On Ethereum it is now possible to combine coins (tokens) as if they were Lego bricks, to create new coins (new tokens) with additional features. This is known as the “Ethereum Money Lego”.
The fact is that to create a token on Ethereum smart contracts are used, which in turn can be made using other existing ones. This allows using tokens as if they were Lego bricks and building new smart contracts on them to generate new tokens.
Actually, from a strictly financial point of view, it’s not something completely new, since derivatives have existed in finance for a long time: in fact, financial derivatives are in some ways very similar to tokens built on other tokens, but there is a difference: tokens can be decentralized and built on other decentralized tokens.
Ethereum and Lego
For this reason, the Ethereum blockchain is becoming a sort of sandbox to experiment with new ways of using smart contracts, for example, to connect different dApps.
This activity has been called “Ethereum Money Lego” and one of its examples is the so-called collateral swap, presented a few days ago by David Truong on Twitter.
I created the first 'Collateral Swap': Swapping the underlying collateral in a @MakerDAO Vault/CDP with another asset, using @AaveAave 's flash loan feature and @UniswapExchange for collateral conversion, all in one transaction w/o liquidation. 😇#DeFi #composability #ethereum
— David Truong (@daveytea) February 4, 2020
This swap is based on 3 existing DeFi platforms: Maker, Aave and Uniswap. It consists of a single transaction that allows a collateral swap of a Maker Vault/CDP with another asset using a flash loan from Aave and Uniswap for the conversion of the collateral itself.
In this way, for example, it is possible to replace ETH with BAT or vice versa within a Maker Vault using a single transaction, and without the need to repay the loan or lose the DAI positions.
This is still an experimental solution, but given that a similar transaction previously required borrowers to pay off the entire DAI debt, close the deposit, exchange the underlying tokens and then open a new deposit with the collateral, the potential is very clear.
Therefore, thanks to Ethereum Money Lego, it is not only possible to create new types of tokens, but it is also possible to create new simplified transactions by combining together operations that are currently only possible on different platforms.