What is ERC-4626?

The answer is that ERC-4626 is a new proposal for a token standard on the Ethereum blockchain. Currently, tokens running on it are created to the ERC-20 technical standard. It is hoped that this new standard will “resolve a sore issue in decentralized finance (DeFi): the mishmash of design types for tokens that print money.”

Joey Santoro, a co-creator of the new standard said that the token’s documentation is ready for “final review.” He also asked for the “giga chad brains” of the Crypto community on Twitter to support this improvement to Ethereum.

Why is it important for DeFi?

If it becomes the ‘standard’ it will allow platforms, such as Aave and Yearn, to build assets that reward users in a more simplified way. Originally ERC-4626 was proposed as a way of standardizing yield-bearing tokens in a way that made them easier to build with, but the modified proposal issued on 4th January, delivers a wider set of use cases. For example, it could “simplify parts of the entwined DeFi “stack” by creating a shared interface for tokens held in vaults and therefore save developers time and money,” Coindesk reports.

Santoro explained on Twitter, “It’s just an interface for depositing and withdrawing the token from any kind of strategy that handles a single token. It’s just an interface for depositing and withdrawing the token from any kind of strategy that handles a single token.”

DeFi Yield

One of the primary benefits of DeFi is the ability to generate yield. The rates are better than in traditional savings accounts to start with, and DeFi tools incentivize use and attract liquidity by paying out tokens. Furthermore, in DeFi there is interoperability, meaning that tokens can be plugged in on different platforms to perform different economic tasks.

You can earn yield by lending, aggregate it from different sources, or hold a yield-bearing instrument, such as xSushi on Sushiswap. “You can already see that those are like some pretty diverse use cases,” Santoro said. “And there is no standard interface for a token which generates yield.” He added that this is a problem across DeFi, which so far requires “custom connectors all over the place.”

CoinDesk’s DeFi reporter Andrew Thurman believes it is a small change that could have a large impact: “It’s very similar to wrapped ETH in my mind: an incremental change that most people don’t even notice (wrapping/unwrapping ETH happens on the backend of lots of swaps, deposits, etc., now and users don’t even know it’s happening) but actually has huge impact on usability, liquidity and utility.”

Alberto Cuesta Cañada, who is a co-author of the latest ERC-4626 documentation, asked for feedback on Twitter, and some people have already responded on Github, which is where the code is posted.

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