Composability requires fungible collateral. A token locked on Ethereum cannot be used as margin on Solana without a bridge, creating liquidity silos and systemic risk. This fragmentation defeats the core promise of a unified financial system.
liquid-staking-and-the-restaking-revolution
Blog
Why Composability Demands Collateral That Works in Every Money Lego
The DeFi ecosystem is fragmenting. The next generation of dominant collateral won't be the asset with the highest yield, but the one that functions seamlessly across lending, derivatives, and restaking protocols. This is a first-principles analysis of the universal collateral thesis.
introduction
THE INTEROPERABILITY IMPERATIVE
Introduction
Fragmented collateral is the primary bottleneck preventing the seamless, trust-minimized composability promised by DeFi.
Native yield-bearing assets are the standard. Protocols like Aave and Compound mint interest-bearing tokens (aTokens, cTokens), but these are non-transferable across chains. This creates a paradox where the most desirable collateral is also the most isolated.
Bridged assets introduce new risks. Using LayerZero or Axelar to wrap assets creates custodial dependencies and dilutes the security of the original chain. The resulting synthetic token is a weaker, non-native financial primitive.
Evidence: Over $20B in TVL is locked in cross-chain bridges, representing capital that is simultaneously deployed and stranded, unable to natively interact with protocols on its destination chain.
key-trends
THE FRAGMENTATION TRAP
Executive Summary
The promise of DeFi composability is broken by siloed collateral, creating systemic risk and capital inefficiency across chains like Ethereum, Solana, and Avalanche.
01
The Problem: Stranded Capital Silos
Native staked assets like stETH or SOL are locked to their origin chain, creating $50B+ in non-composable value. This forces protocols to rely on risky, wrapped derivatives, fragmenting liquidity and security.
- Capital Inefficiency: Assets can't be used as collateral on other chains without introducing bridge risk.
- Security Fragmentation: Each wrapped asset creates a new attack surface, as seen with multichain bridge exploits.
- Yield Suppression: Staking yields are isolated, preventing use in cross-chain lending markets like Aave or Compound.
$50B+
Stranded TVL
10+
Bridge Risks
02
The Solution: Canonical, Programmable Collateral
A collateral primitive that is natively issued and verified across all major VMs (EVM, SVM, Move). This turns siloed assets into universal money legos, enabling true cross-chain composability.
- Native Verification: Collateral state is proven, not bridged, eliminating intermediary risk from layers like LayerZero or Wormhole.
- Single Debt Position: Users manage one collateralized debt position (CDP) that works across Ethereum, Solana, and Arbitrum simultaneously.
- Protocol Agnostic: Serves as base-layer money lego for DEXs (Uniswap, Jupiter), lenders (Aave, MarginFi), and perps (dYdX).
0
Bridge Trust
100%
Utilization
03
The Result: Hyper-Efficient Capital Networks
Unlocking canonical collateral reshapes DeFi architecture, moving from isolated pools to a unified global liquidity layer. This mirrors the evolution from isolated intents (UniswapX, CowSwap) to generalized solvers.
- Systemic Risk Reduction: Eliminates the bridge oracle as a single point of failure for $10B+ in derivative markets.
- Capital Velocity 10x: Enables flash loan-like efficiency for cross-chain leverage and arbitrage.
- New Primitives: Enables cross-chain money markets, unified margin accounts, and resilient stablecoin backstops.
10x
Capital Velocity
-90%
Slippage
thesis-statement
THE MONEY LEGO IMPERATIVE
The Universal Collateral Thesis
Interoperable DeFi requires collateral assets that maintain their utility and value across all smart contract environments.
Composability is non-negotiable. A DeFi protocol's value is its ability to integrate with others. Collateral locked in a silo, like a native staking derivative on a single L2, destroys this value. It cannot be used as margin on GMX, lent on Aave, or swapped via UniswapX.
Native yield is a liquidity trap. Protocols like Lido (stETH) and EigenLayer (LSTs) create yield-bearing assets, but their utility often ends at their origin chain. This fragments liquidity and creates systemic risk, as seen with wrapped asset de-pegs on bridges like LayerZero or Wormhole.
The standard is cross-chain fungibility. True universal collateral must be a single, canonical asset with identical behavior on Ethereum, Arbitrum, Avalanche, and Solana. The failure of multi-chain USDC pools versus the success of cross-chain native USDC demonstrates this. Wrapped assets are a scalability bottleneck.
Evidence: Over 60% of DeFi TVL is in bridged or wrapped assets, creating a $50B+ attack surface for bridge exploits. Protocols like Circle's CCTP and Chainlink's CCIP are building the primitive for canonical, cross-chain value transfer to solve this.
COMPOSABILITY SCORECARD
Collateral Fragmentation Matrix
Evaluates collateral assets by their ability to function as a universal base layer for DeFi money legos like Aave, Compound, MakerDAO, and Uniswap.
| Core Feature / Metric | Native ETH | Wrapped BTC (wBTC) | Liquid Staking Tokens (LSTs) | Omnichain LSTs (e.g., ezETH, weETH) |
|---|---|---|---|---|
Native DeFi Integration (Aave, Compound) | ||||
MakerDAO Collateral Type (DSR, Spark) | ||||
Cross-Chain Native Liquidity (LayerZero, Axelar) | ||||
Settlement Asset for Intents (UniswapX, CowSwap) | ||||
Average Collateral Efficiency (Loan-to-Value) | 82% | 70% | 75-80% | 78% |
Protocol Revenue Share (e.g., EigenLayer, Lido) | ||||
Settlement Finality for Bridges (Across, Stargate) |
deep-dive
THE INFRASTRUCTURE
The Three Pillars of Universal Collateral
Interoperable collateral requires standardization, liquidity, and programmability to function as a true cross-chain primitive.
Standardized Asset Representation is the foundational layer. Without a canonical format like ERC-20 or ERC-4626, assets fragment across chains, creating liquidity silos. This is why wrapped assets (wBTC) and synthetic bridges (Stargate) exist, but they introduce custodial or trust assumptions.
Deep, Composable Liquidity determines utility. An asset locked in a single lending market like Aave is inert. Universal collateral must be simultaneously usable as margin on dYdX, collateral for a MakerDAO vault, and liquidity in a Uniswap V3 pool without serial unlocking.
Programmable State Transfers enable complex workflows. Moving collateral should trigger automated actions via smart contracts, not manual approvals. This is the core promise of cross-chain intent architectures like LayerZero's Omnichain Fungible Tokens (OFT) and Axelar's General Message Passing (GMP).
Evidence: The $30B+ in Total Value Locked (TVL) across wrapped Bitcoin variants demonstrates demand, but their fragmentation across wBTC, renBTC, and hBTC proves the standardization pillar is unresolved.
protocol-spotlight
COMPOSABILITY IN ACTION
Case Study: The stETH Flywheel
The stETH wrapper transformed a single yield-bearing asset into the foundational collateral layer for DeFi, demonstrating that money legos only scale if they are universally accepted.
01
The Problem: Illiquid Staking Derivatives
Pre-stETH, staked ETH was a dead asset. It couldn't be used as collateral, traded, or composed into new products. This locked up ~$20B+ in potential capital efficiency and stifled innovation on the nascent Ethereum L2 ecosystem.
- Capital Lockup: Stakers faced a binary choice: security (staking) or utility (DeFi).
- Protocol Risk: Early derivatives like xETH created fragmented, risky liquidity pools.
0%
DeFi Utility
$20B+
Capital Locked
02
The Solution: The Rebase-Pegged Wrapper
Lido's stETH introduced a daily rebasing token that tracks staking rewards, making yield programmatically accessible. Its canonical status and Curve pool created a deep, stable liquidity foundation.
- Universal Balance Sheet: Every protocol (Aave, Maker, Compound) could integrate a single, predictable asset.
- Trust Minimization: Non-custodial design and on-chain verifiability made it the default "risk-free" staking asset.
1:1
ETH Peg
$30B+
Peak TVL
03
The Flywheel: Aave -> Curve -> Leverage Loop
Composability ignited a self-reinforcing cycle. stETH's deep Curve liquidity allowed Aave to list it as collateral, which enabled leveraged staking loops that drove more demand back to Curve and Lido.
- Capital Amplification: Users could borrow ETH against stETH, re-stake, and repeat.
- Ecosystem Growth: This loop became a primary yield source, attracting billions in TVL and solidifying Ethereum's DeFi dominance post-Merge.
5x+
Effective Yield
>60%
of stETH on Aave
04
The Lesson: Canonical Beats Fragmented
The stETH flywheel succeeded where fragmented bridged assets (wBTC, multichain USDC) struggle. A single, verifiable source of truth reduces systemic risk and integration overhead for every downstream protocol like Uniswap, Balancer, and Maker.
- Network Effect: One dominant collateral standard (stETH) is more valuable than ten competing ones.
- Infrastructure Primitive: It became a required integration for any lending or derivatives platform, proving that composability demands consensus.
1
Canonical Standard
100+
Integrated Protocols
counter-argument
THE COMPOSABILITY IMPERATIVE
The Centralization Counterargument
Composability is not a feature but a non-negotiable requirement for collateral, forcing a choice between universal liquidity and fragmented, centralized silos.
Composability is non-negotiable. A DeFi asset's value is its ability to function as universal money lego. Collateral that only works on its native chain is a dead-end asset, creating liquidity silos that break the core promise of decentralized finance.
Native assets create fragmentation. Wrapped assets like wBTC or cross-chain bridges like LayerZero/Stargate introduce custodial or trust assumptions, adding systemic risk. This fragmentation forces protocols like Aave or Compound to manage multiple, non-fungible collateral pools, increasing complexity and attack surfaces.
The evidence is in TVL migration. Chains with dominant, non-portable native assets (e.g., Solana's SOL) see their DeFi TVL trapped. In contrast, Ethereum's canonical ETH flows seamlessly via rollups like Arbitrum and Optimism, demonstrating that liquidity follows the most composable asset.
The counterargument fails on first principles. Proposing a centralized collateral manager for 'efficiency' ignores that trust minimization is the product. The entire system's security reduces to the weakest link, which in a fragmented model is always the bridge or wrapper custodian.
takeaways
COMPOSABILITY PRIMER
Key Takeaways for Builders and Investors
The next generation of DeFi protocols will be judged by the quality of their collateral, not just their yield. Universal collateral is the keystone for permissionless composability.
01
The Problem of Fragmented Liquidity
Every new chain or L2 fragments collateral into isolated pools, creating systemic inefficiency. This is the core scaling bottleneck.
- $100B+ in TVL is trapped in siloed ecosystems.
- ~50% of a protocol's dev time is spent on multi-chain integrations.
- UniswapX, CowSwap rely on solvers to navigate this fragmentation at high cost.
$100B+
Trapped TVL
~50%
Dev Time Cost
02
The Solution: Omnichain Native Assets
Collateral must be natively issued and settled across all major execution layers without wrapped derivatives. This is the standard set by Ethereum and now required for L2s.
- Enables single liquidity pool to serve Uniswap, Aave, and GMX on any chain.
- Removes bridge risk, the #1 exploit vector draining ~$2.5B since 2022.
- LayerZero, Circle's CCTP, and Chainlink CCIP are the infrastructure enablers.
~$2.5B
Bridge Exploits
1 Pool
Multi-Protocol Use
03
The Investor Lens: Protocol Cash Flow vs. Token Speculation
Sustainable value accrual shifts from token mercenaries to fees generated by indispensable collateral utility.
- Protocols like MakerDAO and Aave generate real yield from asset-agnostic lending markets.
- Valuation multiples will compress for apps that don't control a core collateral primitive.
- The moat is liquidity utility, not temporary incentives.
100M+
Daily Fees (Top DApps)
10x
Utility Premium
04
The Builder Mandate: Abstract the Chain
Your users don't care about chains. Your smart contracts must not care either. Design for asset portability from day one.
- Use generalized messaging (LayerZero, Wormhole) and token standards (ERC-7683 for intents).
- Across Protocol demonstrates this with unified liquidity for arbitrary cross-chain actions.
- Future-proofs against the next L2 or app-chain explosion.
<2s
Target Finality
ERC-7683
Intent Standard
05
The Security Paradox: More Chains, Less Trust
Adding chains multiplicatively increases attack surface. The only mitigation is minimizing trust assumptions in the asset layer.
- Native bridging (e.g., Optimism's OP Stack) is superior to third-party validator sets.
- Shared sequencers (e.g., Espresso, Astria) and EigenLayer AVS's can provide economic security.
- Audit the full stack, not just your Solidity code.
10x
Attack Surface
AVS
Security Layer
06
The Endgame: Intents and Autonomous Agents
Fully composable collateral unlocks intent-based architectures where users declare outcomes, not transactions.
- UniswapX, 1inch Fusion are early examples. The solver market is $100M+.
- Agents require guaranteed, portable asset settlement across any environment.
- The winning collateral standard will be the one that Anoma, SUAVE, and Cosmos IBC can all use natively.
$100M+
Solver Market
IBC
Cosmos Standard
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