In a glass bowl microwave marshmallows in 30 second intervals stirring each time until they are hot and starting to melt. Stir in water and vanilla until smooth. Transfer 1/2 to stand mixer with dough hook attachment. Begin adding powdered sugar, 1 cup at a time until dough ball is formed and is not longer sticky. Repeat with other 1/2 of mixture. Use remaining sugar for rolling out fondant. Wrap in plastic wrap and store in fridge for long term storage.