ERC-4626: DeFi’s Newest Money Lego

It’s pronounced E, R, C, four-six-twenty-six. ERC-4626 is a newly proposed Ethereum token standard that might resolve a sore issue in decentralized finance (DeFi): the mishmash of design types for tokens that print money.

Proposed Jan. 4, ERC-4626 co-creator Joey Santoro said Wednesday the token’s documentation is ready for “final review.” He called on the “giga chad brains” of Crypto Twitter to offer feedback on this novel Ethereum Improvement Proposal.

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If adopted, ERC-4626, the “tokenized vault standard,” will offer a general way for platforms like Aave or Yearn to build assets that reward users. The original scope of the proposal was to standardize just yield-bearing tokens to make them easier to build with, but now it covers a wider set of use cases. At the risk of overstatement: This could simplify parts of the entwined DeFi “stack” by creating a shared interface for tokens held in vaults and therefore save developers time and money.

“It’s just an interface for depositing and withdrawing the token from any kind of strategy that handles a single token,” Santoro explained in a recent Solidity Friday podcast. “Standardizing tokenized vault strategies will allow DeFi composability to explode. Better experience for developers AND users,” he said on Twitter.

Decentralized finance is a nascent economy where people lend, borrow and steal tokens – all the basic financial services you can expect – without a middleman. It has grown from a sliver of the cryptocurrency market to its economic engine. There are some $95.2 billion worth of tokens “locked” into various Ethereum protocols alone, not counting other chains like Solana or Near.

One of the primary benefits of DeFi is the ability to generate yield, often at rates much higher than you could expect from traditional bonds or savings accounts. DeFi tools incentivize use and attract liquidity by paying out tokens. Take Sushi, a decentralized exchange, where users can stake their SUSHI tokens to receive xSUSHI, an instrument that pays returns.

Much of DeFi is “interoperable,” meaning that tokens can be plugged in on different platforms to perform different economic tasks. Santoro, who also co-founded the stablecoin platform Fei protocol, teamed up with two Rari devs, Jet Jadeja and the pseudonymous transmission11s, to make it easier to plug and play with yield tokens.

See also: Rari Capital, Fei Protocol Token Holders Approve Multibillion-Dollar DeFi Merger

There are essentially three ways to earn yield in DeFi: earning yield by lending (like on Compound), aggregating yield from different sources (like on Rari) and holding an “intrinsically yield-bearing” instrument that rebases the underlying asset (like xSushi), Santoro said.

“You can already see that those are like some pretty diverse use cases,” Santoro said. “And there is no standard interface for a token which generates yield.” He noted this is a problem not just for yield aggregators but across DeFi, which so far requires “custom connectors all over the place.”

It’s a small change that could have a profound impact, CoinDesk’s DeFi reporter Andrew Thurman said. It’s “very similar to wrapped ETH in my mind: an incremental change that most people don’t even notice (wrapping/unwrapping ETH happens on the backend of lots of swaps, deposits, etc., now and users don’t even know it’s happening) but actually has huge impact on usability, liquidity and utility.”

Question remain about how this will propagate throughout DeFi and Ethereum broadly. The Defiant reports it won’t require a hard fork to implement. Like any other open-source development, the code is posted to Github and teams across the industry could implement it as they see fit.

“Please read the proposed spec, and give us your feedback. Let’s make this work,” Alberto Cuesta Cañada, who is a co-author of the latest ERC-4626 documentation, said on Twitter. Some technically minded people have already raised concerns on GitHub. Approached for comment, Cañada has not yet replied.

Like all else in DeFi, it’d be better if this were properly audited before implementation. But it’s a fast-moving world and it’s not every day a new token type is proposed – ERC-4626 is worth keeping an eye on.

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