Microwave marshmallows and water in 30 sec intervals till melted. Stir after each time to check consistency. Takes about 2 or 3 times.
Stir marshmallows and water till smooth, add in vanilla. Mix again.
Slowly add in most of the sugar, about ¾ of it. Grease hands and surface with butter or shortening. You can also use the extra powdered sugar to keep the fondant from sticking to surface or rolling pin.
Knead the fondant till smooth, add more sugar if needed.
Add any color now by flattening out a piece of fondant and putting a drop or 2 of color in center. Fold fondant over and knead until color in incorporated.
Store greased or powdered, wrapped in plastic and in a ziplock bag.