Yearn Finance, a vault-based and decentralized yield aggregation system, is the first major protocol publicly to support ERC-4626, providing legitimacy for others to explore the use of ERC-4622.
ERC-4626, a new standard for Ethereum tokens, is designed to streamline the design of different types of tokens that print money (aka yield-bearing tokens).
Before the introduction of ERC-4626, “the tokenized vault standard,” DeFi developers commonly wrote unique coding solutions to integrate yield-bearing tokens and spent their own money or the project to audit that custom-made code for potential security vulnerabilities.
DeFi is a subsector that is growing with $120.59 billion in total locked value on the Ethereum blockchain, people can have financial services and yield generation access without the need to use a traditional intermediary.
Yield-bearing tokens, like Aave’s a token, Compound’s cToken or Sushi’s xToken, are essential elements in DeFi because they represent a person’s share of yield-generating activity on a DeFi protocol.
ERC-46226 is standardization of yield-bearing tokens, making them simpler to create. Additionally, it provides an interface for tokens stored in vaults or smart contracts that draw liquidity on deposits of asset tokens. This allows for the creation and maintenance of yield farming strategies.
Santoro clarified, “The novel standard basically applies to any place where the user puts in a token and receives a token out.”
Moreover, developers don’t have to write new code to create custom vaults for every single new DeFi application.
Any application built on top of an ERC-4626 vault will work for any ERC-4626 token – much like building for ERC-20 tokens, the standard that launched the infamous initial coin offering boom in 2017.
DeFi developers believe that this will open the door to financial innovation in the sector with its improved composability.
Yearn is one of the largest DeFi stakeholders said on Twitter Tuesday, “the Great Vault Standardization begins now” as “ERC-4626 will be the gold standard for any sort of interest-bearing token.”
According to Santoro, Yearn’s announcement on Twitter was its way of “putting their flag in the ground and saying we’re going to drive adoption of this standard.”
He predicts ERC-4626 will become ubiquitous in part because Yearn will drive adoption even if protocols don’t adopt ERC-4626.
Let’s say other major DeFi applications like Aave and Compound decide not to build on ERC-4626; Yearn can still generate a wrapper contract in which a developer can create another token that would wrap Aave and Compound’s yield-bearing token, making it compatible with the standard.
Or as Yearn said, “Yearn V3 + ERC-4626 = INEVITABLE.”
Santoro said that it is a good idea for future developers to build directly according to the standard since wrapping requires extra gas or steps.
ERC-46226 is an important tool for DeFi developers. It allows them to contribute to different lending markets, yield aggregators, and intrinsically-interest-bearing tokens.
While there have been reports indicating that ERC-4626 is set to be implemented at the next Ethereum fork upgrade, these reports are a misconception, according to Santoro and Señor Doggo. It is final and being used by people already.
The developers can implement the new standard at their own pace since ERC-4626 doesn’t require a hard fork.