How do soulbound tokens (SBTs) operate and what are they?

Digital identity tokens that represent a person’s or an entity’s traits or reputation are known as soulbound tokens (SBTs).

Web3 has stunned the world by developing an alternative financial system with unprecedented flexibility and innovation in less than ten years. Smart contracts and consensus mechanisms, among other economic and cryptographic primitives, have contributed to the development of an open-source system for executing and approving financial transactions.

However, due to the absence of a native Web3 identity, the decentralized finance (DeFi) ecosystem cannot support simple contracts like an apartment lease. This article seeks to show how even small advancements in the representation of social identities via soulbound tokens could get over these limitations and steer Web3 in a genuine, more revolutionary direction.

Soulbound Tokens (SBTs): What are they?
Blockchains must be at the center of cooperative and intriguing ecosystems, with projects and use cases concentrating on social identities and communities rather than just money. In a paper titled “Decentralized Society: Finding Web3’s Soul,” co-founder of Ethereum Vitalik Buterin, strategy counsel at FlashBots Puja Ohlhaver, and political economist and social technologist E. Glen Weyl suggested the idea of soulbound tokens to address this problem.

A decentralized society (DeSoc), defined by the authors as a co-determined sociality in which communities and souls join together bottom-up as emergent aspects of one another to co-create plural network goods and bits of intelligence at various scales, is based on soulbound tokens. An individual’s qualifications, connections, and commitments are represented by a soulbound token, a nonfungible nontransferable token (NFT) that is publicly verifiable and nontransferable. A non-transferable token is what it sounds like.

Non-transferable tokens (NTTs) are NFTs that can be added to addresses and used to track reputation but cannot be traded. But what do “Souls” in soulbound NFTs actually mean? Souls are the wallets or accounts that SBTs or other non-transferable tokens are permanently connected to. An individual’s career history, for instance, may be represented by a Soul and could be self-certified, much like the content in a curriculum vitae.

However, the actual power of the mechanism is only realized when SBTs held by one Soul can be issued — or attested — by other Souls who are counterparties (e.g., people or organizations) to these interactions. The Ethereum Foundation, for instance, might be a Soul that grants SBTs to people who attend Ethereum conferences. The concept of “plural network groups,” according to the report, relates to interactions and communications inside the networks and is one of the most important factors in economic growth.

The functioning of soulbound tokens
Web3 networks may be helped by Soulbound tokens to use non-transferable tokens as reputation indicators rather than relying on frameworks that are money-centric to do so. For instance, in order to give an undercollateralized loan, the lender now confirms the borrower’s bank account balances, credit ratings, and repayment history.

However, a person’s reputation will serve as collateral to obtain an undercollateralized loan when SBTs are used to reflect their qualifications. Now, if you remember the core idea of NFTs, they stand for assets or property that have a monetary worth. However, how can a blockchain-based, trustless system evaluate a person’s reputation?

Let’s use the voting mechanism of a decentralized autonomous organization (DAO) as an example to clarify this idea and how SBTs function in the Web3 area. The majority of DAO governance solutions provide voting power according to a member’s token holdings.

However, DAOs generating SBTs may give reputation precedence over tokens held by a member. Users’ interactions with the community can be used to confirm the reputation. Examples of trophies that can be used to reflect someone’s reputation come from the Governance Rewards program offered by Kusama for each on-chain referendum member votes in.

To that end, trophies in Kusama and Polkadot DAOs serve as a visible reflection of a member’s on-chain participation, which may now be enough security for an undercollateralized loan. A reputation-based voting system may also protect DAOs from Sybil assaults.

In a Sybil attack, one or more malicious parties seize possession of the majority of governance tokens in order to sway the project’s course in their favor. Due to their ability to be publicly verified, soulbound tokens can shield DAOs from malicious individuals. For instance, to safeguard the integrity of decentralized autonomous organizations, souls owning respectable SBTs may be given majority voting power.

Do soulbound tokens exist, though? There are a few uses for soulbound tokens in the Web3 universe, which are discussed in the section below. When, however, will soulbound tokens be made accessible? The first SBT that Binance will release on the BNB chain is called Binance Account Bound (BAB). The BAB token will not be exchangeable and will not have any monetary value.

It will act as a substitute for traditional verification for Binance users who have met the necessary Know Your Customer (KYC) standards. Furthermore, third-party protocols can employ BAB SBTs to support airdrop and DAO governance voting, among other use cases.

What use do soulbound tokens serve?
There are numerous use cases for SBTs in Web3 in daily life, as follows:

ownership of NFT
By connecting soulbound tokens to their artistic profile, artists can get rid of dishonest people who sell NFT collections while posing as well-known artists. While blockchain integration allows buyers to monitor the creation date of a given item, SBTs would allow them to trace the social provenance.

An artist might, for instance, produce a tradeable nonfungible token (NFT) from their soul to enable customers to identify their creations by the amount of soulbound tokens they contain, so demonstrating the trustworthiness of the nonfungible token. As a result, Souls would create a publicly verifiable on-chain staking system and establish a reputation based on an item’s provenance and rarity.

Jobs available
In order to address an organization’s human resource demands, soulbound tokens that represent a candidate’s academic achievements, including degrees, professional certifications, and prior employment, can be employed as proof of expertise.

SBTs, which may be transformed into exclusive, non-transferable reputation tokens inside of game avatars, allow for the tracking of a user’s Web3 activities. Being a good Web3 citizen means that you can level up without really playing the game, providing your avatar experience and skills that aren’t transferrable.

verification of the credit history of borrowers
SBTs may also be used to represent conventional credit reports, allowing lenders access to a borrower’s complete credit history. Additionally, once the loan has been returned, the SBT may be erased or changed to payment documentation. People are unable to conceal their ongoing commitments as a result.

There are several uses for soulbound tokens.

To attract new communities, Souldrops Web3 has primarily relied on token sales or airdrops, however neither strategy is particularly effective. As an alternative, Souldrops can be distributed using SBTs, for example, to developers with a proof of attendance protocol using soulbound tokens for 5 out of the last 10 conferences (POAP). People can prove they attended a live or recorded event using POAPs, a unique NFT.

What advantages do soulbound tokens offer?
Using soulbound tokens for credential verification has the benefit of preventing information falsification because data is copied forever on the blockchain. A person’s accomplishments can also be publicly verified using SBTs, including any honors and certificates obtained. Furthermore, it promotes trust among token holders and the general public because authenticity cannot be bought with soulbound tokens.

Thanks to soulbound NFTs, procedures will also be able to verify borrowers’ credit histories and assess their credit scores to figure out how much they can borrow. Additionally, SBTs prevent Web3 projects from turning into moneymaking enterprises by prohibiting the trading of digital representations. NFTs cannot, however, be purchased; instead, one must work hard to earn them.

Are there any dangers that go along with using soulbound tokens?
Soulbound tokens have several drawbacks in addition to their valuable benefits. For instance, the lack of community recovery strategies may make the existing wallet mix unsuitable for SBTs. In order to recover lost Souls, community recovery wallets require a wide range of soulbound tokens scattered over different communities.

A community recovery technique, in which a Soul’s private keys can be acquired provided permission from a qualified majority of one of the communities (that the Soul belongs to) is granted, offers a solution to the aforementioned issues.

Although it is possible for some individuals or groups to identify interests at odds with their own ideologies, this poses a privacy risk because it might conceivably result in harassment, violence, or even trolling.

Theoretically, SBT-based credit systems might create dystopian ecosystems (where freedom and independent thought are constrained) like China’s social credit system, where particular social groupings are automatically eliminated because certain soulbound tokens are present.

NFTs against SBTs
Soulbound tokens are non-transferable NFTs because they are bound to the Soul, whereas non-fungible tokens can be purchased and traded on NFT exchanges. The following table summarizes how SBTs and NFTs differ from one another:

NFTs are easily transferable even if they cannot be changed or duplicated, which could be an issue if they are used by someone with access authority before being given to a holder. In order to prevent tampering, soulbound coins are linked to a specific Soul address and are verifiable using on-chain credentials.

Future plans for soulbound tokens
Despite being an intriguing idea, the NFT ecosystem cannot be replaced by soulbound tokens because they are very new. Instead, it can be used as a substitute for identity control, enabling DAOs, for example, to interact with their community members more effectively.

It is unclear, nevertheless, whether SBTs and NFTs will coexist up until DeSoc manifests themselves in the Web3 domain or whether SBTs alone can function as digital identity tokens in the decentralized environment.

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