Solana Announces ‘Token Extensions’— What Are They? How Do They Work?

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Solana (SOL) introduced a new token program called “token extensions”, which promises to bring advanced functionality and features such as confidential transactions, non-transferable tokens, transfer fees, and more.

With Solana taking plenty of attention in the crypto world, it’s worth understanding what these new features bring to the Layer 1 blockchain.

Solana’s token extension upgrade, announced yesterday, is aimed at enterprise blockchain users and institutional clients that require added token functionality to meet their business needs and compliance obligations.

Most notably, the token extension upgrade will allow token issuers to issue permissioned tokens on a permissionless public blockchain like Solana.

Let’s learn what token extensions on Solana are all about. We will also discuss the use cases and benefits of Solana’s upgrade.

Key Takeaways

  • Solana introduced “token extensions”, enhancing its blockchain with features like confidential transfers and non-transferable tokens.
  • The upgrade targets enterprise users and institutions needing advanced token functionality for compliance, such as permissioned tokens on Solana’s public blockchain.
  • New features include confidential transfers for private transactions, interest-bearing tokens for real-world assets, and permanent delegates for token control.
  • Solana aims to use these features — for instance, confidential transfers for company payrolls — to attract traditional finance players.

What are Token Extensions on Solana?

Token extensions are a series of new features and capabilities introduced to the Solana Program Library (SPL) in January 2024. SPL is a collection of on-chain programs that create and manage fungible and non-fungible tokens (NFTs) on Solana.

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Token extensions are specifically designed for businesses and enterprises to meet compliance and regulatory obligations. According to the team, these extensions bring new functionality to Solana-based tokens and allow token issuers to create advanced, compliance-friendly, and versatile tokens based on their business needs.

The Solana upgrade will be built into the core protocol level, allowing easy deployment of the new token features. Developers will not have to develop and audit complex token smart contracts to use the new features, which will reduce security risks and testing costs.

Features of Tokens Extensions on Solana

According to Solana, there will be two types of token extensions on Solana: Mint Extensions and Account Extensions.

The new features that Mint Extensions will introduce are:

Feature What It Does
1. Confidential transfers Confidential transfers will allow participants to make token transfers without revealing the amount of cryptocurrencies transferred.
2. Transfer fees Transfer fees extension allows token issuers to automate a fee on every token transfer.
3. Mint close authority This extension will allow users to close mint accounts.
4. Interest-bearing tokens Interest-bearing tokens can now be created on Solana.
5. Non-transferable tokens Non-transferable tokens can now be created on Solana.
6. Permanent delegate This extension can be used to specify a permanent account delegate for a token mint. The delegate will have privileges to burn and transfer tokens, allowing the delegate to seize assets and repossess tokens.
7. Transfer hooks Transfer hook extensions add extra programmability by calling a piece of custom logic when a token is transferred.
8. Metadata pointer and metadata Token issuers can designate addresses that describe the official metadata for tokens. Metadata of tokens can be added, updated, and removed as needed.
9. Group and group pointer Tokens can belong to a group that can be configured to a maximum size, initial size, and more.
10. Member and member pointer Allows token creators to designate a member account that describes the token mint.

The new features that Account Extensions will introduce are:

Feature What It Does
1. Memo required on transfer Each token transfer will require an attached message for regulatory compliance, reporting, and enhanced audit trails.
2. Immutable owner This extension makes it impossible to reassign ownership of an account.
3. Default account state This extension freezes all new token accounts so that users interact within the project.
4. CPI guard This extension restricts other programs from interacting with your token.
5. Reallocate This extension allows owners to reallocate their token account to create room for more extensions.

Use Cases of Token Extensions

  • Confidential transfers for company payroll and trading firms

Blockchain transparency can be problematic for companies who want to keep transactional data private. A company may want to keep employee salaries confidential, while a trading firm may choose to keep its market trades private to maintain a competitive advantage and to prevent frontrunning.

With confidential transfer extension on Solana, users can now transact without revealing the transaction amounts. The transactions will be partly transparent, and information on the source and destination of the token transfer will be public.

Speaking about the feature, which you can watch on YouTube, Jon Wong, head of ecosystem engineering at Solana Foundation, said:

“[Confidential transfers] use zero-knowledge proofs to encrypt the amounts of the transfer. Token issuers can also appoint an auditor to decrypt the amount transferred.

“Suddenly, previously sensitive actions like merchant settlement flows and payroll are now possible on the blockchain, because one can make these kinds of payments without the amounts being public information.”

  • Transfer hooks for fully compliant stablecoins and NFT royalties

Transfer hook extensions are tools that give token issuers the power to dictate how tokens and users interact. This extension can be used to create complex token interactions based on a host of on-chain criteria.

Token issuers can use transfer hooks to enforce Know Your Customer KYC compliances on token holders, while game creators can use transfer hooks to enforce royalties each time gaming NFTs are bought and sold.

Token issuers will also have absolute authority using the permanent delegate extension. The issuer will now have the power to burn and seize tokens when required.

  • Interest-bearing real-world asset tokens

Interest-bearing token extensions add traditional finance functionality to real-world asset (RWA) tokens. RWA tokens representing treasury bills, secured loans, corporate bonds, and real estate investment trusts (REIT) can earn interest for their holders while being fully KYC compliant.

Benefits of Token Extensions on Solana

The key benefits of token extension on Solana are:

  1. Flexibility – Token issuers can customize how tokens interact with holders to suit their specific needs.
  2. No additional programming needed – Token extensions are built into the core protocol layer on Solana making it easy to use.
  3. Reduced risk – Token extensions are audited and tested against vulnerabilities.
  4. Reduced testing costs – Token extensions are easy to implement, reducing time and costs.
  5. Faster pilots – Fast deployment and reduced security risks reduce the time to create blockchain projects that use token extensions.
  6. No need to audit – Proven token extensions remove the need to audit smart contracts.
  7. Enterprise ready – Token extensions are designed for enterprises to customize projects according to their specific needs.

The Bottom Line

Token extensions are great new additions to Solana – a blockchain that has been working on attracting the big players from the traditional finance world.

The added functionality and greater control enabled by token extensions are bound to attract clients who want to strike a balance between staying compliant and exploring new possibilities with blockchain and cryptocurrencies.

Solana is shaking up the blockchain market in 2024. According to Austin Federa, head of Strategy at Solana Foundation, no other public blockchain network has offered this level of functionality and customizability to developers and users in a single token program.

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Mensholong Lepcha
Crypto & Blockchain Writer
Mensholong Lepcha
Crypto & Blockchain Writer

Mensholong is an experienced crypto and blockchain journalist, now a full-time writer at Techopedia. He has previously contributed news coverage and in-depth market analysis to Capital.com, StockTwits, XBO, and other publications. He started his writing career at Reuters in 2017, covering global equity markets. In his free time, Mensholong loves watching football, finding new music, and buying BTC and ETH for his crypto portfolio.