DeFi Composability: Advanced Money Legos Strategies
DeFi's superpower is composability—the ability to stack protocols like building blocks. Learn how to combine staking, lending, yield tokenization, and restaking to create strategies that maximize capital efficiency and amplify returns.
- Composability lets you stack protocols to earn multiple yields on the same capital.
- Common stacks: LST + Lending, Restaking + LRT, Pendle yield tokenization.
- Leverage loops amplify yields but also amplify liquidation risk.
- Each additional protocol layer adds smart contract risk—understand the tradeoffs.
- Use Thrive to track complex multi-protocol positions and monitor health factors.
What is DeFi Composability?
Composability is DeFi's defining characteristic—the ability for smart contracts to interact with each other permissionlessly. When you deposit ETH into Lido, you get stETH. That stETH can be deposited into Aave. The aToken from Aave can be used elsewhere. Each protocol builds on the last.
This is impossible in traditional finance where each institution is siloed. Banks don't automatically connect with brokerages which don't connect with insurance companies. In DeFi, everything connects by default because it's all on the same blockchain.
Composability in Action
Single transaction, multiple protocols:
Each arrow represents a composable interaction, all executable in a single transaction via smart contract routing.
The power of composability is that developers can build new financial products by combining existing ones. Users can create custom strategies by stacking protocols. Innovation compounds as each new protocol adds possibilities for all others.
Understanding Money Legos
Money legos is the popular term for DeFi's composable building blocks. Like Lego pieces that snap together in countless combinations, DeFi protocols create interoperable financial primitives that can be combined.
Staking/LSTs
Lido, Rocket Pool, Jito
Convert ETH/SOL to yield-bearing tokens usable elsewhere
Lending
Aave, Compound, Kamino
Deposit to earn yield or borrow against collateral
Yield Tokenization
Pendle, Spectra
Split yield-bearing assets into tradeable components
Restaking
EigenLayer, Symbiotic
Reuse staked assets to secure additional networks
The key insight is that each lego produces an output that can become another lego's input. stETH from Lido is the input for Aave. aTokens from Aave can be inputs for Pendle. This chain of composable interactions is what makes complex DeFi strategies possible.
Yield Stacking Strategies
Yield stacking means earning multiple yield streams from the same capital. Instead of choosing between staking OR lending, composability lets you do both—and more.
Basic Stack: LST + Lending
Intermediate Stack: LST + Restaking + LRT
Advanced Stack: LST + Pendle + Lending
Leverage Loops Explained
Leverage loops (also called recursive borrowing) are the most aggressive composability strategy. You deposit an asset as collateral, borrow against it, deposit the borrowed asset, and repeat—amplifying your exposure and yield.
LST Leverage Loop Example
Starting capital: $10,000 ETH
Result: ~$25,000-30,000 effective stETH exposure on $10,000 capital
Yield amplified 2.5-3x, but liquidation risk if stETH depegs
Leverage loops are powerful but dangerous. If stETH depegs from ETH (as happened briefly in 2022), your collateral loses value faster than your debt, triggering liquidation. The more loops, the smaller the price move required to liquidate you.
For deep dives on leverage, see our DeFi Leverage Strategies Guide.
Pendle: Yield Tokenization
Pendle is a yield tokenization protocol that splits yield-bearing assets into two components: Principal Tokens (PT) and Yield Tokens (YT). This creates entirely new DeFi strategies around fixed yields and yield speculation.
Principal Token (PT)
Represents the principal redeemable at maturity. Buy PT at a discount to lock in fixed yield. At expiry, 1 PT = 1 underlying asset.
Yield Token (YT)
Represents claim on yield until maturity. Buy YT to speculate on variable rates. Higher rates = more valuable YT.
Pendle Strategies
- • Fixed yield: Buy PT, hold to maturity for guaranteed return
- • Yield speculation: Buy YT betting rates will be higher than implied
- • Yield hedging: Sell YT to lock in current rates, protect against drops
- • LP provision: Provide liquidity to PT/underlying pools for swap fees
Pendle's real innovation is making yield tradeable. Before Pendle, if you thought staking yields would increase, you could only stake more. Now you can buy YT and gain leveraged exposure to yield changes. This opens strategies impossible elsewhere in DeFi.
Restaking & LRTs
Restaking via EigenLayer represents the latest evolution in composable yield. It allows already-staked ETH (via LSTs) to secure additional networks called AVSs (Actively Validated Services), earning extra rewards on the same capital.
The Restaking Stack
Each layer in the restaking stack adds potential yield but also additional risk: smart contract risk at every layer, slashing risk from AVSs, and complexity in tracking positions. The points meta has made this space highly competitive.
For details on restaking, see our Restaking & EigenLayer Complete Guide.
Composability Risks
Composability is DeFi's superpower—but it's also its greatest source of systemic risk. Each additional protocol layer multiplies risk exposure.
Cascading Smart Contract Risk
If you stack 4 protocols, a vulnerability in ANY of them can drain your funds. Risk multiplies, not adds. That "safe" strategy using 5 audited protocols has 5x the attack surface of using one.
Liquidation Cascades
Leverage loops create fragile positions. A 5% price move might not liquidate a single position, but in a loop, it can trigger a cascade. Each liquidation pushes price further, triggering more liquidations.
Oracle Dependency
Complex positions depend on multiple oracles working correctly. An oracle failure or manipulation can cause incorrect liquidations or enable exploits across multiple protocols simultaneously.
Gas & Timing Risk
Complex strategies require complex transactions. During market stress (when you most need to act), gas prices spike and transactions may fail or take too long, leaving you unable to manage positions.
The rule of thumb: understand every protocol in your stack deeply before using it. If you can't explain how each component works and what could go wrong, you're flying blind. Start simple and add complexity gradually.
Interactive Strategy Builder
Explore different composability strategies and see how yield stacks up across protocol combinations:
Strategy Flow
Risk Level: Medium
Multiple protocol interactions increase smart contract risk. Monitor collateral ratios.