JAN 25, 2024
Real use cases of Solana Token Extensions
by 3hVa..8MBw, AgbYu4HmVmhHdzYDVCwnwiVXpaVmVteMTFiejn3YCaKU
Solana's answer to TradFi folks
Solana Token Extensions were launched yesterday. The most pleasing thing for me with this feature is that it isn’t just serving the degens and the native crypto industry. There are a lots of functionalities that would be extremely useful in the TradFi world. Even central banks may use Solana in the near future if we made the right moves.
I am not surprised that this is coming after the Visa initiative that Solana had been chosen for, as that would have given the engineers at Solana Labs a lot to think about. Now jumping into the key functionalities and the real applications that they can enable.
Here are a few examples of how Token extensions can be used by TradFi and Web3 folks.
- Transfer hooks allow the program to define constraints/criteria for token transfers. For instance if you are an NFT DAO and want to distribute tokens to your NFT holders, transfer hooks can be an excellent way of doing it.
- In mainstream capital markets, this can potentially drive programmable money, perhaps even driven by central bank policies. For instance, if in the world of CBDCs (Central Bank Digital Currency), a central bank wants to charge lower transaction fees for a certain region of people in the country, it can be programmed using transfer hooks. That could drive financial inclusion at scale.
- Issuers of tokens can now mandate KYC and AML checks before allowing users to transfer tokens.
- Coming back to the degen world, NFT royalties can be programmed using transfer hooks too.
- Transaction confidentiality (or the lack of it) has been one of the biggest headwinds for the adoption of digital assets by mainstream financial services participants. Large capital market players aren’t going to want us spying over their onchain activities and figuring out their plans.
- Privacy has been achieved by Hyperledger and R3 Corda by performing transactions on their permissioned chains. Polygon has its Polygon supernet, Avalanche its Ava subnets and Cosmos has an equivalent as well. Solana recently launched Solana Permissioned Environments to address the same issue.
- Confidential transfers can also have an auditor appointed that can rubber stamp transactions.
- Confidential transfers combined with Permanent Delegate and Transfer Hooks can enable regulated entities to perform transactions on a permissionless blockchain in a permissioned way.
I have always been a sceptic of how large regulated institutions could use permissionless infrastructures. But Solana Token Extensions definitely has moved not just the chain, but the entire Web3 world in the right direction.
Permanent delegate allows a chosen authority to create a compliant transaction environment. They can revoke transactions, freeze and seize assets. These are important capabilities that are available in the banking system today, and if we need capital from mainstream capital markets players to flow into web3, our product capabilities should ideally reflect some level of alignment with their way of life.
Non-transferable token (Soul bound tokens)
This is not a surprising extension at all - Soul bound tokens are web3’s cookies, and in a more traditional analogy - it is your on-chain credit file. If you are part of an ecosystem and have gained some creds by virtue of some transactions or actions, your Soulbound will reflect this. The Saga genesis token is a great example.
This will allow a DAO or a community to see where you are in your journey within the ecosystem and reward/identify/acknowledge you for your efforts.
This extension allows transactions to hold metadata information. This is an interesting extension in a capital markets context. Imagine making a payment of an invoice, and being able to input the invoice details onto the payment.
This functionality will make lives of finance operations people so simple. Most of the mapping between payments and invoices even in a matured organisation is not seamless today.
An NFT (Tokenized invoice) could also hold the invoice information and merchants can use the NFT to access credit in a trade finance context.
In May 2020, 35 countries were looking at CBDCs, today that count is 135. These countries contribute to 98% of global GDP. CBDCs and more recently RWAs could be the fastest growing narrative within the digital assets space.
With Solana’s token extension, I can see how these narratives can soon become a reality.