[SOLUTION] Please describe your proposed solution.

In short:

Our proposal aims to enhance the Cardano blockchain by introducing programmable features to its native tokens, similar to those found in Ethereum's popular ERC-20 tokens. In simple terms, we're working to make Cardano's tokens smarter and more flexible, allowing for features like blocking certain addresses or adding fees to transfers without changing their core nature. This innovation will not only keep the tokens user-friendly but also open up new possibilities for how they can be used, benefiting everyone in the Cardano community. Our project will demonstrate these enhancements through practical examples.

Our enhancement of Cardano's native tokens will benefit the entire community by offering a new foundation for innovation. It allows for the development of new types of applications, enriching the ecosystem and benefiting everyone, from developers (they have a foundation to build upon) to long-term ADA holders (ecosystem progress) and SPOs (overall increase in the ecosystem attractiveness).

Longer more technical version:

Cardano tokens are unique by being a direct part of the user's UTxOs. They enjoy native support within the Cardano ledger. This contrasts with Ethereum's ERC-20 tokens which are essentially smart contracts that internally track balances. While this approach has its drawbacks, it also provides the significant advantage of programmability. Any smart contract logic can be executed during token transfers, a feature extensively used within the Ethereum ecosystem.

Currently, integrating the functionalities of Ethereum's ERC-20 tokens into Cardano's native tokens presents a significant challenge. These functionalities are vital for compliance and sophisticated token management. It includes capabilities such as blacklisting specific addresses, enforcing mandatory fees on token transfers, the ability to freeze tokens during critical situations, and much more.

Our approach does not rely on locking tokens into smart contracts. We believe that would fundamentally alter their nature and be impractical. Instead, we propose a solution that aligns closely with the philosophy behind Cardano's native tokens and does not compromise interoperability with decentralized applications (dApps).

Our aim is to thoroughly explore and document this concept. The solution will not necessitate modifications of the ledger. It will include the development of three distinct proof-of-concept sample implementations. These will illustrate our findings and demonstrate how they can be applied.

The potential this brings to Cardano is substantial. By adopting the principles outlined in our proposal, Cardano's native tokens could leverage the advanced capabilities currently seen in Ethereum’s ERC-20 tokens. This advancement is not just theoretical; it holds the promise of accelerating and enabling a range of innovative projects within the Cardano ecosystem.

[IMPACT] Please define the positive impact your project will have on the wider Cardano community.

The primary impact of our project is to bridge the capabilities of Ethereum's world with Cardano's native tokens, significantly enhancing their utility. This includes not just compliance-related features but also opens up possibilities for NFTs with integrated royalties, deflationary tokens, automatic charitable donations, advanced security measures like blacklisting known scammers, allowing only whitelisted users to own certain assets, advanced token recovery options, time-based loyalty and reward systems and many more. Our proposal will explore functionalities like transfer fees, maintaining a blacklist of addresses and token freezing in case of an emergency.

These features are crucial for projects that currently face difficulties in controlling token transfers due to compliance or operational requirements, and those that are completely infeasible without them. Our proposal aims to overcome this challenge by exploring and presenting viable solutions. This initiative draws in projects that would find it infeasible to integrate into our ecosystem under current conditions.

The ultimate goal of this proposal is to enrich the Cardano community by broadening its scope, capabilities and audience. As for measuring our project's success, we will focus on the level of interest and discussion it generates within the community. Engagement and enthusiasm about this topic will serve as key indicators. Our team is open to engaging with interested parties and helping any company that seeks to explore these new possibilities. Updates and insights will be shared through our social media channels, ensuring that the community stays informed and involved in this groundbreaking journey.

[CAPABILITY & FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

As seasoned auditors of smart contracts on Cardano, we possess extensive experience with audits and design reviews conducted in Plutus, Plutarch, and Aiken languages. We have already identified various vulnerabilities, viewable at <https://github.com/vacuumlabs/audits>. Additionally, we are launching a series of blogs on common Cardano vulnerabilities, accessible at https://medium.com/@vacuumlabs_auditing.

Furthermore, thanks to Catalyst 10, we are developing the Capture the Flag game. The ongoing progress and the tasks already completed can be found at the milestone module or in the public repository.

Drawing from our expertise, we are confident in our ability to create a well thought-through and useful programmable tokens' design.

[Project Milestones] What are the key milestones you need to achieve in order to complete your project successfully?

Milestone 1: Research on Programmable Tokens

• Duration: 2 months
• Objectives:
• Investigate the integration of programmable tokens within the eUTxO model, covering the specified examples.
• Begin drafting the Design document, incorporating diagrams where necessary.
• Outputs and Acceptance Criteria:
• A draft of the Design document, made available as open-source, detailing the on-chain architecture for programmable tokens. This includes functionalities like transfer fees, address blacklisting, and token freezing.

>Milestone 2: Exploring Wallet and dApp Interactions

• Duration: 1 month
• Objectives:
• Thoroughly analyze all potential interactions, focusing on common dApps and wallets.
• Update the Design document with detailed information on these interactions, including token transfers and engagements with major Cardano decentralized applications.
• Outputs and Acceptance Criteria:
• An enhanced Design document detailing interactions with wallets and decentralized applications.

>Milestone 3: First Proof of Concept for Common Programmable Tokens

• Duration: 1 month
• Objectives:
• Develop the first proof-of-concept smart contracts for a specific use case: freezable tokens.
• Implement and document a sample off-chain test to showcase its usability.
• Outputs and Acceptance Criteria:
• Open-source, well-documented proof of concept validator(s) (on-chain) and off-chain test cases demonstrating the specified functionalities.

>Milestone 4: More Proofs of Concept for Common Programmable Tokens

• Duration: 2 months
• Objectives:
• Develop more proof-of-concept smart contracts for specific use cases: fee on transfer tokens, blacklisting addresses with an extendable blacklist.
• Implement and document a sample off-chain test to showcase their usability.
• Outputs and Acceptance Criteria:
• Open-source, well-documented proof of concept validators (on-chain) and a basic off-chain test demonstrating the specified functionalities.

>Milestone 5: Final Assessment and Future Roadmap

• Duration: 1 month

• Objectives:

• Conduct research on the necessary steps for the broader adoption of programmable tokens.

• Evaluate the need and practicality of standardizing programmable tokens.

• Write up potential additional use cases uncovered during the research phase.

• Outputs and Acceptance Criteria:

• Inclusion of researched next steps in the Design document.

• Deliver a comprehensive project completion report + video.

  [RESOURCES] Who is in the project team and what are their roles?

Vacuumlabs Smart Contract Auditing Team: website

Michal Porubský is the Lead Smart Contract Auditor at Vacuumlabs. As a founding member of the smart contract auditing and consultancy division, he specializes in providing expert consultation to find the optimal design of decentralized applications and conduct comprehensive Cardano smart contract audits to ensure their robustness and security. He previously worked for WingRiders, NuFi and in the traditional finance world. During the high school he competed at several national and international competitions where he won several regional and national ones. Later at the university he helped to organize and prepare tasks for similar programming competitions.

Michal Sládeček is a Smart Contract Auditor, a security consultant and an ethical hacker with a very wide range of experience ranging from web exploitation to reverse engineering and cryptography. He is a holder of the OSCP certificate with experience in programming C++, C, Javascript and Python code, and a good theoretical background in algorithms. One of his biggest accomplishments is a bronze medal from the International Olympiad in Informatics (IOI). During his university studies, he also helped organize national competition in programming.

Michal Anderle, also a Smart Contract Auditor at Vacuumlabs, honed his problem-solving skills through competitive programming during his studies. His achievements include a bronze medal from the IOI, participation in the ACM ICPC finals, and organizing programming competitions. Currently, he teaches an algorithmic course at a university. In his role, he employs these skills to identify potential vulnerabilities, enhancing the efficiency and security of his clients' products.

[BUDGET & COSTS] Please provide a cost breakdown of the proposed work and resources.

Research and Design Document (2 months): 60,000 ₳

Comprehensive research and initial Design documentation.

Wallet and dApp Interaction Research (1 month): 30,000 ₳

Detailed analysis and expansion of the Design document.

First Proof of Concept Development (1 months): 30,000 ₳

Creation and testing of the first smart contract proof of concept.

Two More Proofs of Concept Development (2 months): 60,000 ₳

Creation and testing of two more smart contract proofs of concept.

Final Analysis and Roadmap (1 month): 20,000 ₳

Final project next steps’ research, reporting, and video production.

Therefore, the total budget is 200,000 ₳.

The work will be conducted by the Vacuumlabs Auditing team, leveraging their deep understanding of the underlying primitives essential for achieving high-quality results in this project.

[VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

This proposal offers significant value to the Cardano ecosystem by introducing functionalities from Ethereum which have already demonstrated their extensive utilities such as collecting transaction fees on-transfer, implementing deflationary mechanisms, charitable donations, whitelist/blacklist functionalities and much more. These are essential for i.e. the development and management of regulated fractionalized assets within Cardano.

The proposal can be thought of as an investment in the future capabilities of Cardano’s ecosystem. It opens up opportunities for new types of projects that were not possible before. Everyone will benefit from this progress.

A critical component of our proposal is the formulation of a comprehensive design. To achieve this, we are utilizing the expertise of our smart contract auditors, ensuring the highest quality at a cost-effective rate. This strategic use of resources underscores the proposal's value for money, positioning it as an efficient investment in the future capabilities of Cardano’s ecosystem.