Yearn Finance, a vault-based, decentralized yield aggregation platform, has become the first major protocol to publicly support the adoption of ERC-4626, providing a level of legitimacy and encouragement for others in the space to start exploring the usage of ERC-4626.
ERC-4626 is a new Ethereum token standard aimed at streamlining the different design types of tokens that print money, aka yield-bearing tokens.
The novel standard was finalized last month and has already garnered use from some of decentralized finance's (DeFi) largest players – perhaps an indication of the speed and innovation happening within the Ethereum ecosystem as the network gears up for its proof-of-stake upgrade called “the Merge."
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’s to audit that custom-made code for potential security vulnerabilities.
DeFi, as a growing subsector with $120.59 billion in total locked value on the Ethereum blockchain, enables people to have access to financial services and yield generation without the need of a traditional middleman.
Yield-bearing tokens, like Aave’s aToken, 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.
Now is different
ERC-4626 not only standardizes yield-bearing tokens to make them easier to build with, but it also creates a shared interface for tokens held in vaults, or smart contracts that draw liquidity from deposits of asset tokens for yield farming strategies.
Santoro clarified that the novel standard essentially applies to any place where a user puts a single token in and gets a single 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.
With improved composability, DeFi developers think this could open a new wave of financial innovation in the sector.
Yearn, 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.
In this light, Yearn can force adoption in a backward compatible way by creating these wrapper vaults.
Or as Yearn said,“Yearn V3 + ERC-4626 = INEVITABLE.”
Santoro indicated that it makes sense for future developers to just build directly with the standard because wrapping requires extra gas and steps.
Regardless, ERC-4626 is a game changer for DeFi developers contributing to various lending markets, yield aggregators and intrinsically interest-bearing tokens.
See also: ERC-4626: DeFi's Newest Money Lego
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. The standard is final, and people are already using it.
It is up to the developers to implement the new standard on their own time, as ERC-4626 does not require a hard fork.
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