A newly proposed Ethereum token standard, ERC-4626 could resolve the mishmash of the types of design associated with tokens that print money in DeFi. The Joey Santoro-led Fei protocol is among the new adaptations of the Ethereum DeFi network.
The Tokenized Vault Standard
Yearn Finance recently became the first central platform to support the use of ERC-4626 publicly. The move aimed to provide legitimacy to the concept and encourage others to adopt it.
The DeFi industry is moving toward a more standardized model. The model will allow users to quickly transfer their assets between different financial institutions. This process aims to make asset transfer more efficient and more accessible. It will also help the community build a more standardized DeFi.
The ERC-4626 tokenized vault standard standardizes the vaulting process. It ensures that coins are protected from unauthorized access and can be easily minted or wrapped. Notably, the increasing number of EVM compatible chains will reduce the time and cost associated with the wrapping process.
Aside from end-users, using the vault standard can also benefit developers. They can create interfaces for their tokens during the vaulting process. Hence, it reduces the time it takes to complete a project. In addition, it increases flexibility and convenience in the integration of tokens.
According to Joey Santoro, the creator of the Fei Protocol, the use of the vault standard is akin to the DeFi Lego concept because of the ease of use and cross-compatibility with other technologies.
On March 18, the protocol announced the approval for the EIP-4626. Since then, several DeFi protocols, including Yearn Finance, Rari Capital, and mStable, have started implementing it in their vault.
The approval of the EIP-4626 has made it easier for various protocols to implement their yield strategies in the vault. It has resulted in the creation of innovations.
Notably, ERC-4626 classifies vaults into transferable and non-transferable. The user’s representative token, the ERC-20, represents a fraction of the vault’s pool in a transferable vault. On the other hand, non-transferrable vaults do not make use of tokens.
The creation of standardized vaults has allowed various protocols to implement their yield strategies in one place. It could lead to an increase in interoperability across multiple blockchains.
Positivity Around ERC-4626
One of the most significant stakeholders of the DeFi platform, Yearn, said on Twitter that the Great Vault is starting now. He referred to the upcoming standard for interest-bearing coins as the “gold standard.”
According to Santoro, Yearn’s announcement was a way for DeFi to put its flag on the ground and show its commitment to the standard. He believes that Yearn’s announcement will drive the adoption of the standard even if other protocols don’t support it.
Developers of various DeFi applications, such as Aave and Compound, could still use the standard if they decide not to build on it. Yearn could still create a wrapper contract that would allow them to make another token that would work with the standard. Hence, by creating wrapper vaults, Yearn can force adoption backwards-compatibility.
The Future Looks Bright
According to Santoro, it makes sense for developers to build directly with the standard instead of wrapping their projects in layers. Developers can now contribute to various lending markets and yield aggregators with the help of the ERC-4626 standard.
Many of the developers in the DeFi ecosystem are already building on the standard. These include Alchemix, Rari Capital, Open Zeppelin, and Balancer. Contrary to popular belief, implementing the standard will not be included in the next Ethereum fork. Santoro and Seor Doggo noted that the reports about the standard’s implementation are not accurate.