Ever heard of ERC-4626? Innovation through iteration is common across the digital assets sector. Over time, all mainstream blockchain platforms have evolved to accommodate new use cases and fend off competition from emerging rivals. Ethereum is perhaps the most versatile.
Since it launched in 2014, the Ethereum network has experienced major upgrades every few years and minor upgrades every few months. From the unfortunate DAO fork in 2016 to the Constantinople gas optimizations of 2019, every successive upgrade to the network has made it faster, cheaper, and more capable. Now, the development team is implementing another upgrade that standardizes tokens for DeFi applications.
Here’s a closer look at this latest update to the world’s second-most popular crypto network.
What is ERC-4626?
“Ethereum request for comment,” or ERC is a way for developers to suggest and implement new upgrades to the Ethereum blockchain network. One of the best known is ERC-20 which helped standardize the process of creating and managing new tokens on the Ethereum blockchain. Maker (MKR), Basic Attention Token (BAT), Augur (REP), and OMG Network (OMG) are all based on this protocol.
Now, ERC-4626 wants to standardize the process of “interest generating assets.” In other words, it brings the same framework to decentralized crypto exchanges and Decentralized Finance (DeFi) products on the market.
Right now, an investor in a DeFi product has to store the tokens in a complex web of interacting smart contracts. ERC-4626 would simplify and streamline this process so that a standard “digital vault” that lives on the Ethereum network can store these interest-bearing assets for investors.
ERC-4626 was passed just earlier this month and has already been adopted by major DeFi platforms such as Yearn.Finance. “To build a single app on top of DeFi’s yield-bearing tokens, you have to write dozens of complex, error-prone adapters that can handle each unique variation,” said the Yearn team on Twitter. “[to] build an app on top of one ERC-4626 vault, […] it will work for all other ERC-4626 tokens.” Other exchanges and DeFi platforms are likely to adopt the protocol soon.
DeFi’s growing influence
ERC-4626 is a sign that DeFi is rapidly becoming an integral part of the Ethereum ecosystem. At the time of writing, tokens collectively worth $78.35 billion are locked in DeFi contracts across the digital assets ecosystem.
Maker, AAVE, and Compound dominate this sector and have the most assets. All of them are based on the Ethereum blockchain. That makes Ethereum the de facto leader of the DeFi revolution.
ERC-4626 is also an encouraging sign for Ethereum users and investors. The rapid implementation of this tool makes it clear that Ethereum has the ability to adapt to new use cases and new features. Every time the community finds a new product or innovative use case – such as fungible tokens, non-fungible tokens, or multi-tokens on a single smart contract – the development team implements ERCs 20, 721, and 1155 to accommodate them.
This ability to adapt makes the network more resilient and less susceptible to obsolescence.