Measuring Asset Composability as a Proxy for DeFi Integration

TL;DR

This paper investigates how asset composability in DeFi on Ethereum, through transaction analysis of derivatives, indicates levels of financial integration and potential systemic risks within the network.

Contribution

It introduces a novel metric for measuring asset composability as a proxy for DeFi integration and analyzes extensive transaction data to reveal composability trends.

Findings

High levels of asset composability observed in Ethereum transactions

Sequential derivative compositions suggest increasing financial integration

Potential systemic risks identified from composability patterns

Abstract

Decentralized financial (DeFi) applications on the Ethereum blockchain are highly interoperable because they share a single state in a deterministic computational environment. Stakeholders can deposit claims on assets, referred to as 'liquidity shares', across applications producing effects equivalent to rehypothecation in traditional financial systems. We seek to understand the degree to which this practice may contribute to financial integration on Ethereum by examining transactions in 'composed' derivatives for the assets DAI, USDC, USDT, ETH and tokenized BTC for the full set of 344.8 million Ethereum transactions computed in 2020. We identify a salient trend for 'composing' assets in multiple sequential generations of derivatives and comment on potential systemic implications for the Ethereum network.