Due to the Treaty of Algeron with the Romulan Empire, the Federation had long been banned from developing traditional cloaking technology. However, the tactical advantage of masking a ship from its enemies could not be overlooked and in many cases a technology to do this was needed.
The Federation's answer was to develop a new system that performed the same basic function but in a completely different way, so as to not violate the treaties that prevented use of cloaking devices. The holocloak was developed as an offshoot from the holodeck technology employed on many modern starships and just took that principle to a totally different scale.
The Holocloak takes a completely different approach to disguising a ship from the known Romulan/Klingon Cloaking Device. Instead of trying to make a whole ship disappear the technology is based around the idea of masking a ship as something that is non threatening an uninteresting to others.
This cloak is often called chameleon cloak due to the fact that it effectively creates a holographic illusion around the ship, using strategically placed holographic emitters on the hull, to make it look and feel like virtually any other object in the computer's database. Coupled with this is an additional system that masks the warp and energy signatures of the ship to match that item.
Due to the fact that all that is required to power this system is energy for holographic emitters and masking systems a ship that has activated this system may continue to use shields and weapons (which are masked to reflect the chosen form) at will.
It is important to note that while this system can change the appearance and even apparent size of the ship, it is limited to a range of simulating an object no larger than 1.5 times the size of the ship it is masking. Beyond that the holographic projectors on the hull cannot support the illusion and the image appears to flicker and fade. Similarly it is physically impossible to create the illusion that a 300 meter ship is really only 170 meters.
A Romulan Warbird may engage its cloak to enter a hostile area and become totally invisible to ships around it, yet if detected it is extremely vulnerable as it cannot raise shields or fire weapons while it is cloaked.
In contrast the holocloak would not allow a Federation ship to become totally invisible but does hold several advantages over the traditional cloak. In many ways a holocloak can even be more useful than complete invisibility as an area of space that appears to contain a completely unthreatening object is far less likely to get any attention than an empty area of space potentially containing a cloaked ship.
For example a holocloak could allow a ship to appear as a comet and simply drift into a hostile area of space without causing any alarm. In another case a holocloak could even create the illusion of a friendly ship to the hostiles, masking power signatures and warp trails to confirm the illusion.
The holocloak is not fool proof. If the enemy knows what it is looking for then it will undoubtedly detect a holocloaked ship. However, that does not mean that such detection will be easy or quick and just the notion that a holocloaked ship is in the area could be a great distraction to an enemy who suddenly feel the need to run detailed scans of every comet or dust cloud.
The holocloak may be fitted to Federation vessels under approval by R&D. Other powers do not yet possess the technology to replicate the holocloak's operation.