How ERC-4626 is Fueling the Next Wave of DeFi
- Pavel Fedotov
The Total Value Locked (TVL) across all DeFi protocols has reached nearly $193 billion, according to DeFi Llama. Yield farming has been popular since the explosion of decentralized finance in 2020, and yield aggregators, or vaults, have been created. Unfortunately, these vaults lacked implementation standards, making them difficult to build applications on top of and increasing security vulnerabilities.
EIP ERC-4626 Approved to Create Vault Standard for DeFi
On March 18, Ethereum Improvement Proposal (EIP) ERC-4626 was approved, creating a vault standard. This allowed applications built on top of ERC-4626 vaults to work with all yield-bearing vaults, making integration and innovation much easier.
The ERC-4626 standard classified vaults into two main categories: transferable and non-transferrable. Transferable vaults issue a representative ERC-20 token to the user which represents their fraction of the vault pool. Non-transferrable vaults do not use tokens. However, liquidity pools still have challenges, such as the Rari Capital hack in April where $80 million in crypto was drained.
Risks of Yield Aggregators and Vaults in DeFi
The standardized vaults open up new possibilities for interoperability between different protocols, which could pave the way for increased compatibility of protocols across multiple blockchains. Although this was a great step forward, users must still be aware of the risks associated with taking out loans and staking small cryptocurrencies on DeFi protocols. As seen with the Fantom whale, when large amounts of a native token are being sold off piece by piece, panicky investors may run for the exit, but because fees are high and transactions are slow, they usually won’t be able to exit their positions. This could lead to a death spiral, which is why it is important to be aware of the risks and do your due diligence before investing in DeFi.
Interoperability and Innovation Enabled by ERC-4626 Standard
The introduction of ERC-4626 has been a major step forward in the development of DeFi protocols and applications. With the ability to build apps on top of the vaults and greater interoperability between different protocols, the potential for growth and innovation is enormous. However, it is important to remember that these applications carry risks, and users should always be aware of the potential pitfalls before investing in DeFi projects.
Potential of DeFi as Ethereum Continues to Mature
As decentralized finance continues to grow, we can expect to see more ERC standards developed and more improvements made to existing protocols. With a greater understanding of the potential risks, users will be able to take advantage of all that DeFi has to offer.
The ERC-4626 standard is just one of the many examples of how Ethereum is driving innovation in the DeFi space. With a wide range of projects and protocols built on Ethereum, users have an abundance of options when it comes to participating in decentralized finance. The opportunities are only increasing, and with the proper research, users can find the project that is right for them.
The development of standards like ERC-4626 is also making it easier for developers to build applications on top of existing protocols. The potential for growth and innovation is tremendous, and as DeFi continues to expand, we can expect to see more improvements to existing protocols and new projects emerging.
As Ethereum continues to mature and new standards are introduced, DeFi has the potential to revolutionize the way we interact with finances. With greater interoperability between protocols and improved security, users will be able to reap the benefits of decentralized finance with greater confidence.
The introduction of ERC-4626 has been a major step forward in the development of DeFi protocols and applications. With the ability to build apps on top of the vaults, greater interoperability between different protocols, and improved security, users have an abundance of options when it comes to participating in decentralized finance. Although there are potential risks associated with investing in DeFi projects, users who are aware of these risks can take advantage of all that DeFi has to offer. As Ethereum continues to mature and new standards are introduced, DeFi has the potential to revolutionize the way we interact with finances.