How ERC-4626 Could Fuel the Next Wave of DeFi

If you know NFTs, you know token standard ERC-721. But are you caught up on ERC-4626?

The TVL (total value locked) across all DeFi protocols stands at nearly $193 billion, according to data from DeFi Llama. Since the explosion of decentralized finance in summer 2020, a concept called “yield farming” emerged. Users deposit funds to a platform, such as the lending protocol Compound, and get rewarded with a share of the profits as their deposits are loaned out, reminiscent of a traditional bank’s interest payments.

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But yield farming was less attractive to individual users without significant capital or knowledge of the concept, which led to the introduction of “yield aggregators”—sets of smart contracts that pool user funds and optimize yields. These quickly became known as vaults.

However, these vaults lacked implementation standards, which led to multiple complexities. Yield aggregators, vaults, lending markets, and native yield tokens were always implemented with slight variations. It was difficult to build apps on top of the vaults, and it created the potential for security vulnerabilities. Scaling was also limited.

With vaults operating on smart contracts, general users couldn’t directly interact with them, which only increased the importance of potential decentralized apps (dapps) that could be built atop the vaults.

The vault standard

An Ethereum Improvement Proposal (EIP) created on December 22, led by Fei protocol founder Joey Santoro, set out to change that. Enter ERC-4626.

While the proposal’s main goal was to establish robust implementation standards for the vaults, it also outlined the potential security implications of vaults lacking a specific…