Potential Game-Changer for Decentralized Operations in Web3
This article will help to answer some of the frequent questions asked about these new assets.
What are Soulbound Tokens?
SBTs are non-transferrable, verifiable, digital tokens/awards that can show an individual’s accreditations, work history, experience, and past records. They are like the virtual badges you receive for leveling up in your favorite video game. Only that SBTs are stored on a blockchain and are visible in the user’s web3 wallet.
SBTs were created by Ethereum’s co-founder Vitalik Buterin, lawyer Puja Ohlhaver, and economist Eric Glen Weyl. Buterin took inspiration from a popular fantasy video game, WarCraft, noting in January 2022 that rewards received from completing tasks in the game are ‘Soulbound’; they cannot be sent, exchanged, or sold to others once a player has claimed it. This idea was extended to the creation of SBTs for the blockchain ecosystem, attempting to solve some major decentralization and structural issues that web3 is currently battling.
In May 2022, a whitepaper by Vitalik Buterin and his colleagues was released, titled Decentralized Society: Finding Web3’s Soul. The paper extensively covered the proposed model and its potential as a solution for the major issues in the web3 cyberspace. Somewhat like a non-sharable ‘cousin’ to NFTs, SBTs cannot be exchanged or transferred on public markets from one person’s wallet to another. They are permanently linked (bound) to a unique wallet, and in the whitepaper, those wallets are compared to ‘souls’ — hence ‘Soulbound’. According to their makers, “The tokens would be like an extended resume, issued by other wallets that attest to these social relations.”
The Difference Between Soulbound Tokens (SBTs) and Non-fungible Tokens (NFTs)
NFTs are transferable tokens, stored on the blockchain, that enable exclusive rights associated with ownership of a particular asset. The asset could be anything: a game, video, artwork, song, or even a physical item or real estate. Their application is not limited to the common belief of NFTs representing ‘cartoon art and monkey pictures’.
NFTs have been used to sell virtual apparel by the likes of Nike and Adidas, custom digital art by companies like Samsung, and even access to web3 tooling by DAOs like PageDAO. There are some similarities between NFTs and SBTs, but also some key differences, and these are reflected in their use cases. The table below compares the features of each token type:
Differences Between NFTs and SBTs
What Are the Use Cases for SBTs?
The most optimistic solution SBTs have to offer is the closing of the web2/web3 credential gap by allowing wallets to accumulate verified credentials over time. As decentralized as web3 claims to be, there’s still heavy reliance on web2 products for social interaction. DAOs and other web3 companies actively use applications like Twitter, Discord, and other centralized platforms for communication because it’s easier to know who they’re dealing with. The reason many people are skeptical about diving into web3 is lack of trust. With SBTs, social credibility and privacy can work in concert.
Right now, almost all the things that happen in the Web3 ecosystem are purely financial objects: They’re transferable and saleable wrappers, like wallets of transferable saleable assets, like tokens and currencies, there’s no actual such a thing as a person. All there is, is a financial holding account
Weyl reiterated that in the absence of social development, there will continue to be a constant restraint on financial relationships in web3, noting that “It’s just like a feature of reality, that our social relationships are the fabric on top of which financial relationships are built. And a system that’s not able to represent that is going to be extremely limited, hyper-financialized, anarcho-capitalist, etc.”
SBTs could be the safest and easiest way to build up a valid CV/resume based on past works and records. They detail the assets of an individual, work experiences, social experiences, and history with other organizations. Hiring an unknown individual does not pose as much issue when they have on-chain credentials issued by trusted organizations. Partnerships, skills, job history, or artistic work that are represented by SBTs can all be used to self-certify. A soul that exhibits these SBTs effectively builds a CV or digital resume for web3.
Being able to describe the qualitative traits that we have, as individuals, as non-financial contributions to our communities, things like our achievements, our capabilities, our friendships, relationships, our memberships and secret societies, all of these traits describe us as humans, and deserve the ability to interact with our smart contracts.
For example, an unskilled developer or designer who is interested in getting involved with a project will only make poor contributions as a result of their subpar inputs. These issues are mitigated through the use of SBTs detailing the work performed in the past. SBTs create unique virtual resumes that prove that the individual has the required skills for the position they are applying for.
SBTs can also help prevent malicious attacks, such as Sybil attacks, by indicating clear differences between bots and people. In DAOs, SBTs could be used as a proof-of-humanity token for its verified members, so as to deny voting rights to bots and some unauthorized wallets or members who are not making relevant contributions to the community.
Souldrops are another potential use case for soulbound tokens. New projects could create an exclusive airdrop of personalized SBTs which could potentially be upgraded later to be transferable. It is possible to gain clarity into which souls are more likely to contribute to and remain active in a community by studying the SBTs in each community member’s soul. Souldrops can then immediately interact with and certify these souls. Only with more precise information on wallet owners than was previously accessible is this type of targeted marketing feasible.
Advantages of Soulbound Tokens
SBTs can be useful for:
hiring companies looking to recruit employees with skills specific to a position.
improvements to voting processes in DAOs.
upgrades to DeFi lending by granting uncollateralized loans and overdrafts. The conventional banking system works based on credit — how much you’re worth defines how much you can borrow because of the issue of loan repayment defaults. Certain SBTs could prove an individual’s or organization’s ability to pay back a loan.
creating a better trust platform which will make the decentralized foundation of web3 more practicable.
Disadvantages of Soulbound Tokens
The risk that too much information is revealed about a person: Users may want to keep certain aspects of their work record (even the merits) private, but if those are issued on SBTs, it is publicly shown to anyone who has access to it.
The feature of being non-transferrable might be an issue when the need arises.
Security and attack resistance cannot be vouched for yet; they might not be fail-proof after all. SBT details almost everything about a person, their work history, memberships, work experience, awards, and qualifications. If the blockchain upon which the token is built is not strong enough to resist attacks and hacks, the information of users will be badly compromised.
Future of Soulbound Tokens
The whitepaper released by Vitalik Buterin assures us that SBTs will be the new bedrock for decentralization in web3. They are a hot topic in the industry and are set to offer solutions to some of the many problems of the new internet, particularly in relation to digital reputation and trust between parties.
These tokens are currently in use; we’re beyond the on-paper stage. Some platforms, such as Kudos, implement them for peer-to-peer recognition to promote involvement and measure impact.
While some challenges remain for the role of SBTs in building a truly decentralized society, soulbound tokens have the potential for large-scale applicability.
Quilia is a web3 writer, content creator and enthusiast who has authored some pieces regarding blockchain. She loves to research, write fan-fiction and when she’s not working, she hangs out with her dog, Brown.
links is a web2 product leader and startup artist seeking inspiration in web3.
Trewkat is a writer and editor at BanklessDAO. She’s interested in learning as much as possible about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
Tonytad is a graphic designer who has worked locally and internationally with organisations and firms on over 200 projects, which includes branding, logo, flyers, cards, and covers.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.
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