Understanding Closed-Loop Tokens: Enhanced Security and Customization

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
requiring
specific
constraints.
For
example,
certain
applications
may
need
tokens
that
can
only
be
used
for
particular
purposes,
by
authorized
accounts,
or
within
specified
marketplaces.
Loyalty
programs,
in-game
currencies,
and
restricted
marketplaces
often
benefit
from
controlled
environments
where
tokens
cannot
be
traded
or
used
outside
their
intended
context.

Regulatory
compliance
also
necessitates
restrictions
on
token
usage
to
ensure
that
only
verified
or
authorized
entities
can
hold
and
use
these
tokens.
Implementing
such
controls
helps
mitigate
the
risk
of
misuse,
fraud,
and
regulatory
breaches,
creating
a
secure
economic
system
with
enforceable
rules
and
restrictions.

Opportunities
Unlocked
by
Closed-Loop
Tokens

CLTs
empower
developers
with
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:

• 
  Restrict
  token
  usage
  to
  authorized
  applications.
• 
  Set
  up
  custom
  policies
  for
  transfers,
  spends,
  and
  conversions.
• 
  Add
  arbitrary
  restrictions
  on
  token
  transfers
  between
  user
  addresses,
  spending
  tokens,
  and
  token
  usage
  in
  smart
  contracts.

These
capabilities
enable
a
wide
range
of
possibilities.
For
instance,
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
compliance
with
regulatory
requirements
by
restricting
usage
to
verified
accounts
or
specific
services.

How
Closed-Loop
Tokens
Work

Builders
implement
CLTs
through
the

sui::token
module,
which
distinguishes
them
from
traditional
coins
by
their
lack
of
the
store
ability.
This
means
CLTs
cannot
be
wrapped,
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
an
ActionRequest,
allowing
the
token
owner
to
specify
which
actions
(transfers,
spends,
conversions)
are
permitted
and
enforceable
through
predefined
rules.
A
TokenPolicy
is
a
shared
object
that
the
token
creator
can
generate
using
the
TreasuryCap,
specifying
the
conditions
for
token
transfers,
spends,
or
conversions.
These
policies
are
enforced
by
programmable
rules
within
the
TokenPolicy,
implemented
as
separate
Move
modules,
allowing
for
modular
and
reusable
policy
definitions.

To
address
token
storage
issues,
CLTs
utilize
a
spend
method,
where
spent
tokens
can
either
be
burned
directly
or
delivered
to
the
TokenPolicy
as
spent_balance.
This
balance
cannot
be
reused
and
can
only
be
burned,
ensuring
strict
control
over
token
lifecycle
and
usage.

Closing
the
Loop

Closed-Loop
Tokens
offer
a
level
of
control
and
customization
not
possible
with
the
Sui
Coin
standard
or
typical
token
standards
found
on
other
blockchain
protocols.
By
enabling
developers
to
impose
specific
rules
and
restrictions
on
token
usage,
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
relied
upon
as
an
endorsement
or
recommendation
to
buy,
sell,
or
hold
any
asset,
investment,
or
financial
product
and
does
not
constitute
financial,
legal,
or
tax
advice.

Image
source:
Shutterstock