EIP-4626 and the Future of DeFi
Despite the somewhat popular opinion that the Ethereum blockchain is slow to update and limited in terms of functionality — at least when compared to newer competitors — a huge number of innovations are currently in the works.
Known as Ethereum Improvement Proposals, or EIPs, these are standards that describe potential new features for the Ethereum blockchain. Many eventually go on to garner adoption, while others (i.e. those that require major changes to the protocol layer) can be implemented through a fork.
One new proposal, known as EIP-4626 is beginning to garner significant attention, owed to its potential to change the way users and developers manage their ETH and Ethereum tokens.
What is EIP-4626 and the ERC-4626 Standard?
EIP-4626 is a recently proposed new standard for creating yield-bearing token vaults on the Ethereum blockchain, helping to pave the way for an array of standardized products and services that are more accessible, more streamlined, and easier to integrate.
According to the original proposal, EIP-4626 provides an implementation of a standard API for yield-bearing vaults controlled by smart contracts. The goal is to provide a standard template that developers can use when building their yield-bearing products.
The new standard was created by Joey Santoro, the co-founder of the decentralized stablecoin project Fei Protocol, who revealed the development on his personal Twitter account in early January — garnering considerable support from the Ethereum community.
ERC-4626 (the token standard, not the EIP) is designed to be an extension of the ERC-20 token standard — which most projects that launch on Ethereum use for their native utility tokens. The new specification is designed to be backward compatible with ERC-20.
Although yield-bearing vaults are not a new innovation in the blockchain sector — since products like Yearn Finance, Compound, xSushi already exist — there lacks standardization, and most yield-bearing products have markedly different architectures. The ERC-4626 token standard dramatically cuts down the amount of time and work required to implement new yield vaults into app front-ends, since developers will only need to get to grips with a single API.
But more than this, standardization ensures that innovations and security audits can be centered around a single point, helping developers build more powerful products over time, while ensuring everything is thoroughly battle-tested and hardened.
Benefits and Challenges
Widely thought of as a new form of DeFi lego, ERC4626 will allow yield tokens to be connected to a variety of services that integrate the technology without necessarily requiring a separate audit for each integration.
A number of reference implementations of ERC-4626 have already been demonstrated. These include a simple tokenized vault known as the Solmate Minimal Implementation as well as the near production-ready Rari Vaults.
Some of the things standardized by ERC-4626 include the way users deposit and withdraw their tokens to/from the vault, the functions that act on these funds, and how events are emitted
Unlike Ethereum Improvement Proposals (EIPs), like the recent EIP-1559, no hard fork will be required to implement EIP-4626. Developers are already free to begin leveraging and tinkering with the reference implementations, and the only obstacle now is achieving adoption.
Despite its potential to streamline the yield vault landscape, EIP-4626 still needs to be audited to see if there are any unresolved bugs and potential exploits. According to a recent statement Santoro made to CoinDesk, the ERC-4626 is scheduled to be audited by multiple firms. This will be paid for by Fei Labs on behalf of Tribe DAO. Nonetheless, EIP-4626 currently has no major unresolved issues on GitHub — though several users have suggested an array of changes or improvements in the discussion.
Although EIP-4626 was first announced just weeks ago, the ERC-4626 token standard is already being adopted by several prominent players in the Decentralized Autonomous Organization (DAO) space.
Rari Capital DAO and Tribe DAO will be among the first platforms to make extensive use of the ERC4626 token standard.
The first products leveraging the new standard may be set to go live within just weeks, with the first product looking likely to be a version of the aforementioned Rari Vault on Fei Protocol.
Yield Bearing Tokens and the Future of DeFi
Decentralized finance has quickly grown to become one of the most promising applications of blockchain technology, with a huge number of tools and protocols emerging in the last year to help cryptocurrency users access new opportunities and do more with their funds.
The cambrian explosion of innovation in the DeFi space has led the development of a wide variety of new financial primitives and incredibly efficient protocols for exchanging, lending, borrowing, investing, and bridging cryptocurrencies.
In line with this, users can now earn bank-beating interest rates through a variety of DeFi protocols, exchange their assets (including tokenized traditional assets) for just a fraction of the cost by cutting out the middlemen, move their assets between a variety of blockchains with ease, and even deploy automated trading strategies with little to no programming experience required.
Indeed, adoption of DeFi technologies among cryptocurrency users is rapidly growing, and according to Defi Llama, there is now close to $200 billion worth of digital assets being held in or managed by DeFi protocols — equivalent to almost 10% of all digital assets in circulation.
Never before has the future of finance been so accessible. But a recent innovation of yield bearing tokens may be set to help deliver the unique benefits of DeFi to a wider audience — by essentially eliminating the learning curve that can come with leveraging blockchain-based financial products.
Unlike many DeFi products, yield bearing tokens are incredible simple to grasp, they are simply tokens that tend to accrue value over time. As we previously touched on, the way they go about this can generally vary from token to token, but yield tokens generally represent fractional ownership of a pool of assets. As that pool grows in value, so too does the value the tokens that represent the user’s share in the pool.
Some of the more popular examples of yield bearing tokens include SushiSwap’s xSUSHI token, Yearn Finance’s yvVault tokens, and Curve LP tokens.
Yield bearing tokens are some of the more recent innovations in the DeFi sector. Nonetheless, yield-bearing platforms currently rank among the top 3 most popular DeFi apps on the three largest blockchains by TVL (Ethereum, Binance Smart Chain, and Solana).
With yield bearing tokens set to become far more widespread, capable, and accessible, it may not be long before most cryptocurrency users have at least some exposure to yield vaults and their benefits.
About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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