Tokenized vault standard is finalized and promises an end to patch jobs and custom connectors
Yearn Finance yesterday championed the new ERC-4626 token. It announced on Twitter that the platform’s new V3 Vault will abide by the new token standards.
- The very short narrative of ERC-4626’s journey up to now
- What are ERC Tokens?
- How does ERC-4626 work?
- The Great Vault Standardization and Yearn Finance’s position
A developer by the name of Joey Santoro first proposed the ERC-4626 token on January 4th. On March 17th that ‘ERC-4626 is now FINAL’. Yesterday, Yearn Finance posted on Twitter that they’d completed the ‘Tokenized Vault Standard’ and that ‘the Great Vault Standardization begins now’.
A new token standard doesn’t usually make the news, but when it promises to solve some of the longest-standing issues in DeFi, we all suddenly take notice. At the moment, yield-bearing tokens have no standard way of communicating with one another. ERC-4626 changes this.
Ultimately, ERC-4626 could revolutionize the way users and platforms stake their tokens and collect their yields. Due to the absurdly complex nature of blockchain technology, most people who benefit from this will be unaware that anything has even changed.
What are ERC tokens?
Most people have heard about the ERC-20 token. It provides a set of guidelines that all other tokens need to stick to to work on the Ethereum blockchain or other chains following the EVM standard. ERC stands for Ethereum Request for Comment and the 20 is the proposal number developers assigned to the project.
Once the ERC-20 token standard was implemented, everyone developing for Ethereum knew the rules they had to stick to in order for their project to work. This introduced composability to the blockchain system. Now, tokens on Ethereum were fungible. This meant users could swap one type of token for another., allowing for scalability and a more interesting ecosystem.
Fabian Vogelsteller introduced the ERC-20 token back in 2015. It was a landmark moment for blockchain technology, representing a giant leap forward in so many ways.
Other ERC standards you probably know of without knowing it are the ERC-721 and the ERC-1155 tokens.
- The ERC-721 was the first standard to set guidelines for developers to use to embed ownership of non-fungible tokens. It was the birth of NFTs.
- The ERC-1155 token provides standards primarily for NFTs. But it is fungible-agnostic, meaning it works for both fungible and non-fungible tokens. ERC-1155 reduces gas prices meaning more people can participate.
Now we have a new token standard with ERC-4626.
How does ERC-4626 work?
Joey Santoro developed ERC-4626 to solve the issue of yield-bearing tokens. Until now, there have been slight variations in the implementation of yield aggregators, vaults, lending markets and native yield tokens like xSUSHI.
This meant that anyone who wanted to build an app on top of a yield-bearing token would need to write multiple plug-ins and adapters to make the misaligned pieces of code talk to each other. Developers got around this issue by wrapping tokens but it wasn’t a perfect solution.
If you’ve ever come across WETH or WBTC, this means a token is wrapped. In these cases, WETH stands for Wrapped ETH and WBTC is Wrapped BTC. They’re all pegged one-for-one to the underlying coin, but are built with different token standards. Wrapping a coin facilitates its movement across different blockchains. This enables people to swap tokens across different mainnets and it’s critical for the staking and yield-farming process.
But wrapping tokens is costly, time-consuming and has inherent security flaws. Picture a developer designing custom connectors for every unique variation in different yield-bearing tokens. It takes time and money to do this. Bridging misaligned parts with each other creates vulnerabilities in the system. Ultimately wrapping is a type of bridging, and we’ve all seen recently how wrong that can go.
ERC-4626 provides a standard so that all of these different tokens across multiple blockchains can talk to each other. Like the ERC-20 token seven years ago, this new token standard brings composability to the ecosystem.
The Great Vault Standardization and why support from Yearn Finance matters
Yearn Finance stated clearly in a Twitter thread: ‘Yearn V3 + ERC-4626 = inevitable’. Yearn Finance is a popular yield aggregator in the DeFi space. They maximize profits for yield farmers by placing their staked assets in the place where they will generate the most money.
With $2.92 billion total value locked into its platform, Yearn Finance has plenty of clout even if it’s not a market leader in the space. So when it announced that it’s changing its token standards to ERC-4626 for its upcoming V3 Vaults, it’s highly likely that other similar platforms will listen up.
Yearn Finance also announced in its Twitter thread that the Great Vault Standardization has arrived. Vaulting is the process of locking tokens away on one blockchain so that other tokens can be minted and used on a different blockchain. Think of it as a like-for-like exchange where people can drop off something they own in one location and then pick up something different but of equal value somewhere else.
It’s one of the backbones behind DeFi because it enables staking and yield farming. Now we have the ERC-4626 standard, the vaulting process should soon be the same across all blockchains. To quote Joey Santoro, the more the Ethereum ‘ecosystem coordinates development efforts, the faster DeFi can grow and scale’. DappRadar will certainly be keeping an eye on the situation to see if those hopes are realized.
You can also track Yearn Finance’s on-chain analytics here and see where it comes in DappRadar’s DeFi dapp rankings pages. Yearn Finance also has its own native token called YFI, built on the Ethereum blockchain. Use our Token Explorer to see its performance over time.