ERC-4626 — Mechanics

What it is

Tokenized vault

A smart contract that holds one asset (e.g. USDC) and mints ERC-20 share tokens to depositors — like a mutual fund on-chain.

One deposit asset per vault
Shares represent pro-rata ownership
Used by Morpho, Aave wrappers, yield products

Two tokens

💵

Asset

USDC deposited

⇄

🎫

Vault receipt token

Deposit asset → get shares. Redeem shares → get asset back at current price.

The core mechanic

totalAssets ÷ totalShares = NAV / share

When the vault earns yield, totalAssets goes up but shares stay the same → each share is worth more. No separate payout is issued.

Example · User deposits USDC

Alice calls deposit(10,000 USDC) on an ERC-4626 vault at NAV = $1.00/share.

Alice · before

$ USDC 10,000

Vault shares 0

10,000 USDC → deposit()

ERC-4626 vault

$ Receives USDC +10,000

Mints shares +10,000

→ transfer

Alice · after

$ USDC 0

Vault shares 10,000

10,000 USDC leaves Alice's wallet → vault totalAssets increases → vault mints 10,000 share tokens to Alice. At $1.00/share her position is worth $10,000.

Deposit & redeem flow

👤

Depositor

Hold USDC

→deposit()

🏦

Vault

Holds assets
Mints shares

→invest

📈

Yield source

Lending, LP, etc.

💰

Interest

Accrues to vault

→NAV ↑

🏦

Vault

totalAssets grows

→redeem()

👤

Depositor

Get USDC back

How yield shows up

Before yield

totalAssets$10,000

totalShares10,000

NAV / share$1.00

+$500
interest

After yield

totalAssets$10,500

totalShares10,000

NAV / share$1.05

Four standard functions

deposit(assets) Send USDC → get shares

mint(shares) Specify shares → pay USDC

withdraw(assets) Ask for USDC → burn shares

redeem(shares) Burn shares → get USDC

previewDeposit / convertToShares read the exchange rate before acting.

Remember

Shares ≠ dollars Shares are a claim; value = shares × NAV.

New depositors buy at current NAV Late joiners don't dilute early depositors.

Variable rate Morpho vaults: NAV moves with lending yield daily.