The DeFi space is arguably one of the busiest sectors of the blockchain industry. Many experts agree that the competition in this sector is enormous. Each project tries to outdo the other in providing top-notch services that would drive growth within its community. As a result, DeFi platforms often announce upgrades or new additions to their network.
Yearn Finance recently tweeted that it would welcome the ERC-4626 token standard into its community. Token standards are a big deal for DeFi protocols. Token standards are frequently included in blockchains that support smart contracts. They guide users on how to create, issue, and roll out new tokens based on their underlying blockchain. The ERC-4626 token happens to be one of the newest to emerge on the scene. However, is it worth the attention?
You’ve heard of ERC-20s, ERC-721s and ERC-1155s
Soon you shall know ERC-4626s
The Tokenized Vault Standard (ERC-4626) is final. And the Great Vault Standardization begins now
tl;dr 👇
— yearn (@yearnfi) April 5, 2022
What Is the ERC-4626 Token About?
Different token standards have different functions in the crypto space. For example, the ERC-20 is mostly for stablecoins and governance tokens. In addition, the BSC-20 is for the Binance Chain’s compatible coin with ERC-20. And the ERC-721 and 1155 are for NFTs. Almost all tokens people interact with today adhere to the ERC-20 standard. Users are simply not aware of this because “ERC-20” is the generic term for tokens that can be moved around on Ethereum. The ERC-4626 is a simple concept. But the standard will bring about significant changes.
ERC-4626 is a new Ethereum token standard that could solve a long-standing problem in the DeFi world: the mishmash of design types for tokens that print money. The ERC-4626 will provide a new pattern for projects like Aave or Yearn to develop assets that incentivize users.
ERC-4626 is the tokenized vault standard. By vaulting, we mean the practice of locking in a token on one chain to have it minted into a token usable on another chain. So, the newly minted token, known as a wrapped X, would then be interoperable with other chains. The ERC-4626 will usher in a new sense of security for users locking their coins in smart contracts.
ERC-4626 Will Change DeFi
Prior to the emergence of ERC-4626, DeFi developers would frequently write specially made coding solutions to integrate yield-bearing tokens. They also spent their project’s funds to audit that custom-made code for possible security problems. This was a source of concern to developers. Due to the absence of standardization for yield-bearing tokens, inadequacies and insecurity spread throughout DeFi.
3/ To build a single app on top of DeFi's yield-bearing tokens, you have to write dozens of complex, error-prone adapters that can handle each unique variation
ERC-4626 makes that a thing of the past
— yearn (@yearnfi) April 5, 2022
The ERC-4626 performs a series of functions. It standardizes yield-bearing tokens to make them simpler and faster to develop. In addition, it also develops a common interface for tokens held in vaults or smart contracts that pull liquidity from asset token deposits for yield farming methods. This token standard largely relates to any location where a user enters a single token and receives a single token. Any app built on an ERC-4626 vault will work for any ERC-4626 token.
4/ It’s composability at its finest
Build an app on top of one ERC-4626 vault, and it will work for all other ERC-4626 tokens
— yearn (@yearnfi) April 5, 2022
How Does the Token Standard Work?
It should be noted that the ERC-4626 is an interface, not an implementation. Projects and users can implement this standard in any way they want. However, the implementation must adhere to the interface. Furthermore, since this standard extends to ERC-20 tokens, vault tokens must also conform to that interface. The token standardizes:
- The manner in which users deposit and withdraw funds from the vault.
- The functions for calculating the amount of vault token and underlying token needed for deposits and withdrawals.
- A method for determining the underlying token.
The ERC-2646 has the potential to change the DeFi landscape.
What’s the Future of This Standard?
This standard has sparked an interest among protocols that provide tokenized vaults. One of the largest DeFi stakeholders, Yearn, signaled its interest in the token standard via a series of tweets. Joey Santoro, a co-creator of the new standard, believes Yearn’s interest in the token standard will trigger adoption. So Yearn, in a way, has given credibility to the standard.
5/ Yearn V3 + ERC-4626 = inevitable
Contributors are already working hard implementing the standard for Yearn’s V3 vaults
So are devs at @AlchemixFi, @balancer, @RariCapital, @feiprotocol, @OpenZeppelin and elsewhere
Perhaps one day, we’ll even see a Erc4626 tab on @etherscan
— yearn (@yearnfi) April 5, 2022
Santoro believes that developers in the future will rush to embrace the ERC-4626 token standard. In addition, the possibility of building directly with the standard will lure them since wrapping requires extra gas and steps. In any case, ERC-4626 is a disruptive force for DeFi developers who want to contribute to different lending markets and yield aggregators.
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