk and will be used on their Basilisk platform as well.
First, we have to introduce Tornado Cash, a protocol that allows Ethereum users to send private transactions in the network. It works on the principle of gathering multiple transactions, mixing their inputs and thus anonymizing the original sender.
The caveat here is that you should wait at least 24 hours or even more in order to achieve maximum anonymity and your funds are not doing anything in this time. So here comes Whirpool Cash to the rescue! When you wait for mixing your transaction, Whirpool can put them into works with yield farming on any L2 network and generate you an additional profit in the meanwhile! And not just that, you will be able to anonymize any ERC-20 token transaction from any L2 chain which is a huge privacy improvement over current solutions that support ETH transfers only.
Also, Whirpool and Angular are only examples of projects that are currently being developed on top of the Picasso & Composable. There will be more to come and they will all provide great value to the entire Dotsama ecosystem!
Picasso & Composable Finance
Now, when we have laid out the basics, let’s have a look at how all these pieces connects together and how Composable puts them in work for the greater benefit of its users.
Picasso is currently deployed on Kusama, meaning it’s a canary network for the Composable Finance. In spite of that, there will be differences between the two. Picasso will include Mosaic, Mural and all aforementioned features allowing its users to easily transfer their liquidity. However, the real magic will happen on the Polkadot, more specifically on the Composable Finance parachain, where the XCVM will be deployed.
While Picasso and Mosaic represents the infrastructure layer that provides technology foundation of the Composable, XCVM represents a routing layer. It will be a virtual machine capable of running Rust-based smart contracts that can take advantage of the accessibility of all L2 layers.
Imagine you are looking for a cheapest loan in a DAI stablecoin — there will be a smart contract on XCVM that will do the job for you and create debt position on the most suitable L2 network or project. You can have a smart contract that will be able to automatically move your LP positions across all networks based on the performance of various pairs. Or, you can write a smart contract that will arbitrage assets between various L2s.
XCVM will be the “smart” layer, allowing usage of the smart contracts suited for the multi-chain and multi-app use cases. It will also handle all the heavy lifting connected with calculating fees or finding the best (and cheapest) route to the other chains.
As you can see, Picasso will be the parachain containing all the necessary low-level primitives for actually being able to transact on the L2 networks. Composable will include the XCVM which makes use of Picasso and thus creating a great synergy between these two parachains — one of the best we have seen in the ecosystem.
Therefore, Composable Finance parachain will allow development of smart decentralized applications that can take advantage of any L2 network and can benefit from free movement of assets between them.
SDK stands for Software Development Kit which means that any 3rd party will be able to integrate with Composable and use all the features it offers. So, for instance, anyone can create a dApp that will use Composable under the hoods in order to transfer liquidity from one L2 network to another.
Having an SDK really helps with the adoption of the project and allows anyone to build applications on top of the Composable’s features.
Each parachain has its own token, one is called PICA and the second one is LAYR. There is an interesting relationship between the two so let’s discuss PICA first.
- total supply is 10,000,000,000
- voting about which features (pallets) should team develop on Picasso
- voting on spending LAYR tokens from the treasury
- LAYR tokens holders will be able to claim PICA as well
- financing of projects that will deploy on Picasso parachain
- total supply is 100,000,000
- can be staked and get fee discount as a reward
- staking will work on multitude node types — collators, oracles or routing providers
- provide funding for development of Picasso
- LAYR will finance all activities happening on the Ethereum (development of smart contracts for example)
While Picasso already won a parachain slot on Kusama in the 3rd batch of auctions with 115,000 KSM crowdloaned, Composable Finance will compete for the slot in the upcoming 2nd batch on Polkadot, beginning at the 23/12/2021.
Current reward is 0.48 LAYR per DOT while distributing 12,000,000 out of the 100m total supply. There are also following bonuses prepared
- 5% for contribution within the first 24 hours
- 5% for the Picasso crowdloan contributors
- 10% for contribution within the first 3 days
Another interesting fact is that you contribute not only with DOT tokens but also by using various stablecoins from the Ethereum ecosystem. This can really help Composable in the crowdloan since not everybody wants to buy DOT in order to just contribute into the crowdloan.
Additionally, Composably chose to start gathering funds from community a couple of months ago using their Parachain Vault Strategy allowing to buy DOTs with rewards from the yield farming across various L2 networks.
We also have a referral for the Composable crowdloan so feel free to use it if you would like to support our work.
As you can see, Composable is a really ambitious project that adds a great value not only to the Dotsama ecosystem but to the all Ethereum 2nd layers as well. It offers functionality that is currently desperately needed by all DeFi users and it will help to consolidate the scattered liquidity of decentralized applications across the various L2 platforms which in turn leads to the better user experience for all crypto enthusiast.
We are really excited about the Composable Finance and we think this is one of the projects that serves as a great example of what can be achieved with Polkadot and how it can serve the greater good of the entire crypto space by interconnecting separated, siloed solutions to one another.
With 2nd batch of auctions on Polkadot behind our doors, we can only recommend to have a closed look to the Composable and support the project in the crowdloan if you recognize its potential like we do!
If you like this article, consider supporting us by nominating your tokens to our Kusama or Polkadot validator going by the POLKADOTTERS name.