How Permissioned Tokens Can Supercharge Institutional Adoption

We hear this every cycle – that this moment is finally the time that institutions are coming onchain. But like clockwork, every cycle we see institutions come to dip their toes in the water, only to balk at fully embracing onchain solutions.

What’s going on? It’s not just as simple as lack of executive sponsorship or fear that decentralized finance is a fad. It’s actually something deeper.

What’s often going on is a fundamental misalignment between institutions and blockchain ecosystems. Blockchains are open, transparent, and censorship-resistant by design; they are generally built so that, as the popular saying goes, code is law. But traditional institutions – from banks to tokenized asset providers – very often have their own rules they must follow, whether from their own internal risk policies or government regulation.

If you’re a financial institution, for example, you might not want to build directly on an open mainnet. Maybe you don’t want competitors to see exactly how many assets are being moved as part of a transaction, or you want to have the authority to retrieve funds for accidental transfers or regulatory compliance. If you are a national bank, perhaps you want to limit transaction validation to a geographical subset of nodes.

In past cycles, there were indeed methods of building out these custom requirements. Institutions would have to develop and maintain their own private blockchain, which is less than ideal.

Subnets and permissioned environments (such as Solana Permissioned Environments) are a good stopgap for these institutions – but they have their disadvantages as they are, by definition, private. They are separate from mainnet, and thus removed from the composability, global liquidity, and development activity in public blockchain ecosystems.

If a customer of a financial institution wanted to use their tokenized asset to participate in DeFi, for example, they would have to bridge over to mainnet. Similarly, the financial institution would not be able to take advantage of the greater liquidity one ecosystem or another without a bridge. Using a bridge introduces friction and potential points of failure.

All of this leads to a less than ideal experience that can leave these sophisticated institutions – and their customers – wondering if there are any advantages to using blockchain at all. Hence, we see this cycle of experimentation that does not lead to a full embrace of blockchain solutions.

To be entirely frank, up until this point the available tooling hasn’t entirely caught up with what these institutions actually need. The real solution to this problem – and what makes this cycle different – is a proliferation of tokens that can be easily customized for an institution’s unique needs, which allow for permissioned tokens on public, permissionless blockchains.

In the Solana ecosystem (which I am admittedly most familiar with) this has taken the form of token extensions, the latest iteration of the Solana token program. Built by engineers at Solana Labs and Anza with feedback from the broader ecosystem including global regulated institutions, token extensions take advantage of a standard interface for tokens, allowing developers and token issuers to create plug-and-play permissioning at the token level.

In essence, these customized tokens can take the advantages of using a private blockchain without the friction and expense, and still have access to the liquidity and composability of mainnet. They are versatile, regulation-friendly, and significantly decrease engineering time and resources.

Some of the token extensions include:

• Confidential balances, which protects the confidentiality of user balances and transfer amounts within a transaction while keeping other transaction information transparent, is useful for treasury management and B2B payments;

• Transfer hooks, giving token issuers control over which wallets can interact with tokens – good for KYC/AML verification, token-gated access, and royalty enforcement;

• Permanent delegation, allowing a program to have irrevocable authority over a token and can be used for automated subscription services as well as regulatory compliance with freeze & seize orders;

• Transfer fees gives issuers the ability to charge fees within the token itself, such as royalties, publisher fees, or transaction fees;

• Non-transferable tokens, which allows the creation of tokens that only the issuer can reassign ownership of – advantageous for managing external databases;

Read about all the token extensions here, or check out the developer resources.

In 2024 we’ve already seen some large, traditional institutions adopt these customized tokens (vs. private chains) and have found them to be advantageous.

One case study to look at: PayPal USD on Solana. One of the first major issuers to take advantage of customized tokens via token extensions – specifically transfer hooks and permanent delegate – the expansion of PYUSD to the Solana network was very successful. PayPal announced the expansion in May 2024; by August, the circulating supply on Solana was double than on Ethereum.

“[Customized tokens using token extensions] are not merely nice-to-haves,” PayPal USD wrote at the time of the announcement. “We believe they are important features to provide to merchants if PYUSD is to grow in its utility to broader commercial segments.”

Other stablecoin issuers, such as GMO Trust, have also seen the advantage of customized tokens and used token extensions for their stablecoins.

The promise of blockchain is to create a low-latency, highly-composable, low-cost trading platform. I firmly believe that traditional institutions should also be able to take advantage of that promise without having to compromise on their specific requirements. It’s only now that tooling at the token level is finally catching up to those needs.

Permissioned tokens, rather than private blockchains, will allow this cycle to be different.

About the Author

Authored by Nick Ducoff, Head of institutional growth at the Solana Foundation