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Yield Vaults and ERC-4626 Standard

The ERC-4626 Tokenized Vault Standard was designed to improve the functionality of yield-bearing vaults within DeFi ecosystems, creating a standardized approach to how vaults interact with tokens. ERC-4626 enables greater interoperability between vaults, enhancing deposits, withdrawals, and yield accounting across platforms.

Concrete adopts this standard to simplify the complex process of managing yields and to offer yield vaults that not only provide users with optimized returns but also integrate a protection layer for the borrow system. This dual utility ensures that deposited assets are maximized for yield generation while also safeguarding borrowers from liquidation risks. A key innovation is how Concrete vaults allocate capital—some funds are directed toward earning yield, while others are reserved to protect loans through Concrete's robust liquidation protection system.

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This design also lays the foundation for future expansions, with plans to include liquid staking tokens (LSTs) and other assets over time.

How Vaults Provide Capital to the Borrow System for Protections​

In Concrete’s ecosystem, the yield vaults are multi-functional. Not only do they generate returns for users, but they also support the platform's liquidation protection system.

When earners deposit assets into Concrete’s vaults, these funds are split between two main roles:

  1. Yield Generation: A portion of the deposited assets is actively managed through various money markets and strategies to optimize returns.
  2. Loan Protection: Another portion of these funds is reserved specifically to support the loan protection feature. Concrete's Probability Engine calculates how much liquidity needs to be set aside to protect loans, ensuring that borrowers are safeguarded from liquidation.

This allocation is critical for maintaining the security of loans on the platform. In cases where a borrower’s collateral is at risk of liquidation, the reserved liquidity from the vaults is deployed to stabilize the loan, preventing the borrower from losing their assets.

The reserved liquidity acts as a protective buffer, allowing Concrete to inject liquidity into a borrower's position before they reach a liquidation threshold. This system ensures that the vaults are not only a tool for passive yield generation but also an integral part of the platform’s risk management and borrower protection mechanisms.

How ERC-4626 Enables Smooth Integration Between Yield Vaults​

1. Standardized Deposits and Withdrawals​

  • With ERC-4626, the process of depositing and withdrawing assets from vaults is streamlined. Users deposit their assets (e.g., ETH, USDC, BTC) into vaults, receiving cTokens in return. These tokens represent their share of the vault and are fully transferable across different DeFi platforms that support ERC-4626.

  • Withdrawals are just as simple. When a user decides to redeem their position, they burn their cTokens and receive their underlying assets back, along with any yield that has accrued over time.

2. Interoperability Across Platforms​

  • The standardization brought by ERC-4626 makes vaults and cTokens interoperable across various DeFi platforms, enabling users to move between protocols without friction. Whether it's for yield farming, liquidity provision, or collateralized borrowing, ERC-4626 vaults integrate smoothly with other DeFi solutions, giving users more flexibility and reducing the need for manual intervention.

3. Simplified Accounting for Yield Accrual​

  • Accounting for yield can be complicated across different DeFi platforms, but ERC-4626 simplifies this process by providing a uniform structure for tracking and distributing returns. Concrete’s vaults use this to automatically calculate the yield based on deposits, and the accrued returns are distributed in the form of the asset from which they originated—whether it’s ETH, USDC, or CT tokens.

  • For users, this means they can easily see how much yield they’ve earned, making it straightforward to claim their rewards or reinvest them.

How Yield is Accrued for Earners​

Yield is accrued from multiple sources, and earners receive it in the form of the underlying assets. The protocol calculates a notional APY in the vault’s base asset to offer clarity on expected return.

Money Markets​

Funds from the vaults are deposited into various money markets (e.g., Aave, Compound) that offer the best yield opportunities for specific assets. The protocol constantly rebalances these deposits based on changing interest rates and transaction costs, ensuring the highest possible returns.

Loan Protection Revenue​

Earners also receive a portion of the fees generated from Concrete’s loan protection services. This includes fees from opening and canceling protection plans, claims triggered during protection, and foreclosure events. Additionally, when borrowers repay credit lines, any difference in collateral value is passed on to earners as yield.

CT Token Emissions​

Concrete rewards earners with CT tokens, adding an extra source of income for those participating in its yield vaults.

Example​

Imagine you deposit 1 ETH into a Concrete yield vault. In return, you will receive 10 cETH, which represents your share of the vault. Behind the scenes, your ETH is split between generating yield in money markets and providing liquidity to protect borrowers from liquidation.

After some time, you accrue yield from multiple sources:

  • 0.01 ETH from money markets,
  • 150 USDC from loan protection fees, and
  • 100 CT tokens from emissions.

When you decide to withdraw your ETH, you redeem cETH tokens. Concrete’s system ensures there is enough liquidity to facilitate the withdrawal by managing the funds reserved for loan protection and yield generation. If liquidity is momentarily tied up, your request enters a redemption queue, with full transparency on when your funds will be available.

User Benefits​

  • Track your earnings through cTokens. The system calculates and displays the notional value of the yield accrued, expressed in the asset originally deposited (e.g., ETH).

  • Redeem your cTokens to reclaim deposited assets and accrued yield with minimal hassle. Concrete’s liquidity management system ensures that withdrawals are executed efficiently, even if a redemption queue is needed to ensure liquidity.

  • Assets are constantly being shifted to the best-performing money markets. By monitoring interest rates, transaction costs, and liquidity utilization across multiple DeFi platforms, Concrete optimizes returns without the user needing to micromanage their investments.