What are Soulbound tokens, and how do they work? Are they useful, or just costly and dangerous? Let’s dive in.
Within the digital creator economy, web3 use-cases embrace disruption and innovation. Now, Vitalik Buterin, Glen Weyl, and Puja Ohlhaver have proposed a building block for Web3 called the Soulbound Tokens concept.
But what are Soulbound tokens, and how do they work? Are they useful, or just costly and dangerous? Let’s dive in.
According to the Soulbound Tokens white paper draft, the Web3 concept is centered around tradability. Essentially, Web3 disregards the non-transferability of simple social relationships based on trust. Peer-to-peer transactions, for instance, rely on trustless networks that limit the degree of trust for individuals to transact. Soulbound Tokens (SBTs) are non-tradeable tokens that represent an individual’s unique merits and records for their social relationships in the Web3 ecosystem. They can be defined as non-financialized and non-transferable NFTs that portray unique and verifiable achievements, traits, affiliations, and features that define an individual or entity, such as what school you went to. While Soulbound Tokens are still a concept, the ‘Decentralized Society: Finding Web3’s Soul’ authors believe the tokens will be just the beginning in Decentralized Society. Decentralized Society is built on the concept that emerging networks are owned and controlled by users in a bottom-up society. In a nutshell, DeSoc is about influencing Web3’s direction from hyper-financialization to more inclusivity, democracy, and decentralization.
As outlined in the white paper, some SBT mechanics include their nontransferable nature and issuance. For instance, they are easily distinguishable from NFTs, ERC20 tokens, and crypto in general by their non-transferable nature. Transferring SBTs from one wallet to another is impossible since they lack a market value.
SBTs are held within a private wallet called Souls. The Souls establish reputation and provenance. Individuals can also issue SBTs to other souls (associated with individuals or institutions).
Additionally, individuals can have multiple Souls to their name. For example, one for CVs, another for achievements, and another for medical records. All of these are different from one’s identity Soul, the one that shows their personal details like an ID or passport.
SBTs will allow individuals and organizations to accumulate immutable and indisputable non-tradeable merit and attribute records. In other words, Soulbound Tokens are representations and descriptions of an entity or individual. Their utility and power stem from their interrelations to form verifiable commitments, achievements, credentials, and affiliations within a community.
SBTs’ concept of non-transferability and non-financialization is nothing new in the DeFi space. In fact, some booming projects like Proof Of Attendance Protocol (POAP) and Proof-of-Humanity (PoH) are built around the same concept. POAP is similar to an attendance roll call that uses badges to prove an individual appeared at an event. On the other hand, PoH applies the non-transferable concept in associating real-life humans with unique profiles. The PoH system merges dispute resolution and social verification (using reverse Turing tests) to create a Sybil-resistant human registry.
However, SBTs are unique because it is built on a social aggregation system basis. Unlike China’s social credit system, which critics have compared it to, SBTs take the bottom-up approach. They stand to be a vital building block in realizing composable, decentralized, and democratic communities and the wider Web3 society. That said, SBTs are still just a concept.
SBTs’ potential use cases include:
- Uncollateralized DeFi Lending: Unlike conventional financial systems that are built on credit and uncollateralized loans, DeFi is plagued by a lack of uncollateralized lending, which is a challenge that the crypto industry and Web3 ecosystem have yet to solve. This is because it’s difficult to prove the credit worthiness of an individual or institution in a system that boasts anonymity and decentralization. Soulbound tokens coming to play could introduce provenance and reputation to allow uncollateralized DeFi loans.
- Digital resume: An individual’s Soul could hold their achievements, academic records, and institutional affiliations like colleges/universities or firms they have worked with/for. It beats the hassle of verifying a candidate’s job qualification to make recruiting decisions when SBTs can offer publicly verifiable resumes.
- NFT Provenance: Centralized systems are prone to the dangers of a central point of failure. An over-reliance on central systems is risky in the event of a temporary downtime. SBTs tackle this issue by enabling users to mine NFTs from their Souls. Furthermore, SBTs could provide a Web3-native reputation and identity for legitimacy.
- Medical record management: Having a medical record Soul (or simply medical Soul) could enable a seamless shift in insurance providers or doctors. SBTs could eliminate the cumbersome process of having to verify one’s identity, answer security questions, explain medical histories to different doctors, and endless phone calls requesting this information. Essentially, the medical Soul would hold an individual’s medical history.
- DAO Sybil attack security: One of the challenges that decentralized autonomous organizations (DAOs) face is the Sybil attack, where individuals or organizations garner enough governance tokens to sway proposal votes in their favor. Leveraging SBTs can help mitigate this threat. They could have in-built algorithms to check for ties between SBTs held by different Souls and discount them if they support a certain vote.
While supporters feel that SBTs are a much-needed transformation in web3, critics are skeptical that they are unnecessary and expensive. Critics also highlight that the concept of SBTs have already existed for a long time and is an expensive proposed solution to matters that have already been solved.
The future of SBTs is still a blank sheet. Their use cases and utility have yet to be extensively explored. Nevertheless, they have the potential to change the landscape for the Web3 ecosystem, blockchain technology, NFTs, and cryptocurrencies.
