Closed-Loop Tokens (CLTs) are emerging as a crucial innovation in the blockchain space, offering enhanced security, compliance and tailored functionality for specific applications, according to The Sui Blog.
The need for closed-loop tokens
While the unrestricted nature of the Sui Coin standard is valuable for many use cases, it falls short in scenarios that require specific restrictions. For example, certain applications require tokens that can only be used for certain purposes, by authorized accounts or within specific marketplaces. Loyalty programs, in-game currencies, and limited marketplaces often benefit from controlled environments where tokens cannot be traded or used outside of their intended context.
Regulatory compliance also requires restrictions on the use of tokens to ensure that only verified or authorized entities can own and use these tokens. Implementing such controls helps reduce the risk of abuse, fraud and regulatory violations, creating a secure economic system with enforceable rules and restrictions.
Abilities unlocked by Closed-Loop tokens
CLTs give developers a higher degree of control and customization over how tokens are used and transferred within their applications. Using the CLT standard in the Sui framework, developers can:
- Limit token use on authorized applications.
- Set custom policies for transfers, expenses and conversions.
- Add arbitrary restrictions about token transfers between user addresses, spending tokens and token usage in smart contracts.
These capabilities allow for a wide range of possibilities. For example, tokens can be designed to prevent on-chain trading, making them ideal for loyalty programs or in-game currencies where speculation is undesirable. They can also ensure legal requirements are met by limiting usage to verified accounts or specific services.
How Closed-Loop Tokens Work
Builders implement CLTs through the sui::token module, which sets them apart from traditional coins due to their lack of storage capacity. This means that CLTs cannot be packed, stored as dynamic fields, or freely transferred unless a custom policy allows it. They can only be owned by an account and not stored in an application, but they can be spent.
The authorization mechanism for CLTs is called ActionRequest, which allows the token owner to specify which actions (transfers, spends, conversions) are allowed and enforceable via predefined rules. A TokenPolicy is a shared object that the token creator can generate using the TreasuryCap, specifying the conditions for token transfers, releases, or conversions. These policies are enforced by programmable rules within TokenPolicy, implemented as separate Move modules, allowing for modular and reusable policy definitions.
To address token storage issues, CLTs use a spend method, where spent tokens can be burned directly or provided as spend_balance to the TokenPolicy. This balance cannot be reused and can only be burned, ensuring strict control over the lifecycle and usage of tokens.
Closing the loop
Closed-Loop Tokens provide a level of control and customization not possible with the Sui Coin standard or typical token standards found in other blockchain protocols. By allowing developers to impose specific rules and restrictions on the use of tokens, CLTs open up new possibilities for secure, compliant, and specialized applications. The adoption and implementation of CLTs are expected to play a crucial role in shaping the future of DeFi and digital assets.
Note: This content is for general educational and informational purposes only and should not be construed or used as an endorsement or recommendation to buy, sell or hold any asset, investment or financial product and does not constitute financial, legal or tax information . advice.
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