ERC-4626 is a recently proposed Ethereum token standard, developed by Joey Santoro - Founder of Fei Protocol, that might solve a problem that exists in decentralized finance (DeFi): complexities in the design of money-printing tokens.
What is ERC-4626?
ERC stands for "Ethereum Request for Comment", which are application-level standards for Ethereum and can include token standards, name registries, library/package formats, etc. Anyone can create an ERC, however, getting the community to accept and support is a difficult task.
For example, we have some popular standards such as:
- ERC-20 for tokens, especially governance and stablecoins tokens.
- BEP-20 is a token standard on Binance Smart Chain that extends ERC-20.
- ERC-721 for NFTs.
- And more
ERC-4626 (Tokenized Vault Standard), like other standards, aims to offer a framework for Yield-token development, assisting in creating platforms of Yield-bearing tokens like Yearn (yTokens), Aave (aToken), and others in standardizing the creation of their Yield-bearing tokens. Furthermore, ERC-4626 assures that vault token implementations from various protocols are compatible. At the moment, everyone does things a little differently based on the protocol's requirements or the developer's inclination.
Yield-bearing tokens, also known as interest-bearing tokens, produce interest over time. stETH, xSUSHI, cUSDC, and other ibTokens are a few examples. (see detail at yield-bearing tokens).
Why call "ERC 4626 are DeFi's newest money Lego"?
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies, where people lend, borrow and steal tokens – all of the standard financial services – without the need for a middleman. It has progressed from a fragment of the cryptocurrency industry to today's economic engine, with a total TVL of more than $100B.
Integrations with other protocols, or stacking "money legos" on top of each other, are a significant value proposition of DeFi, particularly in the realm of Yield-bearing tokens. Suppose you want to launch a new product that integrates with the tokens of a different protocol. In that case, you must first understand the small changes in their implementation, then adjust your code to operate with it, test, audit, and ultimately launch.
Aave's aTokens, which accumulate interest, and Yearn Finance's yTokens, which rise in value as the deposits they represent create yield, are two examples of yield-bearing tokens. Developers must build a new strategy for aTokens, yTokens, etc., that is, how tokens interact in the Defi ecosystem for each such token. They'll have to spend more money and effort building and auditing each token since a bad plan will result in massive losses.
ERC-4626 allows tokens like aTokens and yTokens to be easily integrated into various DeFi protocols. DeFi's major value proposition is its ability to integrate with different protocols, effectively stacking "money legos" on top of one another. As a result, establishing a standard for these value-adding legos is anticipated to minimize friction in the DeFi development process.
How does ERC - 4626 work?
Since ERC-20 tokens are extended by this standard, the vault tokens must also adhere to it. Users can implement this standard in whatever way they wish, and protocols can communicate with it automatically as long as the implementation follows the interface. At a high level, it standardizes:
- The way that the users can deposit and withdraw to the vault
- Calculate the amount of vault token and underlying token necessary for deposits and withdrawals with these functions.
- An interface to determine the underlying token.
- When interacting with the vault, several events are emitted.
This little but strong collection of features can make significant changes in the background. ERC-4626 will have several advantages:
- Because the techniques in ERC-4626 are secure by default, protocols do not need to spend time and money auditing them.
- Yield-bearing tokens are easier to integrate with other systems.
- Users can manage their assets more easily now that yield-bearing token assets have been categorized into 1.
- Because compatibility has been increased, users can utilize ERC-4626 in various protocols.
Who Uses ERC-4626?
On November 3, 2022, ERC-4626 was completed. Since its inception, it has swiftly acquired acceptance and support from the community, and numerous projects have adopted it. Protocols using it include:
- Balancer Linear Pools
- Maple Finance
- Alchemix v2
- Yearn Finance
- Yield Protocol
- Convex Finance’s yield pools
- And more
Sample Ethereum ERC-4626 contract
Rari Capital's Github repository has an example ERC-4626 Ethereum contract. It inherits the ERC-20 contract standard, as can be seen. Read the contract carefully and give special attention to the following points:
- DEPOSIT/WITHDRAWAL LOGIC
- ACCOUNTING LOGIC
Example Vault contract that uses ERC-4626 contract
Below is a flexible, minimalist, and gas-optimized yield aggregator protocol for earning interest on any ERC20 token. This contract was copied from Vaults repository of Rari Capital GitHub repository.
Conclusion
Defi is a brand-new market with a lot of room for growth. Many elements, such as ERC 4626, are still missing to complete its ecosystem. Many young developers are now working to build and contribute to the Defi ecosystem. Joey Santoro, a young developer at Fei Protocol, is one of these individuals. We should admire and appreciate them for their work and devotion to the Crypto industry in general.
ERC-4626 is a unique product that adds significant value to the DeFi ecosystem as a whole and Yield-bearing tokens in particular. On the other hand, Joe Santoro will have to put in more effort in the future to develop and show the efficiency of this product.
References
[1] What are Yield-Bearing Tokens?, academy.stakedao.org, accessed April 26th, 2022.
[2] EIP-20: Token Standard, eips.ethereum.org, accessed April 26th, 2022.