ERC4626 is a tokenized vault standard that uses ERC20 tokens to represent ownership shares of another asset.<h1 style="margin-left:0px;">The motivation behind creating ERC-4626</h1>Tokenized Vaults currently lack standardization, resulting in a wide range of implementation approaches. These implementations can cover areas such as lending markets, aggregators, and tokens with built-in interest. The absence of a standardized approach makes it challenging to integrate these tokenized Vaults at the aggregator or plugin level.Establishing a standard for tokenized Vaults would simplify the integration process for yield-bearing vaults.How ERC-4626 Vaults Operate:1. Depositing Assets:<ul><li>Users initiate the process by depositing their assets into a smart contract vault.</li><li>The vault aggregates all the token assets, and in return, it issues ERC-20 tokens to the users. These ERC-20 tokens represent the user’s ownership stake in the pooled tokens.</li></ul>2. Yield Generation Strategies:<ul><li>Each vault is equipped with predefined strategies designed to maximize yields for the deposited tokens.</li><li>These strategies are configured to ensure that the rewards from token holdings are optimized for users.</li></ul>3. Token Allocation and Reserves:<ul><li>Vaults allocate tokens based on programmed conditions.</li><li>A certain percentage of tokens is retained within the vault’s reserves.</li><li>When a user initiates a withdrawal, tokens from the reserves are distributed first before accessing tokens from the allocated sources.</li></ul>4. Growing Asset Balance:<ul><li>In cases where the balance of the token asset in the vault grows at a faster rate than the production of token shares, users will receive a larger amount of the token asset upon withdrawal compared to their initial deposit.</li></ul>Projects Building on ERC-4626:<ul><li>Yearn Finance: Yearn Finance utilizes ERC-4626 for its vaults, allowing for seamless transfers of deposits to other ERC-4626 vaults.</li><li>Balancer: Balancer employs ERC-4626 in its Linear pools, the foundation of Boosted Pools. This facilitates trading between two tokens at a fixed exchange rate using linear mathematics.</li><li>Frax Finance: sfrxETH represents an ERC-4626 compliant vault. To obtain sfrxETH, users first approve the sfrxETH contract as a frxETH spender, and then execute either the mint() (for minting a specific amount of sfrxETH) or deposit() (for depositing a specific quantity of frxETH) function.</li><li>Maple Finance: Maple incorporates ERC-4626 in its xMPL contract and RevenueDistributionToken. These components are utilized to distribute protocol revenue to staked users with vesting.</li></ul><h1 style="margin-left:0px;">The ERC4626 Execution Functions</h1><h1 style="margin-left:0px;">Asset Deposits</h1>Asset deposits can be performed using two functions:<figure class="image image_resized" style="width:679.994px;"><img src="https://miro.medium.com/v2/resize:fit:784/1*vPNplWW6MoigGaHQ7KNlUw.png" alt="" loading="lazy"></figure><ul><li>deposit(): This function enables you to specify the amount of assets you wish to contribute, and it automatically calculates the corresponding number of shares to allocate to you.</li><li>mint(): With this function, you specify the desired number of shares you want to obtain, and it calculates the amount of ERC20 assets to transfer from your account.</li></ul><h1 style="margin-left:0px;">Asset Redemption</h1>Asset redemption can be accomplished using two functions:<figure class="image image_resized" style="width:679.994px;"><img src="https://miro.medium.com/v2/resize:fit:784/1*SqoRA9iV1Vud081lfWRV7A.png" alt="" loading="lazy"></figure><ul><li>withdraw(): With this function, you can indicate the quantity of assets you intend to retrieve from the contract, and the contract will determine the number of shares to be burned.</li><li>redeem(): Using “redeem,” you specify the number of shares you want to burn, and the contract calculates the amount of assets to be returned to you.</li></ul><h1 style="margin-left:0px;">Implementation Example</h1>Here’s a version that’s slightly easier to understand for educational purposes:<figure class="image image_resized" style="width:679.994px;"><img src="https://miro.medium.com/v2/resize:fit:784/1*-486ZpDNRLv8xtJI6Ux59A.png" alt="" loading="lazy"></figure>Let’s break it down:The contract imports three different contracts:<ul><li><code>ERC4626.sol</code>: This OpenZeppelin contract implements the ERC-4626 standard.</li><li><code>Ownable.sol</code>: This contract provides basic access control, allowing us to restrict the <code>lendOnAave</code> and <code>withdrawFromAave</code> functions to the contract's owner.</li><li><code>IPool.sol</code>: This interface helps in interacting with the Aave Pool contract for supplying and withdrawing tokens from Pools.</li></ul>Most of the heavy lifting is handled by the OpenZeppelin ERC-4626 contract.<ol style="list-style-type:decimal;"><li><code>_deposit(uint _assets) public</code>: This function allows users to deposit assets and receive vault share tokens in exchange. It updates the user's shareholdings in the <code>shareHolders</code> mapping by adding the result of the <code>deposit</code> function, which is a part of the <code>ERC4626</code> contract.</li><li><code>_withdraw(uint _shares, address _receiver) public</code>: This function enables users to withdraw their deposits, including any accrued interest, in the form of an asset token. It calls the <code>redeem</code> function, also part of the <code>ERC4626</code> contract, and updates the user's shareholdings in the <code>shareHolders</code> mapping by subtracting the withdrawn shares.</li><li><code>_decimalsOffset() internal pure override returns (uint8)</code>: This internal function is used to determine the number of decimal places in the asset being handled by the contract. In this implementation, we've set 1 asset to be equivalent to 1000 shares.</li><li><code>lendOnAave(address aaveV3, uint256 asset_amount) public onlyOwner</code>: This function allows the contract owner to supply assets to the Aave lending protocol.</li></ol><ul><li>It approves the transfer of <code>asset_amount</code> of the asset token to the Aave lending pool.</li><li>It then calls the <code>supply</code> function on the Aave lending pool to provide the specified amount of assets.</li></ul>5. <code>withdrawFromAave(address aaveV3) public onlyOwner</code>:<ul><li>This function grants the contract owner the ability to withdraw assets from the Aave lending pool.</li><li>It calls the <code>withdraw</code> function on the Aave lending pool to withdraw assets. The second argument, <code>type(uint).max</code>, indicates that the maximum possible amount should be withdrawn, and the withdrawn assets are sent to the contract's address.</li></ul>To get you started quickly we have set everything at <a href="https://github.com/BuildBearLabs/ERC4626">BuildBear Labs ERC4626</a><ul style="list-style-type:disc;"><li>Clone/fork ERC4626 :</li></ul><pre><code class="language-plaintext">git clone https://github.com/BuildBearLabs/ERC4626.git</code></pre><ul style="list-style-type:disc;"><li>Install dependencies</li></ul><pre><code class="language-plaintext">cd ERC4626
npm install</code></pre><ul style="list-style-type:disc;"><li>Create your private testnet (forked from the Ethereum mainnet) we are forking Ethereum because we will be using Aave V3 Protocol</li></ul><pre><code class="language-plaintext">npm run createTestnet</code></pre>Once the Testnet is live, its RPC, Explorer, and Faucet details are added to the <code>testnet.json</code> file.<ul style="list-style-type:disc;"><li>To Deploy the <code>TokenVault.sol</code> smart contract</li></ul><figure class="image image_resized" style="width:679.994px;"><img src="https://miro.medium.com/v2/resize:fit:784/1*cwbYwaDVMS-pTrUP3xJ5Mg.png" alt="" loading="lazy"></figure>Let’s break down each part of the deployment script and explain its purpose:<ol style="list-style-type:decimal;"><li>Deploying the TokenVault Contract:</li></ol><ul><li>It uses the <code>ethers.getContractFactory</code> method to create a contract factory for the "TokenVault" contract.</li><li>The <code>tokenVault.deploy</code> method is called to deploy a new instance of the "TokenVault" contract, providing the following constructor parameters:</li><li>Address of the ERC20 token (e.g., WETH) to be managed by the TokenVault.</li><li>Name of the TokenVault contract (“BuildBear”).</li><li>Symbol of the TokenVault contract (“BB”).</li></ul>2. Conversion from Shares to Asset:<ul><li>It calculates and logs the conversion rate from shares to the asset managed by the TokenVault contract.</li></ul>3. Minting and Approving WETH Tokens:<ul><li>The script mints 1000 WETH tokens by calling the <code>deposit</code> method on the WETH contract, specifying the value as 1000 ETH (in wei).</li><li>It approves the TokenVault contract to spend 1000 WETH tokens on behalf of the deployer by calling the <code>approve</code> method on the WETH contract.</li></ul>4. Depositing WETH Tokens to TokenVault:<ul><li>It deposits 1000 WETH tokens to the TokenVault contract by calling the <code>_deposit</code> function on the TokenVault contract.</li></ul>5. Lending WETH Tokens on Aave:<ul><li>It calls the <code>lendOnAave</code> function on the TokenVault contract to lend 1000 WETH tokens to an Aave pool, specifying the Aave pool address.</li></ul>6. Advancing Time:<ul><li>It advances time by calling the Hardhat-specific <code>hardhat_mine</code> method to simulate the passage of time by mining a new block. This is done to trigger interest accrual on the Aave pool.</li></ul>7. Withdrawing WETH Tokens from Aave:<ul><li>It calls the <code>withdrawFromAave</code> function on the TokenVault contract to withdraw WETH tokens from the Aave pool, specifying the Aave pool address.</li></ul>8. Re-calculating Conversion Rate:<ul><li>It re-calculates and logs the conversion rate from shares to the asset after interacting with Aave.</li></ul><figure class="image image_resized" style="width:679.994px;"><img src="https://miro.medium.com/v2/resize:fit:784/1*P-pVjTF9GE1K2apMCyoLXw.png" alt="" loading="lazy"></figure><pre><code class="language-plaintext">npx hardhat run scripts/deploy-TokenVault.js</code></pre>In summary, this deployment script accomplishes the following:<ul><li>Deploys the TokenVault contract.</li><li>Interacts with the deployed contract to deposit, and withdraw WETH tokens.</li><li>Observes the changes in the conversion rate between shares and the asset after interacting with Aave.</li></ul>Initially, 1000 shares are equal to 1 asset. However, after depositing funds to Aave, advancing time, and withdrawing, we find that 1000 shares are now equivalent to approximately 1.068 assets. We have acquired more asset tokens through these interactions.<h1 style="margin-left:0px;">About BuildBear:</h1><a href="https://www.buildbear.io/">BuildBear</a> is a platform tailored for DApp development and testing. Developers gain the freedom to construct a personalized Private Testnet sandbox across a variety of blockchain networks. The liberty to mint unlimited Native and ERC20 tokens, coupled with rapid transaction times on BuildBear (under 3 seconds!), enhances the DApp development lifecycle manifold. The platform comes equipped with tools designed for real-time testing and debugging, ensuring developers can keep tabs on intricate blockchain transactions with unparalleled ease.Connect with us on <a href="https://twitter.com/_BuildBear">Twitter</a> | <a href="https://www.linkedin.com/company/build-bear/">LinkedIn</a> | <a href="https://t.me/Web3_dApp_Developers">Telegram</a> | <a href="https://github.com/BuildBearLabs">GitHub</a>Author: <a href="https://twitter.com/chandan1_">chandan</a>

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Tokenized Vaults currently lack standardization, resulting in a wide range of implementation approaches. These implementations can cover areas such as lending markets, aggregators, and tokens with built-in interest. The absence of a standardized approach makes it challenging to integrate these tokenized Vaults at the aggregator or plugin level.

In-Depth Guide on ERC-4626 Tokenized Vaults

BUILDBEAR // TUTORIALS

In-Depth Guide on ERC-4626 Tokenized Vaults

Let’s get started then, Shall we?

Let’s get started then, Shall we?

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