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What is ERC-4626
04 May 19:20
The Need for Standardization
The DeFi industry is gradually moving towards standardization. Users want the ability to move their assets between different chains and invest with freedom while also keeping their money secure. This is where standardization comes into the picture. It makes moving assets across chains much easier and more efficient. It is certainly where the community wants DeFi to head.
Before moving on to the ERC-4626 standard, let us just recap what vaulting is? In simple terms, it is a process that allows users to lock a token on a chain. After this, it is minted into another token that can be used on the second chain. The token that is minted is called a wrapped token and you will often see a ‘w’ suffix preceding the name of the coin to indicate this, e.g. wBTC.
ERC-4626 - The Tokenized Vault Standard
As the name indicates, the ERC-4626 tokenized vault standard is used to standardize the vaulting process. It also adds to the safety factor of locking coins in a smart contract to wrap or mint new tokens and allows these yield-bearing tokens to be created with more ease. As more and more EVM compatible chains embrace this new standard, the cost, time, and energy of the wrapping process will all improve.
The benefits of this standard are not just limited to end-users. Developers will also benefit as the ERC-4626 tokenized vault standard allows them to create shared interfaces for the tokens that are part of the vaulting process. This significantly reduces the time required to complete a project. It also helps make the integration of tokens more flexible and convenient. As per Joey Santoro, the founder of Fei Protocol, ERC-4626 is akin to ‘DeFi Lego’ due to its cross-compatibility with other technologies and ease of implementation.
He also indicated that the native token of Fei Protocol (TRIBE) will make extensive use of the ERC-4626 standard.
The ERC-4626 standard originated as part of the Ethereum Improvement Proposals. It was co-created by Joey Santoro. It extends the existing ERC-20 standard. The basic difference between ERC-4626 and ERC-721 is regarding fungibility. While the former deals with fungible tokens, the latter deals with NFTs (Non-Fungible Tokens).
Working of ERC-4626
There have been constant developments going on to improve the working and efficiency of the Ethereum ecosystem. For the end-user, efficiency, speed, and cost matter a lot. Even though they might not be concerned with the technicalities like whether their token complies with ERC-4626 or not, they just want the optimum results for their needs.
Nearly all of the tokens that are available in the market comply with the ERC-20 standard. In layman's terms, this means that the tokens can be moved around on the Ethereum blockchain. The ERC-4626 adds more flexibility to the Ethereum blockchain. The concept is pretty simple but the changes that it will help in will have great importance in furthering the DeFi industry.
It must be noted that ERC-4626 is an interface and is not an implementation. It extends the existing ERC-20 tokens meaning that the participating tokens must comply with ERC-20 also. Users have the ability to implement ERC-4626 in any way that they want and the protocols will interact with the implementation in compliance with the interface.In short, the standardization deals with the following points:
- How users deposit and withdraw to the vault
- Functions that calculate the deposits and withdrawal of vault tokens and other tokens involved in the process
- The determination of the underlying token through an interface
- The events related to interaction with the vault
Even though this list may seem like a simple one, these points can result in great improvements for the whole system.
If you want to read the in-depth EIP (Ethereum Improvement Proposal) regarding this standardization, it can be found on the official website.
Conclusion
The DeFi space is poised for massive adoption and people are finding more and more ways to interact with different tokens and increase the value of their assets. Among these, vaulting has also been gaining traction in recent months. With the implementation of the ERC-4626 standard, users find great comfort that their assets can now undergo vaulting in a more secure and faster manner.
Protocols that offer tokenized vaults are rushing to adopt this new standard and in the future, we will see it become one of the de facto standards for the space. ERC-2626 projects are quickly gaining momentum and DeFi giants like Yearn have also backed the standard and are leading its adoption.
Author: Gate.io Researcher: Chuk. U
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
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