ERC-4626 and the History of Yield Farming
Since the beginning of DeFi Summer, a number of different methodologies have been utilized for representing “deposit receipts” for yield-farms. When someone makes a deposit into a yield-farm, that deposit needs to be recorded, and the amount it has grown to also somehow needs to be kept track of — ideally, these “receipts” should also be tradeable. Two competing paradigms quickly emerged: the rebase tokens and the vault-share tokens. The former was pioneered by AAVE with the introduction of their aToken system; as a user’s principal grows in size, their aToken balance is rebased automatically, meaning that the user’s token balance will grow just by sitting in their wallet. These tokens are always redeemable for the underlying asset at a 1:1 ratio. However, the difficulty in accounting that a constantly-shifting balance introduced laid out the need for an alternate approach: share-tokens. Rather than a changing balance, the balance of a share token will always remain constant; however, the backing will increase above 1:1 immediately, growing as the amount of assets in the yield farm grows. A user depositing one token will receive one share worth one-token; in a number of months, that share will likely be worth 1.2–1.3 tokens. This was the yToken concept and quickly became the near-universal standard for yield-farming platforms.
However, while the mechanics of the system first pioneered by Yearn Finance were quickly adopted across the industry, identical method headers were not; nor was this standard truly universal, as rebase tokens endured within AAVE and other lending protocols. This made building systems that operated on-top of yield farms difficult, as one would have to build custom adapters to each yield farm that one wanted to interface with — a universal standard was badly needed to simplify development overhead.
To this end, in January of 2022, Joey Santoro of FEI/TRIBE and T11 of Paradigm co-authored (along with several others), EIP-4626. EIP-4626, which became ERC-4626 in May, introduced a universal standard for building yield-farms. ERC-4626 offers the same endpoints for all developers, meaning that a system developed to work on ERC-4626 yield-farms will work on all ERC-4626 yield farms, be they produced by Yearn, AAVE, Beefy, Reaper, Compound, or any other yield vault provider. Many in the industry, including Yearn, embraced this long-desired concept with open arms; Yearn themselves pledged to develop their forthcoming V3 to conform to the standard, as did many others.
However, this left existing yield-farms in an odd-position — with new farms being developed, how would the existing systems fare? Much time and effort had gone into their design, and they contained hundreds of millions of dollars, so simply abandoning them did not make sense. Nor did scrapping them immediately for many protocols, as building new yield-farms to ERC-4626 spec is not a simple undertaking. This highlighted the need for ERC-4626 adapters able to bridge existing yield-farms into the ERC-4626 era — these contracts would have ERC-4626 endpoints but utilize the existing farms for their yield-farming systems.
When we showed up with an ERC-4626-based system in Resonate, nobody had built these adapters yet for Yearn. So we did.
What we did
Resonate is a system built on ERC-4626. It uses yield-farms to offer, among other things, instantaneous and guaranteed yield, a solution to Impermanent Loss (IL), a way to better align liquidity provider incentives with protocol incentives, and a next-gen treasury-management solution. We designed it to exclusively utilize ERC-4626, but to make that work, we needed ERC-4626 adapters to both Yearn V1 and V2 contracts. Yearn V1 systems are still in use by our partners at Beefy and Reaper Farms. Yearn V2 systems are in use by Yearn themselves. While not a simple undertaking, with the help of the Yearn and Reaper Farms teams, we successfully constructed universal adapters for both systems, having them audited by BlockSec and Zellic and further inspected by our collaborators at Yearn, Beefy, and Reaper Farms.
We are happy to now share that code with the world.
What does this mean for me?
As part of our pledge to drive the engagement of 4626, we are releasing these adapters as a public-good for the crypto community. They are designed to be permissionless systems, requiring only an initial burn of 1000 wei of tokens to prime them at deployment. We hope that this adapter will not only improve the developer experience of interacting with DeFi, but also further drive support for complete-adoption of ERC-4626. Anyone wishing may use the adapter to easily enter and exit Yearn Pools. As we continue to deploy additional Yearn adapters in the coming months, more and more pools will become available, meaning that the average retail trader will have more choices when using 4626-based systems.
What does this mean for the industry?
There are now publicly available Yearn V1 and V2 ERC-4626 adapters open-sourced and available for all. We are currently in the process of deploying adapters to all Yearn V2 vaults in a public-good event we are calling “The Vaultening” — these autonomous vaults will serve the benefit of the entire EVM community, and we hope to see them recognized as the official standard implementation for Yearn V2 and V1 adapters.
A list of vaults for which we have already deployed ERC-4626 adapters may be found in our docs.
What is Yearn Finance
Yearn Finance is the largest yield-farm currently on the Ethereum Mainnet, with a proven track history of low-risk-high-yield strategies for yield-farming. Their vaults are used across DeFi as the gold standard. Resonate is proud to be collaborating with Yearn to help provide up-front payments in exchange for the yield accrued in their vaults by Resonate users. This is why in collaboration with Yearn we have created an ERC-4626 adapter to interface directly with their underlying vaults. Our adapters are capable of helping you deposit and withdraw from any Yearn-Vault, providing a user and developer-friendly way to securely move your funds throughout the DeFi Ecosystem.
Resonate is a Yield Futures Protocol developed by Revest Finance and built on top of Revest’s Financial NFT (FNFT) technology. Using Resonate, we’re able to separate the principal and interest components of a position by issuing two FNFTs; one containing the principal and the other containing the rights to future interest on that principal. Resonate facilitates the commerce of the rights to future interest by matching issuers (who want to sell their interest rights for a one-time upfront payment), and purchasers (who want to buy the rights to future interest for a one-time upfront payment).