ERC-4626 Proposes To Make Yield-Bearing Tokens Their Own DeFi Lego

ERC-4626 has been proposed to standardize yield-bearing tokens.

By: Owen Fernau Loading...

ERC-4626 Proposes To Make Yield-Bearing Tokens Their Own DeFi Lego

A new proposed token standard for Ethereum sent optimistic ripples through the DeFi community this week.

Joey Santoro, co-founder of the Fei protocol, introduced a new token standard, called Ethereum Request for Comment (ERC) 4626 on Twitter on Jan. 4 to general support.

At a high level, the ERC-4626 tokens standardize yield-bearing tokens, making it easier to integrate them into DeFi protocols.

Examples of yield-bearing tokens include lending protocol Aave’s aTokens, which accrue interest, and Yearn Finance’s yTokens, which increase in value as the deposits they represent generate yield.

ERC-4626 streamlines the integration of tokens like aTokens and yTokens into other DeFi protocols, Santoro told The Defiant. Integrations with other protocols, essentially stacking “money legos” on top of each other, is a key value proposition of DeFi. So, a standard for these value-accruing legos would be likely to reduce friction in the DeFi development process.


“DeFi is all about composability, wrap/unwrap, deposit/withdraw or whatever you want to call it,” Santoro said. “Things are being plugged into each other in many different ways. ERC-4626 is a unified plug for connecting tokens to services through these vaults.”

Currently, developers need to create custom solutions to integrate yield-bearing tokens while also expending resources to audit those solutions for security vulnerabilities. Those two processes are expensive in terms of time and money, Jet Jadeja, a co-author of the ERC-4626 standard and developer at Rari Capital, told The Defiant.

“Omg I want this so bad,” tweeted Alchemix co-founder Scoopy Trooples. “Single biggest pain point for Alchemix v2 is the fact that every different yield token integration has a bespoke solution requiring audit.” Alchemix is a textbook example of DeFi’s money lego capability — the protocol relies on three stacks of protocols to facilitate its self-repaying loans.


Source: Alchemix

Addressing Inefficiency

Jadeja drew the analogy to Uniswap, an automated market maker (AMM), which can easily accept any pair of tokens without developers having to write new code. “Imagine if the Uniswap devs had to rewrite and audit the exchange contracts each time they wanted to deploy a new pair,” Jadeja said, emphasizing how inefficient that would be.

Right now though, a similar inefficiency exists for DeFi developers — Jadeja hopes ERC-4626 will help yield-bearing tokens integrate with protocols the same ease that AMMs accept new token pairs.

Jadeja and Santoro worked with another Rari developer who goes by transmission11s to produce the standard.

Santoro expects the standard to be finalized in February, noting that ERC-4626 doesn’t need to be integrated into Ethereum as a hard fork as proposals like EIP-1559 do. This is because the standard exists on Ethereum’s application layer where protocols like Fei and Aave operate. So ERC-4626 simply relies on developer adoption.

Developers are currently discussing details of the standard on Github.

“I think that 4626 is not only going to help protocols and devs save time and money but also enable more room for innovation and drive the space forward,” Jadeja said.