What are soulbound tokens (SBTs) and how do they work?

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By cre­at­ing an alter­na­tive finan­cial sys­tem with extra­or­di­nary flex­i­bil­i­ty and inno­va­tion in less than ten years, Web3 has astound­ed the globe. Eco­nom­ic and cryp­to­graph­ic prim­i­tives such as smart con­tracts and con­sen­sus mech­a­nisms have helped to cre­ate an open-source sys­tem to con­duct and autho­rize finan­cial transactions.

How­ev­er, the decen­tral­ized finance (DeFi) ecosys­tem can­not sup­port straight­for­ward con­tracts like an apart­ment lease because it lacks a native Web3 iden­ti­ty. This arti­cle aims to demon­strate how even mod­est advances toward social iden­ti­ty rep­re­sen­ta­tion with soul­bound tokens could cir­cum­vent these con­straints and reroute Web3 to an authen­tic, more trans­for­ma­tion­al path. 

What are soulbound tokens (SBTs)?

Projects and use cas­es focus­ing on social iden­ti­ties and com­mu­ni­ties rather than just mon­ey are required for blockchains to be at the core of col­lab­o­ra­tive and fas­ci­nat­ing ecosys­tems. To address this issue, Vita­lik Buterin, Ethereum’s co-founder, along with Puja Ohlhaver, strat­e­gy coun­sel at Flash­Bots, and E. Glen Weyl, polit­i­cal econ­o­mist and social tech­nol­o­gist, intro­duced the con­cept of soul­bound tokens in a paper titled “Decen­tral­ized Soci­ety: Find­ing Web3’s Soul.”

Accord­ing to the authors, soul­bound tokens pro­vide the basis for a decen­tral­ized soci­ety (DeS­oc), which is a co-deter­mined social­i­ty in which com­mu­ni­ties and souls come togeth­er bot­tom-up as emer­gent fea­tures of one anoth­er to co-cre­ate plur­al net­work goods and bits of intel­li­gence at var­i­ous scales. A soul­bound token is a pub­licly ver­i­fi­able and non-trans­fer­able non­fun­gi­ble token (NFT) that rep­re­sents an individual’s cre­den­tials, affil­i­a­tions and com­mit­ments. So, what is a non-trans­fer­able token?

Non-trans­fer­able tokens refer to NFTs that can help track rep­u­ta­tion and are added to address­es but can­not be sold. But what does “Souls” refer to in soul­bound NFTs? The wal­lets or accounts to which SBTs or non-trans­fer­able tokens are per­ma­nent­ly bound are called Souls. For instance, a Soul can rep­re­sent an individual’s employ­ment his­to­ry, which can be self-cer­ti­fied sim­i­lar to infor­ma­tion in one’s cur­ricu­lum vitae. 

But, when SBTs pos­sessed by one Soul can be issued — or attest­ed — by oth­er Souls who are coun­ter­par­ties (e.g., indi­vid­u­als or orga­ni­za­tions) to these rela­tion­ships, that is when the mechanism’s true pow­er is revealed. For instance, the Ethereum Foun­da­tion might be a Soul that awards SBTs to those who attend­ed an Ethereum con­fer­ence. Accord­ing to the paper, the con­cept of “plur­al net­work groups” refers to inter­ac­tions and com­mu­ni­ca­tions with­in the net­works and are the most crit­i­cal dri­vers of eco­nom­ic growth.

How do soulbound tokens work?

Soul­bound tokens may assist Web3 net­works in using non-trans­fer­able tokens as rep­u­ta­tion indi­ca­tors rather than rely­ing upon mon­ey-cen­tric frame­works to achieve the same. For instance, the lender cur­rent­ly ver­i­fies the borrower’s bank account bal­ances, cred­it scores and repay­ment his­to­ry to offer an under­col­lat­er­al­ized loan. 

How­ev­er, with SBTs rep­re­sent­ing one’s cre­den­tials, rep­u­ta­tion will act as col­lat­er­al to get an under­col­lat­er­al­ized loan. Now, if you recall the fun­da­men­tal con­cept of NFTs, they rep­re­sent prop­er­ty or assets with some mon­e­tary val­ue. But, how to ver­i­fy someone’s rep­u­ta­tion in a blockchain-based trust­less system?

To under­stand this con­cept and the work­ing of SBTs in the Web3 space, let’s take an exam­ple of a decen­tral­ized autonomous organization’s (DAO) vot­ing sys­tem. Most DAO gov­er­nance mod­els assign vot­ing pow­er based on the num­ber of tokens held by a member. 

Nonethe­less, DAOs issu­ing SBTs could pri­or­i­tize rep­u­ta­tion over tokens owned by a mem­ber. The rep­u­ta­tion can be ver­i­fied via users’ inter­ac­tions with the com­mu­ni­ty. For instance, tro­phies earned from Kusama’s Gov­er­nance Rewards pro­gram for every on-chain ref­er­en­dum mem­ber votes in can be used to rep­re­sent their reputation. 

That said, tro­phies serve as a visu­al rep­re­sen­ta­tion of a member’s on-chain activ­i­ty in Kusama and Polka­dot DAOs, which may now be suf­fi­cient secu­ri­ty for an under­col­lat­er­al­ized loan. Addi­tion­al­ly, a rep­u­ta­tion-based vot­ing sys­tem may defend DAOs against Sybil attacks.

A Sybil attack involves one or more bad actors tak­ing con­trol of the major­i­ty of the gov­er­nance tokens to redi­rect the project’s direc­tion in their favor. Soul­bound tokens being pub­licly ver­i­fi­able, can pro­tect DAOs from falling into the trap of bad actors. For instance, souls hold­ing respectable SBTs may be assigned major­i­ty vot­ing pow­er to pro­tect the integri­ty of decen­tral­ized autonomous orga­ni­za­tions.

How­ev­er, do soul­bound tokens exist? There are a few exam­ples of how soul­bound tokens can be uti­lized in the Web3 world, which is described in the below sec­tion. But. when will soul­bound tokens be avail­able? Binance Account Bound (BAB) will be the first SBT issued on the BNB chain by Binance. The BAB token will not have any mon­e­tary val­ue and can­not be transferred.

It will serve as a dig­i­tal ver­i­fi­ca­tion solu­tion for Binance cus­tomers that have com­plet­ed Know Your Cus­tomer (KYC) require­ments. Addi­tion­al­ly, third-par­ty pro­to­cols can uti­lize BAB SBTs to facil­i­tate DAO gov­er­nance vot­ing and air­drop, among oth­er use cases. 

How can soulbound tokens be used?

In every­day life, there are many use cas­es of SBTs in Web3, as explained below:

NFT ownership

Artists can get rid of dis­hon­est indi­vid­u­als sell­ing NFT col­lec­tions under the guise of famous artists by link­ing soul­bound tokens to their artis­tic pro­file. SBTs would allow buy­ers to trace the social prove­nance, where­as blockchain inclu­sion enables them to track when a spe­cif­ic work was created. 

For instance, a trade­able NFT could be issued by an artist from their Soul to help buy­ers rec­og­nize an artist’s work by the num­ber of soul­bound tokens it con­tains, estab­lish­ing the legit­i­ma­cy of the non­fun­gi­ble token. As a result, Souls would devel­op a pub­licly-ver­i­fied, on-chain method for stak­ing and devel­op a rep­u­ta­tion around the prove­nance and rar­i­ty of an item.

Job vacancies

Soul­bound tokens rep­re­sent­ing a candidate’s edu­ca­tion­al cre­den­tials like degree and pro­fes­sion­al cer­tifi­cates and pre­vi­ous work his­to­ry can be used as proof of skill to meet the human resource needs of an organization.

Gaming

A user’s Web3 activ­i­ty can be tracked using SBTs, which can be con­vert­ed into non-trans­fer­able rep­u­ta­tion tokens inside game avatars that can only be lev­eled up in this method. This means being a good Web3 cit­i­zen: You can lev­el up instead of play­ing the game, giv­ing your avatar non-trans­fer­able skills and experience.

Verification of borrowers’ credit history

Tra­di­tion­al cred­it reports may also be rep­re­sent­ed by SBTs, giv­ing lenders access to a borrower’s whole cred­it pro­file. And, the SBT may be replaced by pay­ment doc­u­men­ta­tion or delet­ed once the loan has been repaid. As a result, peo­ple can­not hide their ongo­ing obligations.

Various use cases of soulbound tokens

Souldrops

Web3 has been main­ly depen­dent on token sales or air­drops to entice new com­mu­ni­ties, but both meth­ods pro­vide mediocre results. As an alter­na­tive, Soul­drops can be issued using SBTs, for instance, to devel­op­ers with 5 out of the last 10 con­fer­ence atten­dance soul­bound tokens serv­ing as a proof of atten­dance pro­to­col (POAP). Peo­ple can use POAPs, a spe­cial NFT, to demon­strate that they attend­ed a live or record­ed event.

What are the benefits of soulbound tokens?

One of the advan­tages of using soul­bound tokens for cre­den­tial ver­i­fi­ca­tion pur­pos­es is that since infor­ma­tion is per­ma­nent­ly repli­cat­ed on the blockchain, no one can fal­si­fy it. More­over, any awards and cer­tifi­cates earned by an indi­vid­ual can be pub­licly ver­i­fi­able via SBTs. Fur­ther­more, since authen­tic­i­ty can­not be pur­chased through soul­bound tokens, it fos­ters con­fi­dence among token­hold­ers and the gen­er­al public.

Addi­tion­al­ly, pro­to­cols will be able to check bor­row­ers’ cred­it his­to­ries and eval­u­ate their cred­it scores to deter­mine how much they can bor­row, thanks to soul­bound NFTs. More­over, SBTs restrict Web3 projects from becom­ing a cash bag by mak­ing dig­i­tal rep­re­sen­ta­tions non-trad­able. That said, an indi­vid­ual can­not buy NFTs; instead, they need to put effort into earn­ing them.

Are there any risks associated with soulbound tokens?

Along with lucra­tive advan­tages, soul­bound tokens have some cons, too. For exam­ple, the cur­rent wal­let mix may not be ide­al for SBTs due to the lack of com­mu­ni­ty recov­ery meth­ods. As a result, com­mu­ni­ty recov­ery wal­lets need a wide vari­ety of soul­bound tokens dis­persed through­out sev­er­al com­mu­ni­ties to recov­er lost Souls.

A solu­tion to the above lies in a com­mu­ni­ty recov­ery strat­e­gy, in which a Soul’s pri­vate keys can be obtained if con­sent by a qual­i­fied major­i­ty of one of the com­mu­ni­ties (that the Soul belongs to) is received..

How­ev­er, some peo­ple or orga­ni­za­tions might rec­og­nize inter­ests that con­flict with their own ide­ol­o­gy, which could the­o­ret­i­cal­ly lead to harass­ment, vio­lence or even trolling, indi­cat­ing a pri­va­cy con­cern as an individual’s per­son­al infor­ma­tion is exposed.

The­o­ret­i­cal­ly, SBT-based cred­it sys­tems could lead to dystopi­an ecosys­tems (where free­dom and inde­pen­dent thought is restrict­ed) like China’s social cred­it sys­tem, where spe­cif­ic social group­ings are auto­mat­i­cal­ly exclud­ed owing to the pres­ence of spe­cif­ic soul­bound tokens.

SBTs vs. NFTs

Non­fun­gi­ble tokens can be bought and sold via NFT mar­ket­places, where­as soul­bound tokens are non-trans­fer­able NFTs because they’re bound to the Soul. A sum­ma­ry of the dif­fer­ences between SBTs and NFTs is list­ed in the table below:

SBTs vs. NFTs

Although NFTs can­not be altered or dupli­cat­ed, they are eas­i­ly trans­fer­able, which could be a prob­lem if they are uti­lized by some­one with access autho­riza­tion with­out first being grant­ed to a hold­er. There­fore, soul­bound tokens are tied to a par­tic­u­lar Soul address and can be ver­i­fied via on-chain cre­den­tials, restrict­ing any­one from mod­i­fy­ing them.

The future of soulbound tokens

The con­cept of soul­bound tokens, despite being inter­est­ing, is quite new and can­not replace the NFT ecosys­tem. Instead, it can serve as an alter­na­tive way of iden­ti­ty con­trol, allow­ing DAOs, for instance, to bet­ter engage with their com­mu­ni­ty members.

How­ev­er, it remains to be seen if both SBTs and NFTs will co-exist until DeS­oc becomes a real­i­ty in the Web3 space or if SBTs alone can serve as dig­i­tal iden­ti­ty tokens in the decen­tral­ized world. 

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