The Austin Federa Interview: Token-2022 Disrupts DeFi
Discover the impact of the Token-2022 protocol, new tools for developers, confidential asset transfers, flat rate token transfer fees and unique KYC capabilities.
I caught up with Solana’s Head of Strategy Austin Federa last week and he schooled me on the power of the Token-2022 protocol, new tools for developers, disrupting DeFi, confidential asset transfers, flat rate token transfer fees and new ways to approach KYC.
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What are some new, creative things that can be built using Token-2022 functions?
Austin: I liken that to “what could you build on the internet after the iPhone existed you couldn't build before?”
I don't think anyone looked at Steve Jobs announcing the iPhone onstage and thought “this will change the way that we date forever.”
No one was like “oh, yes, Tinder was gonna come out of that thing.”
If you think about it, that wouldn't have happened without the iPhone.
Austin: I don’t know what people are going to build with Token-2022, but I have some ideas.
Confidential Transfers is very cool.
It will allow for two people to pay each other without that sum being known. You could see on the blockchain that I paid you but we couldn't see how much money was transferred between us.
That is very impactful for things like payroll, we might be able to start moving payroll on-chain.
Non-transferable tokens, these are sort of soul bound tokens.
Austin: These will be for things like achievement rewards. These can be KYC (Know Your Customer) flags.
I could claim I could do something to prove that this wallet is linked to my Twitter account, and I could never change it from that wallet. There's a lot of very cool stuff that ends up being possible.
Interest bearing tokens are going to totally change the way that DeFi compounding is done.
Austin: On Solana there's no real claim. Everything is auto-compounding because the transaction fees are so low. With interest bearing tokens, as long as this interest has been opened, the token accrues value.
It's not like there's a transfer every second to just show that the value has gone up.
Austin: You could have negative-interest bearing tokens. You could have, for lack of a better term, whatever the opposite of a rent to own model.
Basically you put up a certain amount of money and you hold onto something for that time period. It decreases at 1% per day and then at some point you're out of money and you lose access to the thing.
You can have positive and negative interest bearing which is super interesting for payment flows.
Austin: There's a lot of really interesting stuff that's possible with these kind of new technologies and I'm very excited to see what people actually build with it.
One of the new extensions is called Transfer Fees. How does the extension give a new level of financial control over transactions?
Austin: There's a few different ways that transfer hooks can work, and transfer fees, they work very well together. For example “I'm going to mint an NFT, and every time that NFT is transferred it costs $5.”
We now have shifted from the percentage based royalty system.
This way you can say “every time I buy an NFT I know it's always going to be $5.”
Austin: One of the other cool pieces are transfer requirements. You can do a whole bunch of different new things when you have things like transfer hooks.
What [transfer requirements] will basically do, is say “are there a series of controls around how something can be transferred? Do a certain set of criteria need to be met in order for a transfer to occur?”
This is similar to what Magic Eden was doing for a while.
Every NFT purchased on their marketplace required a signature from Magic Eden in to approve the sale in addition to the user who was purchasing it. That was sort of an anti-spam bot and anti-washtrading thing.
You could see this in all sorts of ways, you could say that I have taken a tokenized fund and I've brought it on chain, or, I've taken a tokenized share of our house or something like that.
Austin: In order for it to be transferred, the wallet has to be KYC, and that KYC could be represented with a soul bound NFT. Let the developer write program logic that says “until the certain criteria are satisfied, this token cannot be transferred.”
There's lots of applications for real world assets, you could also see that take effect for games. If a game wanted to make sure that a player hadn't been banned, it'd be like, “you can only sell your your stuff as long as you haven't violated our terms of service.”
You could say we are basically in a separate escrow account, “there needs to be X amount of insurance money in this insurance fund for these types of trades to happen.”
You could say that someone's doing it for a compliance perspective.
Austin: This could be something like a system where people are doing borrow, lending and collateralization for the purchasing of NFTs.
You could basically say “I have to deposit $20,000 into this insurance fund, and then the program will let me buy and trade NFT's on this marketplace up to let's say $40,000 worth of NFTs.”
So, all of these sorts of things can basically make it easier to put financial controls on stuff.
This is also really big for accounting.
If you're trying to do on-chain accounting, you're a business and you say “hey, like, why do we need a bank account?”
We just want to do everything in USDC because you can pay anyone in the world in USDC.
You can see all these sorts of things can be our primitives that can be built by developers to create totally new systems for how folks can control the flow of assets.
A lot these things are new in context of web3 but are expected functions for users of trad financial tools.
Austin: For a long time people have been not differentiating between decentralization and controlless systems.
A decentralized system is like, no one can mint more Bitcoin. That doesn't mean someone can't prevent you from buying Bitcoin or trading Bitcoin or something along those lines.
It doesn't mean that everything has no controls behind it right. Famously, Circle has freeze authority for all the USDC in existence and Tether has freeze authority for all the USDT in existence.
Austin: So someone can still do something, but what it means is that the people who can do something, those authorities are expressly known at the beginning.
Those authorities are separate from the authority of the network.
If you had a USDC application specific chain, then the programs running on that chain, and the chains underlying currency are both under a centralized control of authority.
The dYdX chain is the same sort of thing on Cosmos. There's basically one interested party.
What’s cool about a lot of this stuff is [that] you can still say
“I, as the creator, can determine where my art can be bought and sold. I don't have the ability to destroy that art. I have the ability to restrict it.”
Will these extra controls and options going to help traditional finance companies adhere to their regulation requirements?
Austin: This is a pretty basic requirement for funds tokenization or anything like that. They are required to maintain a record of transfers that have been made in a lot of situations.
They may even have like KYC requirements for folks.
Austin: The thing here is, full galaxy brain for a second, the difference between a blockchain address in a database entrance and an ATS is basically nothing, right?
There's a hash somewhere that corresponds to my email address, which someone has verified as Austin Federa by looking at my passport and, you know, a utility bill.
You could say something like “if you want to buy this like type of token, your wallet needs to pass a certain level of KYC.”
Nothing about that can't work on a blockchain too.
Some people will create wallets like a KYC. Some people won't.
But all of that can still be composable and still interact with the broader ecosystem on Solana.
