Why SPL22 is Setting the Benchmark for Fractionalization

SPL-22 is emerging as a groundbreaking token standard on Solana, designed to address issues seen in previous standards like SPL-20. By enhancing liquidity, reducing minting costs, and adding native metadata integration, SPL-22 offers a more efficient framework. This article will guide you through how SPL-22 works, its key use cases, and the technical aspects that make it a powerful tool in decentralized finance (DeFi).

How SPL-22 Works

SPL-22 operates on Token Extensions (Token2022), a framework that builds on Solana’s previous token standards, with new features such as transfer fees, interest-bearing tokens, and confidential transfers. One of the core innovations of SPL-22 is how it handles metadata. Unlike SPL-20, which required separate storage for metadata, SPL-22 integrates metadata directly into token accounts, making it much more efficient.

Here’s how SPL-22 functions:

• Minting: When a token is minted using SPL-22, metadata (like the token name, symbol, and additional features) is stored directly in the token account. This reduces costs and makes the process more streamlined compared to older standards.
• Bridging: SPL-22’s two-way bridging allows seamless conversion between fungible tokens and NFTs, enabling users to switch between holding an NFT or an equivalent amount of fungible tokens. This means that an NFT can be “locked” in exchange for fungible tokens, providing liquidity for trading or DeFi purposes, and later swapped back into the NFT form. This functionality enhances flexibility, liquidity, and utility for assets, making NFTs more usable in DeFi ecosystems while still preserving their unique properties when needed.
• Crowdfunded Liquidity: Liquidity pools for SPL-22 tokens can be crowdfunded, ensuring immediate tradability on decentralized exchanges (DEXs). This feature enables new tokens to gain liquidity faster, making them easier to trade without relying on traditional liquidity providers. During the launch of an SPL-22 token, a small liquidity provision fee (e.g., 0.02 SOL per mint) is typically collected. This fee goes into the liquidity pool, helping to seed the initial liquidity that is necessary for DEX trading. This approach allows for fairer token distribution and prevents issues like low liquidity at launch, which often plagues new tokens.

Code Example: Deploying an SPL-22 Token

Here’s a simplified example of how an SPL-22 token might be deployed using Solana’s program instructions. This snippet creates an SPL-22 token with metadata embedded:

let mint_pubkey = Pubkey::new_unique();
let mut token_account = TokenAccount {
    mint: mint_pubkey,
    owner: user_pubkey,
    amount: 0,
    state: AccountState::Uninitialized,
    // Here, metadata is directly embedded into the token account:
    metadata: Some(Metadata {
        name: "MySPL22Token".to_string(),
        symbol: "SPL22".to_string(),
        uri: "https://example.com/token-metadata".to_string(),
        ..Default::default()
    }),
};

// Now, create and initialize the mint:
let initialize_mint_instruction = initialize_mint(
    &spl_token::id(),
    &mint_pubkey,
    &user_pubkey,
    Some(9), // 9 decimals
);

Explanation:

• The TokenAccount struct now includes a metadata field, a key part of SPL-22.
• This metadata is embedded directly into the token’s account on the blockchain, bypassing external services like Metaplex.
• The initialize_mint instruction is used to initialize the mint process with token details like decimals.

Use Cases of SPL-22

SPL-22 has a variety of practical applications in DeFi, offering improved functionality compared to earlier token standards like SPL-20. By leveraging Solana’s efficient blockchain, SPL-22 enhances token creation and liquidity management for DeFi projects.

1. Hybrid DeFi Products: By bridging NFTs with fungible tokens, SPL-22 enables projects to develop hybrid financial products that are more liquid and tradable across multiple markets. For instance, $GHOST (Ghostcoin) uses SPL-22 to facilitate seamless token-NFT swaps, making the process easier and more cost-effective.

1. Tokenized Real-World Assets: Thanks to its integrated metadata capabilities, SPL-22 is well-suited for representing real-world assets on the blockchain. This feature allows for precise tracking of asset data, improving transparency and reliability in asset management.
2. Fair Launches and Crowdfunded Liquidity: With lower minting fees and immediate access to liquidity, SPL-22 makes it easier for projects to launch tokens in a decentralized and fair manner. Crowdfunded liquidity pools ensure that these tokens can be traded immediately, providing faster access to markets through decentralized exchanges (DEXs).

BOZO Finance is one of the few SPL22 projects that have successfully launched with a new system of tokenomics and fundraising

Downsides of SPL-22

Despite its advantages, SPL-22 has some limitations that are worth considering:

• Limited Ecosystem Support: As a relatively new token standard, many wallets, blockchain explorers, and decentralized applications do not yet fully support SPL-22. This can create challenges for developers and users when integrating or adopting this standard.
• Crowdfunded Liquidity Risks: While crowdfunded liquidity pools offer a solution to liquidity issues, they depend heavily on community engagement. If a project struggles to gain attention, the resulting low liquidity can impact the tradability and usability of the token.

Comparing SPL-22 to Ethereum’s ERC404

SPL-22 is often compared to Ethereum’s ERC404 standard, which merges ERC-20 and ERC-721 functionalities. However, SPL-22 provides several advantages, especially for DeFi projects on Solana.

1. Speed and Cost Efficiency: Running on Solana’s blockchain, SPL-22 benefits from faster transaction speeds and significantly lower fees. In contrast, ERC404 operates on Ethereum, which is notorious for network congestion and high gas fees.
2. Scalability for DeFi Projects: Solana’s high throughput allows SPL-22 to handle a large number of transactions more efficiently, making it ideal for DeFi projects that require scalability and frequent token interactions.
3. Crowdfunded Liquidity Pools: SPL-22’s liquidity model ensures that tokens can be immediately traded on DEXs like FluxBeam, while ERC404 continues to face challenges due to high operational costs on Ethereum’s network.

Downside of ERC404

• High Gas Fees: Ethereum’s gas fees make it costly to mint, trade, or interact with ERC404 tokens, creating a barrier for smaller projects.
• Slower Transaction Times: Ethereum’s slower transaction speeds can hinder time-sensitive DeFi trades, especially when market conditions demand fast execution.

SPL-22 is positioned to become a cornerstone of DeFi on Solana, providing a range of features that make token creation and liquidity management more efficient. Its integration of metadata, lower transaction fees, and seamless bridging between NFTs and fungible tokens offer significant improvements over previous standards like SPL-20 and Ethereum’s ERC404. While adoption hurdles remain, the potential for SPL-22 to reshape the future of DeFi is clear. Developers looking for new tools and investors seeking efficient markets should keep an eye on SPL-22 as it continues to gain momentum in the blockchain space.

Paraea is an analyst with a rich background in finance, having worked at various research firms where he gained deep insights into investments and corporate strategies. Now, he blends this expertise with a unique perspective, crafting content for those venturing in finance, tech, or crypto. For more information check out ascendant.finance or join the Discord.

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