We Read Solana’s Token Extensions Paper So You Don’t Have To

The Solana Foundation recently announced a new invention in the world of cryptocurrency called Token Extensions. Since then, the topic has become a hot discussion in blockchain circles. But what exactly are token extensions and how do they move the cryptography field forward? We read Solana’s paper so you don’t have to.

Typically, entities issuing cryptocurrencies need to customize tokens to meet their specific requirements. Sometimes confidentiality is paramount. For instance, a company paying employees in crypto may want to keep salaries private. Other times, non-transferable tokens are needed, or tokens that deduct fees per transaction.

For years, issuers relied on complex smart contracts. Audits were required to ensure security and reduce hacking risks. Coordination with decentralized apps was also needed so platforms could support new features.

Solana’s Token Extensions solve this problem elegantly. They are software add-ons that attach functionality to existing tokens and wallets. For example, a confidential token extension lets companies transfer crypto without revealing amounts. Anyone can view the sender, recipient, and currency type on a blockchain explorer. But the transfer amount remains private, only visible to certain parties like the sender, recipient, and authorized auditors.

Token extensions also allow entities to convert regular tokens into non-transferable NFTs, often referred to as soulbound tokens. These special NFTs are widely used to represent certificates, licenses, and other important documents that are meant to permanently stay with the recipient. Other possible extensions enable currencies to earn interest like bonds do in traditional finance. Extensions can also automate fee deductions on transactions involving a particular token or currency.

One major use case is for legal compliance and regulatory purposes. Extensions empower tokens with transfer prerequisites, such as requiring a memo explaining any large transfer over a set amount. This requirement facilitates the collection of information from users, which can help combat money laundering, tax evasion, and terrorism financing by authorities. By enabling compliant transfers, companies can issue regulated tokens that meet their jurisdiction’s financial laws.

Currently 19 extensions are available on Solana, with more expected over time as usage grows. Two types exist: mint extensions that apply globally across a currency, and account extensions with functions limited to one account.

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