We will look at the new token standard on Ethereum ERC-4626. This is closely related to DeFi, where it has the potential to revolutionize the tokens with which interest income is associated.
What Is ERC-4626?
If you’re watching cryptocurrencies, you’ve probably heard of standardized tokens. These represent a unification in the creation of tokens. It is this unification, for example. It makes it much easier for developers to import new tokens into their products, greatly increasing user-friendliness when working with cryptocurrencies. Of the most well-known ones, you could then hear at least about the classic standard for substitutable tokens, ERC-20, or the standard specialized for NFT (irreplaceable tokens), ERC-721. However, there are more standards for tokens, not only on Ethereum, but also on the vast majority of other platform blockchains. Today, however, we will look at a novelty called ERC-4626.
ERC-4626 is a new standard for tokens that bear interest income. In this article, I will refer to them as the so-called yield tokens. Ethereum’s developers themselves then called it a tokenized vault standard. The draft of this standard was then introduced by several well-known contributors to the development of Ethereum as early as December 12 last year. Since then, it has gone through extensive discussions among developers. However, it has only been approved by the core of the Ethereum development team in recent weeks and is expected to be implemented in the next network network.
To give you an idea of what revenue tokens are in their current form, these are DeFi protocol tokens that prove that you have the right to receive interest from a given DeFi platform. They also represent your share of a specific platform product. Specifically, for example. o aTokens on Aave, cTokens on Compound, xTokens on Sushi and many many more. The vast majority of DeFi platforms use such tokens.
Standard for yield tokens
But what will these newly standardized tokens bring? The need for such a standard is well illustrated by the thread on Twitter yearn.finance, which is one of the leaders in the field of decentralized finance. yearn.finance has also announced that they plan to use this standard, which may be the first big step towards its adoption. But back to why this standard may be important. At present, yield tokens are more or less standardized in any way, and different DeFi projects offer slightly different approaches to these tokens. Here goes e.g. about liquidity aggregators, lending platforms or popular high-yield staking projects in recent months.
And here comes the problem they suggest in the yearn.finance and which was also one of the main motivations for creating this standard:
“To create one application based on DeFi revenue tokens, you will need to write dozens of comprehensive and error-free adapters that can handle any unique variation. With the ERC-4626, this will no longer be necessary. “
If you create an application based on one of the ERC-4626 cash registers or specific tokens, this application will be compatible with all other ERC-4626 tokens. This should bring significantly higher user friendliness to both developers and end users, who could easily use these tokens across multiple platforms in the future.
Standardized tokens on Ethereum then very often take over even competing platform blockchains. So at least those compatible with ETH Virtual Machine (EVM). We can expect that if this token is adopted across ETH DeFi, we will see it on other platforms as well. Although we will still have to wait for the adoption (and the question of whether it will happen, because some developers have also pointed to a few minor problems that this standard could bring), it shows us how honestly it is to Ethereum, which according to plan passes the so-called Merge PoS and PoW networks, works.