Soulbound tokens (SBTs) are an evolution of non-fungible tokens (NFTs). They provide a novel mechanism for storing credentials on the blockchain. NFTs are a significant driver of adoption in Web3. However, the most prominent use cases for NFTs are in gaming, art, music, and the metaverse. SBTs take NFTs to the next level by enhancing their utility and making them unique to each holder. Unlike NFTs, SBTs are non-transferable crypto assets that are "bound" to the "Soul" of a user. Although this technology is still in the early stages of its development, the potential use cases for SBTs extend into multiple real-world scenarios. Furthermore, SBTs could create trustless reputation scoring mechanisms or help to optimize voting in decentralized governance. So, if you're among the many people wondering, "what are Soulbound tokens?" and "how do SBTs compare to NFTs?" – read on!
In this article, we're going to dive deep into the world of Soulbound tokens (SBTs). We'll explore how these non-transferable tokens work and how they differ from non-fungible tokens (NFTs). Also, we'll explore the concept of a decentralized society (DeSoc). Plus, we discuss some of the use cases for SBTs and the roles they could play in the future.
What are Soulbound Tokens (SBTs)?
So, what are Soulbound tokens? Soulbound tokens (SBTs) are non-transferable identity and credentials tokens that represent a person or entity. SBTs are minted by wallets or blockchain accounts known as "Souls". They allow users to tokenize achievements or traits on the blockchain. Users may hold multiple Souls that contain different credentials for different parts of their lives. For example, someone could have a professional Soul for job interviews, an athletic Soul that tracks their progress in the gym, a health Soul for medical records, and a gaming Soul for online gaming.
Published by Ethereum co-founder Vitalik Buterin, Puja Ohlhaver, and E. Glen Weyl in May 2022, the SBT whitepaper, "Decentralized Society: Finding Web3's Soul", aims to establish a user-governed "decentralized society" (DeSoc) where SBTs serve as our credentials. Also, SBTs allow users to create digital reputation scores that are verifiable on the blockchain.
The idea for SBTs takes inspiration from the popular online computer game "World of Warcraft" (WoW). Just like in the game, you cannot sell an SBT. Rather, it is "bound" with a permanent link to the "Soul" holding it. Furthermore, SBTs take the concept of non-fungible tokens (NFTs) to another level by providing utility beyond investing, art, gaming, and collectibles. Moreover, SBTs serve as an extension of NFTs that serve to benefit our daily relationships and interactions.
How Do SBTs Work?
Now that we have addressed the question of "what are Soulbound tokens?", let's take a look at how they work. SBTs are essentially non-transferable NFTs. They provide a transparent and immutable method for storing trust and credentials on the blockchain. For example, if somebody takes out a loan and repays it on time, their trust score could be updated and represented in an SBT. In the future, other lenders will be able to observe this score to define the terms of another lending agreement. Likewise, if someone fails to repay a loan on time, their SBT would show other lenders that this person has a higher risk profile or a lower trust score. This trust score could lay the foundations for an entirely new Web3 trust economy rather than relying on antiquated systems and financial models from yesteryear.
Let's look at another example of SBTs in action. The social media landscape is such that anyone can say anything without much recourse, meaning that there are no robust frameworks in place to ensure that people are who they say they are. However, if creating a fake account or buying an account from another user resulted in a lower trust score and restricted access to services, it could help reduce the amount of spam and trolling online. Plus, it could help users to authenticate the accounts they follow.
Additionally, SBTs could be practical tools for airdrops and token distributions. Airdrops are one of the most effective tools for new crypto projects. They help to build awareness around brands and grow decentralized communities. Currently, most airdrop models use a blanket distribution framework that allocates tokens to anyone who signs up. However, SBTs could help projects to distribute tokens according to a community member’s participation. Also, this type of airdrop could account for any activities participants complete and distribute the most tokens to the most active community members.
The Next Generation of High-Utility NFTs
NFTs are one of the biggest drivers of adoption in the Web3 space. Nonetheless, their utility often relates to entertainment, collectibles, gaming, and investing. Fungible assets such as Bitcoin (BTC), Ethereum (ETH), and fiat currencies are interchangeable. For example, if you take out a loan of one ETH, you can repay the loan using any ETH available; it doesn't have to be the exact same unit(s) of account. However, most non-fungible assets are unique representations of ownership. As such, they are generally not suitable as a medium of exchange.
SBTs give NFTs a new lease of life by giving them high utility in real-world use cases. Instead of providing a record of ownership for in-game items, art, or music, SBTs hold a unique record of an individual's credentials. Nonetheless, SBT NFTs are still non-transferable. Additionally, SBTs have no monetary value and cannot be sold or exchanged after they are bound to a Soul's wallet address.
NFTs vs SBTs
NFTs are becoming essential tools in crypto gaming, collectibles, decentralized finance (DeFi), and the metaverse. However, some downsides to NFTs could prevent them from achieving mainstream adoption in real-world use cases. For example, NFTs are transferable, meaning they can be used with any wallet and are exploitable when others gain access to them.
On the other hand, SBTs are bound to the wallet address or "Soul" to which they are issued. As such, they are non-transferable. SBTs and NFTs share many similarities. Nonetheless, SBTs offer various advantages over NFTs, such as the ability for the issuer to revoke them. Also, because SBTs have a link to a crypto wallet address, any credentials stored within them cannot be transferred. Additionally, SBTs have no intermediaries between the issuer and receiver. Conversely, NFTs often have multiple intermediaries when sold on an NFT marketplace.
Furthermore, because SBTs are more challenging to reallocate than NFTs, they provide many of the same benefits as NFTs but without the ability for users to trade them. Moreover, SBTs facilitate accountability and transparency throughout the Web3 ecosystem in a way that could benefit society at large.
What are Soulbound Tokens Used For?
Soulbound tokens (SBTs) have many potential use cases. However, most of them are theoretical at this time. Nonetheless, SBTs have the potential to provide utility in all kinds of real-life scenarios. For example, SBTs could act as immutable wallets for storing education certificates. Rather than relying on physical pieces of paper, educational institutes could issue SBTs to students upon the completion of their studies. As such, students could verify their credentials even if they lost their physical certificates or their University database became compromised. What's more, SBTs could contain data relating to student attendance records.
Furthermore, SBTs could become useful tools for completing job applications. When applying for jobs, applicants could use SBTs to verify their employment history. Also, applicants could use SBTs to show potential employees their qualifications and skills. Another potential use case for SBTs is for storing medical records. Whenever patients visit multiple medical practitioners or healthcare providers, sensitive data is often missing or needs to be reiterated with each visit. However, using SBTs could save patients and hospitals both time and money. Additionally, storing records on the blockchain in this way provides an additional layer of security and protection against natural disasters.
Another potential application for SBTs is identity management. SBTs could streamline identity verification and allow users to securely access their favorite websites and applications with minimal friction. Moreover, SBTs could become essential tools for any product or service that requires a trust score. In finance, for example, SBTs could help consumers build risk profiles that are more accurate than traditional credit scores.
SBTs in Governance
Decentralized governance is a cornerstone of the Web3 landscape. It has become an essential feature of some of the most prominent Web3 platforms. However, SBTs present a viable alternative to the decentralized autonomous organization (DAO) model that is popular among DeFi protocols. DAO voting is often weighted according to the number of governance tokens one holds. Projects could issue SBTs in a way that allocates voting power to individuals based on their community participation to make this process more equitable.
Not only would SBTs facilitate higher levels of decentralization, but they could also help to minimize the effects of "Sybil attacks" in governance voting systems. When a Sybil attack occurs, whales who hold a large number of governance tokens can manipulate DAOs. As such, the outcomes of some of these votes don't always reflect the will of the community at large. However, SBTs could help to prevent such attacks and stop bad actors from throwing their weight around during governance proposals.
Decentralized Society (DeSoc)
Instead of applying the principles of trustlessness to decentralized financial protocols, DeSoc applies them to real-world use cases that benefit society beyond the scope of finance. Furthermore, DeSoc aims to create open trust networks to underpin the emerging data economy. This allows participants to create live and updating credit reports, resumes, and other frameworks built on trust. This could facilitate higher efficiency and cooperation between social networks in the future.
Additionally, DeSoc could help us to solve everyday problems such as finding the most reliable contractor for a specific task, hiring the best candidate for a job position, applying for a university course, or finding out which charity does the most for its benefactors. Moreover, DeSoc facilitates social credit scoring in a way that cannot be manipulated by centralized parties or used to discriminate by government agencies.
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Soulbound Tokens (SBT) Explained - Summary
Soulbound tokens, or SBTs, are an evolution of the technology behind NFTs. They enable holders to create verifiable digital reputations on the blockchain. Unlike NFTs, SBTs are non-transferable, making them an ideal solution for storing credentials on the blockchain. However, issuers can revoke SBTs, making them ideal for corporate and enterprise settings. Moreover, SBTs could optimize the investment process by allowing entrepreneurs and startups to display their trust scores for potential investors to make informed decisions based on credentials and verifiable knowledge in their respective fields.
The Web3 industry appears to favor financial applications. However, SBTs have the potential to bring Web3 into many different walks of life and become a staple in the workplace. Also, the emerging trend of decentralized society (DeSoc) aims to use Web3 and blockchain to democratize more aspects of our lives and communities beyond finance, gaming, and art.
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