web3’s composability will decompose companies

Recently, many people from the Solana ecosystem started to prefix their twitter name with Composability. What is happening?

On ethereum-like blockchains, any smart contract can call any other smart contract. E.g. a decentralized exchange calls a token contract, a lending protocol calls a DEX, a flash loan calls a lending protocol … the possibilities are endless.

It’s not an exaggeration to say that composability is one, if not THE killer feature of blockchains.

Composability is the compound interest of software

That means, that every solution build on blockchain — and the associated added value — can be endlessly duplicated or multiplied.

Chris Dixon, who coined the term, originally related it to software in general, but it applies even more to smart contracts.

Smart contracts introduce permissionless composability

The call stack I mentioned at the beginning — a flash loan calls a lending protocoll calls a dex calls a token contract — does not need anybody to approve it. It works out of the box, if the smart contracts have a permissionless design. And there is a huge incentive to design your smart contracts permissionless — because it removes any limits on the usage of your stuff — and this is why it has become the standard in DeFi.

Composability will decompose companies

The call stack I mentioned at the beginning would have been encapsulated in a company in traditional finance, typically in a bank or an investment fund.

In fact, the notion of a “firm” was invented precisely to minimize the transaction costs of complex operations. Only firms and corporations had the ability to create the scale effects necessary to distribute high fix costs on as many transactions as possible.

Now, with the advent of blockchains, smart contracts and DAOs, the dawn of companies as we know them, has begun.

Blockchains and blockchain protocols reduce margin cost and therefore the need to bundle complex transactions via the legal fiction of companies.

Companies will eventually decompose into the atomic transactions from which they were originally built.

In the next essay, we will discuss how this applies to insurance. Stay tuned!

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