Primer on Solana’s Token Extensions

Dive deep into Solana Token Extensions (Token 2022), exploring their use cases, and why they could be the next major catalyst for Solana's tokenization narrative!

BCG estimates the tokenization of illiquid assets at $16 trillion by 2030.
Larry Fink, CEO of BlackRock, believes in the tokenization of the financial system.

The tokenization of Real World Assets (RWAs) is a prominent narrative in this cycle and is poised to explode, especially from the institutional perspective. Institutions ranging from JP Morgan to BlackRock, Franklin Templeton, Visa, and the Monetary Authority of Singapore (MAS) are all conducting tokenization pilots in both permissioned and permissionless environments.

Token Standards are essential for the tokenization of any asset, offering a secure and standardized approach to "tokenization." Standards play a pivotal role in any technological adoption. Just as formats such as JPEG and PDF have standardized files across various devices and facilitated content sharing on the internet, a token standard can significantly boost tokenization on Solana.

The latest iteration of the Token Standard, 'Token Extensions,' is a step forward towards the ambitious vision of tokenizing the world's assets on a public shared ledger — Solana. As the pitch to institutions goes, Token Extensions enable 'Permissioned Tokens on a Permissionless Network'.

In this essay, we will briefly explore what Solana Token Extensions are, the different available extensions and their respective use cases, what has been built so far with Token Extensions from both enabler and adopter perspectives, and the top 5 key themes to watch out for.

In short, everything you should know about Token Extensions minus any bullshit.

Why Token Extensions

Solana features the SPL (Solana Program Library) Token program, which supports both fungible and non-fungible tokens by providing basic functionalities. Similar to Ethereum's ERC standards that define protocols for creating, transferring, and managing custom tokens, however, SPL offers a unified standard for all token types – showcasing Solana’s integrated approach. SPL utilizes a single contract to mint all tokens, whereas, in ERC, each token type requires its smart contract and has varied standards for different token types, such as ERC20, ERC1155, and ERC721.

Nevertheless, until now the SPL token program offers only fundamental features, prompting developers to build custom programs atop the token program for enhanced functionality. This practice of pushing changes into the smart contract level to incorporate new features often leads to the emergence of multiple variants or versions of the program, which causes:

1. Fragmentation and Lack of composability – lead to a lack of standardization and uniformity across different token programs. As a result, it becomes challenging for users, exchanges, wallets, and other platforms to support and integrate all these different versions.

2. Security Concerns – Each forked version has additional codes written which might be unaudited and untested.

3. More development costs and time – Building custom codes add up to the costs and time to launch on the market.

To address common functionalities and features desired by developers, Solana Labs has developed a set of additional 'extensions' that can be integrated with the original token program, taking into account the needs of institutions. In contrast to Ethereum's bottom-up approach, where developers must create and promote a new token standard for adoption and integration, leading to a plethora of token standards, Solana has adopted a top-down approach, establishing a unified token standard throughout the ecosystem. The development, which began in late 2021, spanned almost two years from concept to completion, including undergoing six audits by esteemed firms such as Trail of Bits, Ottersec, and Zellic, among others — more extensions will still be added.

The primary aim of Token Extensions is to empower developers, whether they operate in a regulated space or are a small collective of anonymous individuals, to swiftly and securely innovate, craft, and launch assets on-chain.

Note that Token Extensions are NOT a standard by themselves, but just extensions on top of Solana programs, which can be used for compliance standards or new approaches.

Key Token Extensions:

The extensions can be categorized into two types:

1. Mint — implemented in addition to the original SPL program. Popular examples include Confidential Transfers, Transfer Fees, Interest-Bearing Tokens, Non-Transferable Tokens, and Transfer Hooks.

2. Account — appended to Solana accounts to incorporate account-related features. Notable examples are Transaction Memo and Immutable Owner.

We will delve into the most beneficial extensions in depth and provide a succinct overview of the others:

Popular Extensions:

1. Confidential Transfers — Hidder Transfer Amounts
   While Blockchains are designed to be transparent ledgers; however, there are instances when privacy is required. For example, BlackRock may wish to maintain the confidentiality of the transaction amount during OTC trades with JP Morgan on Solana, or the Solana Foundation may prefer to keep the amounts of its grants private.
   
   Confidential transfers enable transactions without disclosing the amounts transferred. It should be noted that the tokens transferred, as well as the sender and receiver addresses, remain visible to the public; these transfers are in no way anonymous. Nevertheless, the transaction amounts are only accessible to the originator, the recipient, and an optional third-party auditor. This feature relies on a robust cryptographic protocol.
   
   Note that: Confidential transfers are still not live yet; will be live in the next upgrade i.e. 1.18.

   

   JP Morgan and BlackRock are representative only, but hopefully one day :P

   
   Use Cases:

   1. Payroll and Merchant Payments

   2. Institutional Finance and Private Funding/Investments

   3. Private Voting

2. Transfer Hooks – Custom Transfer Logic

   Much like the "hooks" in Uniswap's v4, which offer customization in how assets are traded on the Uniswap protocol, transfer hooks can be enforced across all protocols on Solana—not just one.
   
   For instance, an RWA player like T-bills Token Issuers (for example, Franklin Templeton) may want to allow only whitelisted addresses to hold and transfer the tokens. They can simply maintain a list of whitelisted addresses and verify whether an address is whitelisted before allowing the tokens to be transferred. Implementing this custom logic at the token level eliminates the need for complex proxy layers that would otherwise have to be implemented by all stakeholders, such as wallets and DEXs/marketplaces. With transfer hooks, support is inherently provided by all wallets and marketplaces.
   
   In this example, more complex, control-based logic can be implemented, such as:

   1. Requiring additional approval for token transfers exceeding, for instance, $100,000.

   2. Setting a transfer limit per transaction.

   Use Cases:

   1. Stablecoins — Using transfer hooks, teams could enforce full KYC for all users or those holding amounts above a certain threshold.

   2. RWAs — The RWA token could be made transferable only after certain conditions are met, such as completing KYC, ensuring non-violation of the OFAC list, or agreeing to Terms of Service.

   3. Airdrops — To prevent a significant portion of the user base from immediately selling off tokens upon receipt, the tokens could be programmed to allow transfers of amounts above X only after Y months. For example, it was proposed by PRINT that transfer hooks could be used to limit the number of tokens an account can hold and restrict the number of tokens that can be transferred or purchased in a single transaction.

   4. Structured Products – Obligate, an RWA debt player has built a cool prototype for structured product issuances on Solana. They use transfer hooks to do compliance checks, but most importantly keep track of coupon payments using our custom snapshot-transfer-hook. The prototype shows the ability to reduce issuance and price fixing time frames from days to milliseconds and to handle the entire life cycle in a fully automated and transparent fashion.
      

3. Transfer Fees — Fees on Each Token Transfer

   This popular token extension enables teams to impose fees on each transfer, generating revenue through means such as royalty payments, platform fees, and creator fees. These fees can be custom-routed to various stakeholders, such as stakers or token holders.

   
   For example, Paxos Gold (PAXG) on Ethereum employs a custom contract that charges a 0.02% fee for each PAXG transaction. This approach to transfer fees can be readily implemented on Solana.

   

   Use Cases:

   1. Payments — This feature can pave the way for new business models for payment companies on the blockchain. For instance, they might charge a small fee, similar to Visa's merchant fees, of 1% for transfers. Additionally, it allows for automatic tax collection on payments to ensure compliance.

   2. NFT Royalty — Transfer fees enable NFT creators to embed royalties directly into the tokens, making royalty enforcement feasible.

   3. Fee-based Tokenomics

4. Metadata — Native Modular Token Metadata

   The capability to have native, on-chain metadata definitions and storage provides teams with unprecedented flexibility. Developers can now add, update, and remove custom fields as necessary, customizing the metadata to meet the unique needs of their projects. With token extensions, this metadata is carried with the token, ensuring portability across all applications for seamless interoperability.

   For standard token mints—name, symbol, and URL can be easily added directly to the mint account, greatly simplifying the process for indexers and protocols to interact with your token.

   
   Use cases:

   1. Artists – Creators can dynamically embed details about their artwork.

   2. Supply Chain – Key product information, such as origin and manufacturing date, can be embedded into the metadata of tokens representing the products.

   3. DePIN – DePIN projects like ShadowDrive can allow metadata URL to point to on-chain data.

5. Non-transferable Tokens — Soulbound Tokens

   To render tokens non-tradable and uniquely tied to a wallet, the non-transferable extension facilitates the creation of soulbound tokens. These are non-fungible tokens minted to a specific address and intended to remain with the original recipient indefinitely. The tokens serve as a tamper-proof record of ownership, irrevocably linking the original minter and the recipient.

   
   Use cases:

   1. KYC Flags – This confirms whether an individual or entity has undergone KYC verification.

   2. Achievements and Credentials – includes degrees, personal achievements, badges, trophies, or points. Token-gated activities and unlocks.

   3. Loyalty –These are on-chain loyalty cards that are permanently associated with a user, or used as proof of purchase, akin to the recent Saga genesis token issued to owners of the Saga mobile phone.

6. Interest-earning Tokens — Embedding Interest Rates Directly into the Token UI

   The interest-bearing mint extension enables projects to emulate real-world, interest-bearing financial instruments like bonds. Traditionally, most yield-bearing instruments rely on rebasing — distributing accrued yields in the form of additional tokens to reflect gains. This extension allows for the inherent accrual of yield or transparent and automatic rewards without necessitating a rebase. Teams can programmatically set an interest rate and retrieve the token balance, inclusive of interest, at any point. Interest accrues continuously, based on the network timestamp — the value can be updated as often as once per block.

   Note: This feature is purely cosmetic, meaning the displayed amount is for visualization only; no additional tokens are created.

   Use cases:

   1. Fixed Income – This represents a significant opportunity, given that the global fixed-income market is valued at approximately $130 trillion. Money market funds with variable but global interest rates are a good use case.

   2. DAOs and Staking – Tokens that are staked can feature an inherent yield, enhancing their value proposition.

   3. Negative Interest Rates – Similar to a Rent-to-Own model, where an initial sum is paid to secure temporary ownership or use of an asset. The value decreases by 1% per day, leading to the eventual exhaustion of funds and loss of access to the asset.

More Extensions:

1. Immutable Owner — The token account's owner is permanently fixed.

   The immutable owner extension establishes token accounts with a fixed ownership that cannot be transferred. This approach prevents potential misappropriation of the account, ensuring verified integrity and enhanced security.

2. Permanent delegate – Clawback or Revoke Tokens, when required.
   Establishes a designated authority capable of burning or transferring any quantity of tokens. Teams, such as those behind stablecoins or Central Bank Digital Currencies (CBDCs), could appoint permanent delegates with the power to freeze accounts or remove tokens in cases of fraud or criminal activity. It can also be used for revocable membership. The Solana token program has always had "freeze", this extension now enables "seize" as well.

3. Metadata Pointer – Enables token creators to assign an address that defines the official metadata for the token.

4. Group – With Token Extensions (TE), tokens can be associated with a group. Groups are configurable, with options for setting maximum size, initial size, update authority, and more. The 'Member' extension further details configurations for a group member, such as assigning a group address and a member number.

5. Group Pointer – Permits a token creator to specify a group account that provides details about the mint.

6. Account Extensions include:

   1. Memo Required on Transfer – Mandates the inclusion of a memo with each token transfer, facilitating regulatory compliance, reporting, and the enhancement of audit trails. Particularly, useful for payment reconciliation and invoicing needs.

   2. Default Account State – All newly created token accounts are initially frozen, requiring users to engage with the project in a specific manner to activate (unfreeze) the accounts/tokens.

   3. CPI Guard – Limits how other programs can interact with your token by forbidding certain activities during cross-program invocations.

   4. Reallocate – Enables the activation of certain extensions after an account has been created. The 'Reallocate' function permits owners to redistribute their token account space to accommodate additional extensions.

A few notes:

1. Not Immutable — The token extensions are not yet immutable, with Solana Labs continuing to add new changes and extensions primarily based on feedback from institutions.

2. Token Migration — Existing tokens can be migrated to incorporate token extensions by creating a new mint and utilizing the spl-token-upgrade program to convert the tokens. This process involves burning the old tokens and issuing new ones through an escrow account. Can check out Solana Labs for more.

3. Fixed at Mint — Once minted, token extensions are set and cannot be altered; therefore, it's advisable to carefully consider which extensions can be used and can be disabled initially.

For more technical details, please refer to the Solana Labs Documentation.

Token Extension Ecosystem:

Transactions on Solana move fast, and so does the ecosystem – in just a short span of time, more than 50 projects are already building on Token Extensions with more than 500k tokens already being deployed. We can categorize the ecosystem majorly into two parts: Enablers and Adopters.

Token Extension Stats (Source: Top Ledger)

Enablers

Enabling the creation of Token Extensions:

Fluxbeam — DEX and Token Creation Tool

Unquestionably the torchbearer of Token Extensions or let’s just say, it was born in Token Extensions (at the time it was called Token 2022). It was the first DEX to support token extensions, which enabled trading of all TE-based memecoin mania in mid-2023. Fluxbeam also has a telegram bot — Fluxbot, which with its direct integration into Fluxbeam, gives users the earliest access to new token extension launches.

Fluxbeam has also launched its token — FLUXB, which uses the transfer tax on reward holders, twice daily. 40% of Fluxbot fees & 50% of token taxes are distributed twice daily to anyone who holds at least 1000 FLUXB tokens.

They also have a user interface for easily creating and deploying tokens that leverage some set of Token Extensions — one of the best no-code token creation tools on Solana!

Another great tool built by the team is Rugcheck.xyz, which gives users full visibility into what extensions are active, revoked, and used, among other things. While TEs are novel, they also give bad actors a chance to scam or rug in different ways – Rugcheck helps with that.

They will soon be implementing: Fiat On/Off Ramps, Openbook Integrations, Token Migrator, and NFT Pools (Royalty Enforced).

Tweet link

DEXs, Wallets, and Token Creation Tools:

Apart from Fluxbeam, Raydium, known for memecoin liquidity, was one of the first major DEXs to launch Token Extensions-support. The #1 DEX aggregator on Solana - Jupiter has also been supporting Token Extensions.

Most wallets like Backpack, Phantom, Ultimate, Solflare, and have been supporting Token Extensions. There are other tools like Squads (TE support soon), Dexlab, and Underdog Protocol for token creation.

Infrastructure:

Helius Labs – Providing infrastructural support like ownership and off-chain indexing support for T22-native NFTs. These NFTs will now behave like Metaplex NFTs when queried through DAS.

Explorers:

SolanaFM — is one of the best explorers supporting Token Extensions. To see if a token is deployed with extensions, paste the token hash on Solana FM and check if “Token Extension” displays “true” under the token details. By clicking on “Extensions”, you can view all the extensions incorporated by the token — see this tweet for more details.

Other explorers like XRay, Solscan, and Birdeye (for token discovery and prices) also support token extensions.

Adopters

Early adopters of Token Extensions:

Memecoins:

As with any technological advancement in crypto, memes, and culture often serve as early adopters. The true surge in Token Extensions began with BERN in May 2023. BERN, developed as an offshoot of the BONK team (the largest memecoin on Solana), was designed to showcase Token Extensions with a configured transfer fee of 6.9%. This fee was then allocated among holders and a buyback and burn program.

Following BERN's introduction, numerous other memecoins launched, such as Ghost, Chad, VICE, and Catwifhat, with most utilizing transfer fee extensions.

WEN — a cat-themed memecoin that emerged during Jupiter's LFG launchpad testing — has developed an entirely new NFT standard leveraging TEs, known as WNS. This NFT standard employs the metadata pointer, group, and member pointers, along with mint closure extensions, with transfer hooks expected to be added soon to enforce on-chain royalties. It is already gaining significant traction with Asset Dash, one of the largest portfolio trackers, launching its 10k collection!

Gaming:

Games have incredible use cases. For instance, Blessed Burgers — A Solana-based Squid Game, powered by Token Extensions-based protocol called epPlex, which are ephemeral NFTs, programmed to self-destruct. It makes use of TokenMetadata Extension (On-chain voting), TransferHook Extension, Permanent Delegate Extension: Purge & burn NFT, and CloseAuthority (Closing Mint accounts). Fluxbeam is developing another funny on-chain strategy game, called Chronokingdoms using Token Extensions.

Solana Mobile: If you've pre-ordered the Solana Mobile Saga Chapter 2, the Preorder Token acts as a non-transferable token, serving as proof of purchase.

Stablecoin Issuers:

1. GMO: The GMO Trust Company, a prominent stablecoin issuer, has announced the launch of two stablecoins on Solana: GYEN, a regulated Japanese yen stablecoin, and ZUSD, a USD-pegged stablecoin. These will utilize transfer hooks, Metadata pointer, and permanent delegate authority extensions.

2. Paxos: Partner of PayPal USD, has added several extensions to USDP. With these token extensions, Paxos can transfer or remove tokens from the accounts of USDP token holders. The ‘Permanent delegate’ will be used by all NYDFS-based stablecoin issuers (potentially PayPal’s PYUSD too) due to regulatory requirements.

The Opportunities and Trends Prediction for Token Extensions:

1. Superior Alternative to Appchains and Permissioned Blockchains:

Solana is distinguishing itself from other networks by creating standardized, programmable tokens that can be configured to meet the requirements of regulated entities. For example, some chains offer solutions that depend on institutions setting up and managing their permissioned networks.

• Avalanche is promoting subnets to institutions as a solution for creating permissioned networks and has gained decent traction, as seen with J.P. Morgan’s Onyx partnering with LayerZero to connect to Avalanche subnets.

• EVM ecosystems such as OP Stack, Arbitrum Orbit, and Cosmos Appchains.

While custom appchains offer institutions greater control, the prospect of bridging institutional assets on a single shared ledger—while using the same set of tools, liquidity, and composability—presents a more compelling narrative. Maintaining their network is also always a hassle, especially for smaller institutions. However, for certain regulatory requirements and more customisations, appchains will still be preferred.

2. The Default Standard for Stablecoins:

Token Extensions are set to become the standard for all new stablecoins launched on Solana, as evidenced by the recent issuances by Paxos and GMO utilizing TEs:

1. Circle may issue their new stablecoins using Token Extensions.

2. PayPal is launching with TEs, following Paxos's use of TEs.

3. Potential Institutions Tokenizing RWAs:

Considering that Token Extensions are designed with institutions in mind, it’s obvious that a few institutions will start adopting them in 2024. Here are some potential early adopters as per my hunch:

1. Franklin Templeton for issuing Tokenized Funds

2. Visa for settling more stablecoins on Solana

3. FinTech companies like Nubank issue their loyalty tokens using Token Extensions

4. New Business Model Experimentations:

More control also leads to more innovative business models due to newly discovered advantages. For example, transfer fees provide new revenue streams for token issuers. They also allow protocols and creators to directly profit from high-velocity speculative transactions. Crypto payments have struggled to establish clear business models, but token extensions could enable new models, such as automatically charging merchants in their registered networks for each payment. TEs also enable businesses to build moats – for instance, PayPal can embed small transfer fees on PYUSD for specific merchants on the PayPal app.

Another adjacent theme could be ‘Loyalty points’ like DRiP’s droplets getting tokenized using Token Extensions, where the tokens can be made non-transferrable and revocable, making it as effective as web2 db points, but much more transparent and composable.

5. Derivative Standards:

Although Token Extensions are generic, there will be standards specific to use cases such as:

1. RWAs — Standards tailored for Permissioned Real World Assets.

2. Tokenized Vaults — On Ethereum, ERC-4626 is a popular standard for yield-bearing vaults, managing over $10 billion in assets. A similar standard could also be developed on Solana using token extensions.

Closing Thoughts: The Road to $100 Billion in Institutional Assets on Solana

While the initial adoption of Token Extensions is expected to come from memecoins and crypto-native, the significantly larger goal is to onboard institutions such as JP Morgan and Central Banks to issue their Central Bank Digital Currencies (CBDCs) on a public blockchain, equipped with all the customizable features they require. It's evident that regulated institutions are the primary focus, and capturing even a small fraction of this market could easily bring $100 billion worth of assets onto the blockchain, considering the size of the traditional finance (TradFi) market.

There's a dam of institutional interest ready to burst on Solana. Token Extensions will serve as the catalyst.

If you are a builder looking to build any platform using Token Extensions — you can apply for a grant at Superteam (recommended for <$10k) or Solana Foundation (recommended for >$10k; select token extensions in the application).

Feel free to contact me at Yash Agarwal (@yashhsm on Twitter) for any suggestions or if you have any opinions. If you find this even slightly insightful, please share it — justifies my weeks of effort and gets more eyeballs :)

Special thanks to Anna (Solana Foundation), Austin (Solana Foundation), Nick (Solana Foundation), Sitesh (Superteam), Kash (Superteam), Akshay (Superteam), and Seth (Messari) who reviewed and provided insights at different stages of the draft.

References and Further Reading:

1. Exploring Token Extensions – Messari (by Seth Bloomberg)

2. Token Extensions Case Study by Solana Foundation

3. Token Extensions Talks and Podcasts on the Solana channel