An Introduction To The ERC-4626 Tokenized Vault Standard [With Infographic]
Ethereum Request for Comments (ERC) is a standard for Ethereum-based applications used as a means of conveying essential information to developers. These standards include information such as name registries, libraries, token requirements, and much more.
The ERC standards are vital for developers to assess how certain functions of an application may be implemented without access to the source code. With the sheer size of the Ethereum community, these standards come in handy to streamline the development process, thereby increasing interoperability and reducing developer time.
There are a variety of ERC standards available for developers, such as ERC-20 for fungible tokens, ERC-721 for NFTs, ERC-725 for digital identity, and ERC-4626 for yield-bearing vaults.
In this article, we will explain what the ERC-4626 standard is, what vaults are, and how Midas is leveraging the ERC-4626 standard to help users build isolated money markets for all assets across chains.
What Are Vaults?
In the blockchain ecosystem, a vault can store cryptocurrencies just like regular crypto wallets but has additional functionalities that allow advanced security features. Vaults can prevent immediate withdrawals of the funds. Users can also invite other trusted users to create a multi-sig, and transactions are executed only when the required number of users sign the transaction. Moreover, these vaults can also have pre-existing conditions set, and funds will only be moved when these conditions are met.
Vaults can also implement smart contracts that can help DeFi users maximize the yield on their digital assets. Vaults can have pre-set strategies that are designed to generate returns through capital movements, auto compounding, and rebalancing. Once tokens are deposited into the Vault, yield-bearing tokens are issued to represent the deposited share of the pool.
Users can also utilize these vaults to lend their cryptocurrency to earn interest, as is the case with pools at Midas Capital.
The Problem With Tokenizing Vaults
As the DeFi ecosystem grows, the opportunities for users to participate in yield-bearing vaults also increases. However, integrating tokens of different protocols to take a unified approach became increasingly difficult.
To create a DeFi application that supports multiple yield-bearing tokens, developers had to thoroughly research the mechanism through which each of those tokens generated yield and then write additional code to integrate each token’s yield mechanism into their code base.
The whole process becomes time-consuming and complex and can lead to potential errors due to the added complexities related to the variety of implementations that each token can have. If an application supports a lot of tokens, developers will have to constantly be on the lookout for potential loopholes or inaccuracies in the code that can prove to be catastrophic for the users and the application.
This is where the ERC-4626 tokenized vault standard came in, which makes integration easier while mitigating the risks of error.
What is The ERC-4626 Standard?
The ERC-4626 tokenized vault standard, as its name suggests, is a standard protocol for tokenized vaults and is built upon the ERC-20 token standard. The standard has been created to unify the technical parameters of yield-bearing vaults, making development, integration, and interoperability easier for vaults. It is meant to consolidate and standardize development efforts around “ERC-20 token strategies” such as borrowing & lending, farming, and staking.
Since it is a common standard that any yield-bearing vault can use, it reduces development time and effort, significantly easing the process. Moreover, it also reduces cost as developers need not constantly build and integrate new code for tokens while persistently keeping a check and looking out for loopholes to fix. ERC-4626 standardizes everything while enhancing security.
The Ethereum Comment Proposal 4626 for the ERC-4626 standard was created by Joey Santoro — founder of Fei Protocol, who partnered with Ethereum developers @transmissions11, @JetJadeja, Alberto Cuesta Cañada, and @fubuloubu.
The idea of ERC-4626 was built around the notion of creating a standard that made composability and interoperability easier. Since protocols needed to create custom solutions to integrate every yield-bearing token while keeping a check for vulnerabilities, the team decided to create a scalable yet approachable solution.
Drawing the analogy to Uniswap, the team wanted to create a standard that could easily accept any token without the need for new code. Thus, they framed the proposal for the ERC-4626 standard. While the proposal was submitted in late 2021, the standard was approved in May 2022.
How Midas Is Leveraging ERC-4626
At Midas Capital, we are employing the ERC-4626 standard to allow users to deposit assets as collateral into a pool. Then, the assets are deposited into various strategies across protocols to earn additional rewards. Therefore, while users deposit assets into a pool and borrow other assets against it, the deposited assets are funneled through a strategy, earning yield for users. Unlike traditional money markets, in many Midas pools, users earn a yield on their deposits while they are being used as collateral. This results in vastly increased capital efficiency.
Combining this with a generalized infrastructure for rewards distribution (known as the flywheel contract — an open-source token incentives and governance infrastructure to easily interface with other platforms, developed in conjunction with Tribe DAO), Midas enables users to collect the rewards right in the pool itself. Therefore, users do not have to register on a different platform to deposit their tokens to earn yield, nor do they have to visit any platform to collect rewards. Everything is executed seamlessly through the Midas interface.
One of the core examples of this is the jFIAT pool by Jarvis Network, where users can deposit 2BRL LP, BUSD, WBNB, ETH, and jBRL and borrow BUSD, WBNB, ETH, and jBRL. Once the user deposits their 2BRL LP token in the pool as collateral, these tokens are redeposited into Dot Dot Finance, which is Convex fork on the BNB Chain. Users can borrow assets from the pool in lieu of their deposits and still receive rewards from Dot Dot Finance. Therefore, users can earn competitive yield while their assets are being used as collateral.
Future of ERC-4626
While the ERC-4626 standard is relatively new, we have started witnessing adoption from various DeFi projects. Since DeFi aggregators had to deal with a cumbersome process before the standard, the ERC-4626 standard has emerged as a time-saving mechanism. The process that took days of research and coding, followed by constant oversight, has now been reduced to a simple API call. It is certain that in this growing DeFi ecosystem, more yield-bearing vaults, protocols, and aggregators will adopt the standard in the near future.
At Midas, we have employed the ERC-4626 standard for easier interoperability, enabling us to help facilitate as many yield-bearing strategies for our users. Utilizing many popular and top protocols in the space, Midas Capital aims to create easy-to-use functionality in order to achieve this.
About Midas Capital
Midas Capital is bringing isolated and customizable money markets to EVM-compatible blockchains. Enabling users, DAOs, and protocols to create customized and isolated pools for lending and borrowing any asset, Midas is building a cross-chain ecosystem that democratizes money markets. Pool creators have the flexibility to modify pool parameters (interest rate curves, oracles, collateral factors, pool fee, etc.) according to their risk appetite. With isolated pools, Midas offers stellar features for large-scale institutions, protocols, and traditional investors.