Ethereum Watch

A new Ethereum token standard called ERC-4626 could help solve composability issues in DeFi and make yield-bearing tokens more secure.

Meet ERC-4626 

DeFi natives may soon need to familiarize themselves with a new Ethereum token standard.

First proposed in January by Fei Protocol co-founder Joey Santoro, ERC-4626 seeks to standardize the myriad of different yield-bearing tokens used across DeFi platforms. Now, with the ERC-4626 standard finalized, DeFi protocols are preparing to integrate it. 

Currently, protocol developer teams mainly use their own in-house solutions to govern yield generation. While this approach has been the norm in developer circles, it comes with some significant setbacks. As each protocol’s code contains slight variations, getting yield-bearing tokens to interact with each other across different protocols requires a lot of resources. Additionally, as more complex workarounds are committed to the code, it opens protocols up to more potential vulnerabilities. 

For example, last year, an attack against Rari Capital took advantage of the code governing its Alpha Finance yield-bearing ibETH token vault. Because Rari Capital was unaware of certain functions built into ibETH tokens, it unknowingly created vulnerabilities that were taken advantage of by a hacker. If yield-bearing tokens instead used a standardized model, developers would be far less likely to overlook potential exploits.

“Omg I want this now so bad,” said Alchemix co-founder Scoopy Trooples in response to Santoro’s original ERC-4626 proposal. “[The] single biggest pain point for Alchemix v2 is the fact that every different yield token integration has a bespoke solution requiring audit. If they were standardized, it’d be one and done,” they explained. Alchemix is one of several DeFi protocols that interacts with multiple protocol contracts in its yield generation strategies. 

By adopting the ERC-4626 standard, developers aim to make yield-bearing tokens easier to integrate into other DeFi platforms and more secure. According to a Tuesday Twitter thread posted by DeFi protocol Yearn Finance, several protocols, including Alchemix, Balancer, Rari Capital, Fei Protocol, and OpenZeppelin, are planning to implement the finalized ERC-4626 standard. 

Ethereum Request for Comment, or ERC, is a scripting standard used within the Ethereum blockchain. It dictates the rules and actions that an Ethereum token or smart contract must follow and how it is implemented. Most fungible Ethereum-based tokens use the ERC-20 standard, while NFTs generally use ERC-721 or ERC-1155. 

Disclosure: At the time of writing this piece, the author owned ETH and several other cryptocurrencies.