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Bear market blues and composability

Bear markets are a funny thing. It's completely expected, as everyone deep down knows crypto is an exponential asset class that goes x100 one year and -90% the next. Yet somehow, it still deeply affects all of us. The doubts creep in. Was it all a fad at best or a scam at worst, did I waste years of my life on something that was never going to amount to anything?

Some people manage to see the bigger picture and try to calm people down. They know in the real world it's about an unsustainable monetary policy, banking the unbanked, digitalisation, decentralisation and people of the world coming together to build a new digital economy. And this will take time to play out. They remain as optimistic as they were in 2021 and see that fundamentally, nothing has changed. Chances are they will be shown to be right again whenever the tide of prices turns. Others try to abuse the situation and damage the reputation or value of protocols by sowing uncertainty and doubt at what is the most fertile time for it. The average spectator gets swung from one side to the other, feeling at times euphoric and at times completely resentful.

One thing that has taken me for surprise a bit this year is that the uncertainty and doubt has come from a contingent of people that would formerly have been seen as being within the Cardano community, which has made its impact somewhat more significant. These are people running stake pools, producing research, creating dapps that suddenly appear to have vocally turned against it. Likely they came in at peak Cardano hype and feel somewhat wronged by price action since then, so they have turned their attention to protocols they think are more likely to give them a 100x in the near future. Ostentatiously in an organic way, but possibly given a helping hand by rival protocols that wouldn't mind a slice of the Cardano pie, frustrated at how the mood in the community has remained on average quite upbeat.

So we've seen a bit of FUD, which I interpret as "criticism that makes you feel like you've been lied to about a protocol, but really resting on constructions, assumptions and misconceptions". The latest is around supposed lack of composability in Cardano. I want to place this in its proper context first. Resulting out of the cypherpunk movement in the 1980s and 90s, with Bitcoin scarce digital money was created. This was timely, as it was around the 2008 GFC when governments embarked on the long and never-ending road of the fastened eternal debasement of fiat money. The birth of, and persistent greatness of Bitcoin was a direct result of solving the Byzantine Generals Problem. The cypherpunk movement itself wasn't just rooted in technology, but represented a very keen understanding of where digital surveillance and loss of privacy would eventually bring the world (from their manifesto: "People must come and together deploy these systems for the common good."). The people who advocate a digital economy effectively stand on the shoulders of these giants and see the social impact of crypto as far outweighing the purely financial.

But after Bitcoin, technologists and early stage investors took over and created Ethereum: programmable money. From programmable money came DeFi and the technologists were in awe of what they had been able to create and what else this now facilitated. Crypto had to be all about DeFi now. They created ERC20 tokens, decentralised exchanges, yield farming, lending and best of all, all of these layers of code could be put on top of each other like you would in any other code base.

This facilitated creating increasingly complex financial transactions, stacked on top of each other like monetary legos; composability. With one click of a button you could now deposit an asset in one protocol, have it lent out in another protocol and become available as collateral in your wallet for further speculation in yet another one. Flash loans became possible. Yield optimisers become possible. Pretty neat, and from a technology standpoint this seemed both innovative and logical (in what marketing types will call "Web2" you may log in to websites with Facebook, or use your TV and internet connection to watch Netflix; things are composable, now in "Web3" this is turbo charged). If you ever happen to search for the term, you will find hundreds of pages lauding it as the biggest thing in crypto. They started to believe their own hype and it became a self-perpetuating goal.

So does Cardano have composability? Basically yes. We can deposit 100k ADA into Indigo protocol and earn Cardano staking yield, mint 20k iUSD and deposit that into Lenfi to P2P loan to someone and earn more yield, take that bond and use it as collateral in Liqwid to earn yet more yield (if they were to enable that), then borrow Djed against it, which we... You get the point. Pretty composable would you not say? In the most literal sense of the word. Cardano DeFi makes heavy use of NFTs which are native tokens, which also means that the same composability could naturally extend to any layer 2s, sidechains or scaling solutions, where those same tokens could live and represent the same, something which will be harder to achieve in the EVM and account-based world.

What's more, the natural layering of yield by allowing smart contracts to remain staked, Cardano yield serving as the risk-free rate, and on top of that the ability to build yield from lowest to highest risk on Liqwid, Lenfi, Optim/Danogo and so on is intuitive and in accordance with financial orthodoxy for anyone with an understanding of financial markets. This is unlike Ethereum, where you run uncompensated counterparty and market risk on staking and the layers of yield on top don't adequately compensate for risks taken either.

So what exactly is the criticism? The idea is that because Cardano has batchers in for instance AMM decentralised exchanges and pooled lending, and each wallet activity has to be signed off on by the end users, it is not easy for one protocol to talk to the other. You can't click a button on Indigo and have it in a single step mint that iUSD, send it to Lenfi, deposit in a bond and send the collateral token into Liqwid, you would have to do that manually. You can probably do one step, but steps 2 and 3 would be tricky. I have two quick thoughts about this. First, we probably want to distinguish financial composability vs technical composability, and second you probably want to think of technical composability in layers. In the former sense, as explained above, Cardano is perfectly composable and more so than any other crypto protocol I have seen. In the technical sense as well, but there are some bottle necks. A dev will have a harder time interacting with all the batchers and getting the sequence of above transactions done. There is greater reliance on off-chain code. Moreover, there have recently been some bad actors involved in batching. This has led to some outsized criticism.

But is this all a bad thing? What is the purpose of the above loop, who is it suitable and unsuitable for, what risks does a person take doing it and are they compensated for it? I would argue that Cardano is perfectly composable both on the L1 and across any scaling solutions in the technical sense. It is arguably more suitable for P2P DeFi as pooled solutions lead to currently less aesthetically pleasing batcher solutions. However these are still in the process of being optimised, and proposals exist for creating fully decentralised versions of them. If the criticism is that composability is less perfect because one contract cannot always kick off another 3 different ones, particularly if there are batchers in between, I can accept that but would raise that 1) this reduces transparency for the end user and is reminiscent of the worst of what happens in tradfi, 2) if a contract touches on 3 protocols without the end user possibly knowing this, they are usually not getting compensated for that risk (each one of them could get hacked any moment), 3) the assumption that everyone is OK with this newly introduced source of risk and lack of transparency is extremely strange to me.

I'll finish up here but really my score card here is that Cardano does better at financial composability (sources of risk and return built on top of each other like monetary legos), and is only worse at technical composability (protocols built on top of each other like monetary legos) if we assume all protocols need to be easily able to kick off a bunch of transactions in sequential fashion. As always, Cardano finds the middle ground between the most conservative thing in crypto (Bitcoin) and the most reckless (VC funded DeFi). I, like I assume many others, am perfectly fine with that. DeFi is but one aspect of a far larger thing that we are building here, it hasn't exactly delivered a perfect track record over the last years, and if Cardano does it somewhat differently? So be it.