DeFi's Newest Money Lego: ERC-4626

DeFi's Newest Money Lego: ERC-4626
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ERC-4626 is a recently proposed Ethereum token standard that might resolve a common issue of decentralized finance (DeFi), i.e. complications in design types of tokens that print money. The original aim of the proposal was to standardize yield-bearing tokens to make them easier to build with, but now it covers a wide range of use cases. ERC-4626 was proposed on Jan 4; according to co-creator Joey Santoro, the token documentation is almost ready for final review. If the ERC-4626 token is adopted, the "tokenized vault standard" will provide a general way for platforms like Yearn or Aave to create assets that reward users.

This proposal could simplify intertwined parts of the DeFi stack by providing a shared interface for tokens held in vaults, saving the developer time and money. Earlier it was just an interface for withdrawing and depositing tokens from any strategy that manages a single token. Standardizing tokenized vault strategies will provide better DeFi composability leading to a better user experience. Decentralized finance is an emerging economy where people borrow, lend and steal tokens, all the essential financial services without a middleman. 

DeFi is based on distributed ledger technology which removes the involvement of any central authority. One of the significant benefits of DeFi is its ability to generate yield at much higher rates one cannot even expect from traditional bonds or savings accounts. For instance, Sushi is a decentralized exchange where users can stake their SUSHI tokens in return; they get xSUSHI, an instrument that pays returns.

There are mainly three ways to earn yield in DeFi: making profit through lending, combining output from different sources and holding a yield-bearing instrument. Most DeFi tokens can be plugged in on multiple platforms to perform various tasks.

This newly proposed Ethereum token standard is a small change that could profoundly impact. People probably won't notice these changes (like wrapping/unwrapping ETH takes place in the back end of most of the deposits, swaps, etc.), but the impact on usability is significant. Unlike other DeFi mechanisms, this proposal will undergo an audit by multiple firms before merging