Editorial Notes (vol. 26) – Early adopters of ERC-4626 tokenized vaults standard
What are tokenized vaults?
DeFi ecosystem offers an abundance of opportunities for participants to generate yield through investing, providing liquidity, lending, and yield farming among multiple other strategies. However, those that don’t want to create and manage strategies themselves can utilize vaults that automate the processes in exchange for a fee.
Vaults are smart contracts that take in token deposits and perform specific actions with those tokens in order to reap token rewards for the depositor. Vaults can have pre-set strategies that are designed to generate returns through capital movements, auto compounding, and rebalancing. Once tokens are deposited into the vault, yield-bearing tokens are issued to represent the deposited share of the pool.
Due to the size of the ecosystem, these standards come in handy to streamline the development process, thereby increasing interoperability and reducing development time. Just as there are standards for NFTs (ERC-721) and fungible tokens (ERC-20), there is a relatively new standard for yield-bearing/tokenized vaults (ERC-4626).
Lending markets, aggregators, and intrinsically interest-bearing tokens help users find the best yield on their crypto tokens by executing different strategies. However, these strategies are carried out with slight variations, which might be error-prone or waste development resources.
ERC-4626 in yield-bearing vaults will lower the integration effort and unlock access to yield in various applications.
To sum up, the ERC-4626 standard implements the following features:
An optimized vault interface for developers who want to integrate it.
An exchange of a deposit for shares, where shares represent fractional ownership of the vault's underlying token.
A consistent standard for developers to work with in developing yield-bearing contracts.
Battle-tested security for vault tokens.
Now, let’s look at some of the projects that are spearheading the implementation of this new standard.
Leverage your funds without the risk of liquidation and access self-repaying loans with Alchemix.
Alchemix Finance is a future-yield-backed synthetic asset platform and community DAO. The Alchemix platform gives you advances on your yield farming via a synthetic token that represents a fungible claim on any underlying collateral in the Alchemix protocol.
Due to its unique ability to provide collateral that can also generate yield, it can offer self-repaying loans that have a low risk of liquidation.
Utilize Yearn vault strategies and maximize your yields.
Yearn Finance is a decentralized asset management platform that has multiple products, ranging from liquidity provision and lending to insurance. The most prominent product in its ecosystem are Vaults, which maximize users' yields through various yield farming strategies proposed by the community.
The vaults help to socialize gas costs, automate yield generation and rebalancing, and redirect capital to new opportunities. By using ERC-4626 in their vaults, these deposits can be easily funnelled into other vaults.
Lend and borrow almost any asset permissionlessly on Euler.
Euler is a capital-efficient permissionless lending protocol that helps users earn interest on their crypto assets or hedge against volatile markets without the need for a trusted third party.
Euler lets its users determine which assets get listed and allows any asset with a WETH pair on Uniswap V3 to be added.
Access fixed-rate loans with Yield Protocol.
Yield is a protocol for collateralized fixed-rate, fixed-term borrowing, and lending.
At the core of Yield are fyTokens, which represent tokenized loans. They are analogous to zero-coupon bonds in the sense that they do not pay interest, but rather trade at a discount, rendering a profit at maturity when they are redeemed for their full value.
Maximize your yield on Aura Finance by depositing Balancer Pool Tokens.
Aura Finance is a protocol built on top of Balancer to provide maximum incentives to Balancer liquidity providers and BAL stakers (into veBAL) through the social aggregation of BAL deposits and Aura’s native token.
By providing liquidity on Balancer and depositing Balancer Pool Tokens (BPTs) into Aura, users earn Balancer trading fees, boosted BAL rewards, and AURA token. Additionally, Aura pools support the ERC-4626 standard to optimize composability.
Boost, hedge, and trade yield with Timeless Finance.
Timeless is a yield market protocol that lets you boost, hedge, and trade yield. It splits user deposits into two types of yield tokens and allows you to boost the yield you earn from any supported farm by 1-2x, decrease the volatility of the yield you earn, and speculate on whether yield rates are going up or down.
Timeless supports yearn and ERC-4626 vaults, and anyone can use their Factory to deploy new yield tokens and liquidity pools, allowing users to boost their yields.
Access higher yields with Maple by providing liquidity for undercollateralized loans.
Maple is a decentralized corporate credit market. It provides capital to institutional borrowers through globally accessible fixed-income yield opportunities. It allows funds to leverage their reputation to take undercollateralized loans without constant fear of liquidation and margin calls, while allowing the liquidity providers to access higher yields on their loaned assets to offset the risk.
Create your own liquidity pools, earn trading fees by providing liquidity, and trade tokens on Balancer.
Balancer is an automated portfolio manager and trading platform that turns the concept of an index fund on its head: Instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders who rebalance your portfolio. This is done by following arbitrage opportunities. It uses ERC-4626 on its Linear pools, the base component of Boosted Pools for facilitatating trades between two tokens at a defined exchange rate.
Trade and earn yield on your stablecoins on mStable.
mStable is a protocol that enables stablecoin swaps and yield generation by allowing users to mint and deposit mUSD assets, and overcollateralized lending.
mStable’s ERC-4626 Save and Convex strategies have pioneered gas-efficient, optimized yield strategies for depositors to earn and compound yield in a decentralized and secure manner.
Trade on ThorSwap and access liquidity across multiple chains.
THORSwap's DEX Aggregator connects liquidity across 8+ blockchains and compares pricing from numerous Aggregators and DEXs to give you the best cross-chain swap in one click. Through the platform, you can provide liquidity to earn real yield on your deposited assets with impermanent loss protection.
Where can I learn more about ERC-4626?
Can I earn by simply depositing funds into a vault?
By depositing into different vaults, you allow the vault to deploy your deposited funds into the vault's underlying strategies. These strategies are meant to generate yield, however, they are not risk-free and you'll usually also have to pay management and performance fees. Be careful when choosing where to deploy your capital as some strategies can also lose funds in adversarial market conditions.