Melt marshmallows in the microwave in 30 second increments, stirring after every 30 seconds until smooth.
Allow to cool, then stir in water and vanilla extract.
Pour mixture into a large mixing bowl and gradually add in powdered sugar, mixing on low speed, until all but 1 cup sugar is incorporated (save the remaining sugar for kneading the fondant). Turn mixture out onto a surface dusted with powdered sugar.
Spray your hands with cooking spray and knead fondant mixture, using some of the extra sugar to coat the surface so you can work the mixture.
Separate into several balls and add a few drops of gel food coloring to achieve a pastel fondant. We made three different colors for our decorations.
Wrap each fondant ball in plastic wrap and place in an airtight container and refrigerate overnight.