Integrating ERC-4626: A Game-Changer in Tokenized Vaults
Idle DAO is thrilled to announce the adoption of the new ERC-4626 standard, expanding composability on Ethereum
One of the most remarkable features of DeFi is definitely its open-source nature. Innovation runs extremely fast in this exciting space, with ever-changing dApps leveraging each other to build an interconnected and synergistic ecosystem where the keyword is composability.
But everything comes at a price, and those building behind the scenes know this well. With a wide range of independent DeFi protocols, achieving seamless interoperability can represent a challenge for developers, who need to spend a lot of time and effort building several custom integrations.
The new Ethereum standard ERC-4626 is here to change the game, and we’re proud to be among the adopters actively contributing to paving the way to new horizons of DeFi innovation.
The adoption of ERC-4626 enables Idle to provide a standardized framework for vaults and integrated strategies, making integration easy for both on-top and underlying DeFi protocols.
A complete list of Idle’s ERC-4626 compliant contracts, which are currently available, can be found in our docs.
Introducing ERC-4626, the new standard for tokenized vaults
ERC-4626 is a new token standard meant to solve the lack of standardization in tokenized vaults using ERC-20 tokens. The standard was approved in May 2022, following the EIP-4626.
Addressing inefficiency
DeFi allows token holders to earn returns on their assets while keeping ownership and exposure over them. This can be done through various use cases and strategies, for example, using lending markets such as Aave and Compound, yield aggregators, and yield-bearing tokens.
Underlying these different strategies are vaults: smart contracts, which pool user funds together and implement specific actions with the aim of providing token rewards to the depositors in the form of yields.
When a user deposits funds into a vault (so far, ERC-20 tokens), the smart contract mints a specific number of shares, commonly known as LP tokens, which serve as a deposit receipt. At the time of withdrawal, the depositor can redeem the assets originally deposited and claim the interest earned while the shares previously minted are burnt.
Yield-bearing tokens are a specific type of LP tokens that intrinsically accrue interest on top of the underlying assets, each carrying a unique floating cash flow that can be realized in real-time (as is typically the case for idleTokens).
As noted, despite the common goal of generating yields pursued by these different use cases, the implementation is quite varied. This makes the integration process highly complex at the aggregator or plugin layer, with the need for tailored actions and customized adapters, leading to potential errors, higher costs, and lower scalability.
How it works and technical specs
ERC-4626 changes this paradigm by introducing a common framework for tokenized vaults. A complete yet minimal interface, which makes it possible to have details of yield-bearing tokens with one single API call.
At a high level, ERC-4626 represents a new extension of ERC-20, so the two contracts share most of the variables, events, and functions. The interface is consolidated into four state-changing methods, which ensure composability between the vault tokens of different protocols and can easily accommodate any use cases:
- Deposit — exact underlying for some shares
- Withdraw — exact underlying for some shares
- Mint — exact shares for some underlying
- Redeem — exact shares for some underlying
More details on the technical specs can be found on the EIP-4626 page and the OpenZeppelin GitHub repo.
Unlocking DeFi composability
With a unified plug connecting tokens to DeFi protocols through these vaults, ERC-4626 solves all the inefficiencies previously mentioned, achieving:
- Enhanced security: building separate adapters is no longer needed and having a common standard means fewer security vulnerabilities.
- Lower costs: costs are optimized because the integration process is less time-consuming and there is no need for multiple complex audits.
- Higher scalability: speeding up the work of developers enables more room for innovation, with improved interoperability and the best solutions for the end user.
Looking ahead: what the ERC-4626 adoption means for Idle DAO
At Idle DAO, we are on a mission to step up DeFi by reimagining yield automation and risk management. Individuals and businesses of every size, from DeFi protocols and DAOs to institutional players, can leverage our product suite to optimize capital efficiency and tailor their risk exposure to personal needs.
With the new ERC-4626, there is now a standard that integrators and developers can use to build and integrate DeFi apps involving tokenized vaults. Within our product suite, any protocol will now be able to build an ERC-4626 adapter on its own PYTs.
ERC-4626 compliant contracts currently available on our protocol include:
Further details can be found in our docs.
By adopting this solution, we are at the forefront of further facilitating the integration of Idle strategies, unlocking greater efficiency and improved scalability.
At the same time, DeFi protocols that use ERC-4626 and serve as underlying yield sources can now be more easily integrated by Idle. This will make room for more and more partnerships, further developing our extensive network and offerings.
Stay tuned as more announcements are on the way!
About Idle DAO
Idle DAO is a decentralized organization that builds yield automation infrastructure for DeFi. From brand new DeFi protocols to institutional and DAO treasury managers, businesses of every size use our protocol to optimize capital efficiency and manage their treasuries with DeFi.
We believe everyone deserves the best for their idle funds in terms of returns and risks. Over the past three years, Idle has rolled out the features and services, defining and shaping the yield automation space. To learn more about our products and services:
