Soulbound Tokens: A New Innovation?

Soulbound Tokens

Ethereum co-founder Vitalik Buterin, economist Glen Weyl, and lawyer Puja Ohlhaver posted a paper on May 11, 2022, describing a new innovation known as soulbound tokens (SBTs). According to the authors, these tokens will take tokenization (as well as NFTs) to a whole new level, establishing new standards for Web3, while in the process bringing this new decentralized web closer to decentralization.

As things currently stand, we’re also using centralized platforms to trade decentralized tokens, an irony that has drawn well-deserved criticism. There is no doubt that getting to a completely decentralized ecosystem will involve a long journey. Interestingly enough, SBTs could play a major role in eradicating some of the prevailing barriers. It is important to note though: As the paper explains, soulbound tokens and the Decentralized Society (DeSoc) are just concepts and will require more research before implementation. As a result, one can’t help wondering if SBTs can really be a new innovation or turn out to be just another hype.

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What are soulbound tokens?

NFTs represent real-world or virtual assets like land, digital art, and in-game items on the blockchain. Now imagine a token that takes things a step further, representing your commitment to pay a loan or publishes your education credentials on the blockchain. This is what soulbound tokens seek to accomplish.

The paper defines SBTs as non-transferable tokens “representing commitments, credentials, and affiliations.” Think of a soulbound token as a tokenized version of your “social identity,” ranging from your accomplishments to your financial credit reputation, and more. These are some of the traits that make you who you are as a person. In that sense, SBTs are more complex than NFTs since they represent what makes a person rather than what they own.

According to the paper, SBTs will bring social identity to Web3, allowing it to shed dependence on centralized Web2 structures. As it stands today, digital identity is one of the most important, yet centralized constructs and blockchain technology have long been hailed as a possible solution.

How do soulbound tokens work?

SBTs will initially be publicly visible, and issuers could have the power to revoke them if they so choose. The tokens will be stored in wallets called souls, held by DeSoc participants comprising individuals, companies, and institutions.

SBTs can be self-certified, similar to how you share your CV with others claiming that you have a list of particular skills and you’ve accomplished several things. On the other hand, they can be attested by others, meaning that someone issues you with SBTs confirming you’ve achieved something. For instance, a university can issue its graduates with SBTs verifying that they’ve completed a course and acquired a specific GPA (grade point average). Once a graduate receives these SBTs, they’re non-transferable because they represent unique accomplishments that are specific to one individual. This is different from NFTs, which are transferable from one person to another. Also, SBTs aren’t necessarily financially valuable like NFTs.

The paper further explains that there’s no need to limit one soul (wallet) to one human and that a soul can be pseudonymous with different SBTs representing various achievements.

What are the benefits of soulbound tokens?

While soulbound tokens are just an idea, they could potentially offer the following benefits.

Expanding Web3 beyond financial assets

Web3 is presently hyper-financialized, meaning that most use cases are tied to a financial function. SBTs will introduce a non-financial side to Web3. It will also improve the financial side of things because financial and social relationships are closely related. Speaking to Cointelegraph, the paper’s co-author Glen Weyl further explains the point as follows: “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.

The expansion of Web3 beyond financial assets could also attract more people to the space, increasing Web3 adoption.

Making it easy to trace social provenance

Soulbound tokens will make it easy to verify the authenticity of a piece of work that an artist has created or more generally, any piece of work that has been created by its creator. The SBTs would enable an interested party to trace the social provenance (origin) of the soul that issued the art. As a result, they can discover the social identity of the soul, namely their credentials, memberships, and affiliations. More thoroughly knowing the social provenance of things will help strengthen the relationship between them and their creators, most likely benefiting the latter.

How might Soulbound tokens change the future?

Buterin and the paper’s co-authors envision SBTs having the following use cases:

Uncollateralized lending

SBTs would facilitate uncollateralized lending by replacing centralized, opaque, and top-down credit systems that discriminate against people that haven’t accumulated enough data to prove their creditworthiness. This could help transition crypto lending from the need of having to be collateralized to making under- or non-collateralized loans a reality. Soulbound tokens representing work history, rental contracts, and education credentials would allow borrowers to stake their reputation to get a loan, making it easier to prove their credit history and good repute.

Revocable and non-transferable SBTs (reputational collateral) would represent loan and credit lines until the borrower repays the amount borrowed. Once, the loan is repaid, there would be proof of repayment issued to the borrower. The non-transferability of SBTs ensures that borrowers can’t transfer or hide their loans. Moreover, “a rich ecosystem of SBTs ensures that borrowers who try to escape their loans (perhaps by spinning up a fresh Soul) will lack SBTs to meaningfully stake their reputation.”

Preventing Sybil attacks on DAOs

Decentralized autonomous organizations (DAOs) are susceptible to Sybil attacks. Such attacks could occur when a single user acquires multiple wallets (active fake Sybil identities) to amass voting power. On the other hand, DAOs with simpler one-token-one-vote governance systems can face Sybil attacks when a user hoards tokens to get 51% voting power.

SBTs can prevent Sybil attacks in the following ways:

  • Granting more voting power to people with more reputable SBTs.
  • Issuing unique proof-of-personhood soulbound tokens.
  • Examining a soul’s collection of SBTs to differentiate real souls from bots.
  • Looking for correlations between soulbound tokens held by various souls that support the same vote and applying a low-weight vote to highly correlated voters.

Art

Artists could issue art NFTs from their souls, allowing buyers to easily verify NFT legitimacy. Artists can simplify the process for buyers by having many SBTs proving who they are. For instance, an artist can have various SBTs representing previous clients, their reviews, and their educational background. Artists can also issue a linked SBT declaring that the NFT belongs to a collection and affirming the NFT’s scarcity limit.

Wrapping it up

In summary, SBTs’ potential to shake up how things are done in Web3 is truly exciting. Linking SBTs and individual souls leads to more transparency and lower transaction costs, enabling use cases that have so far been barely achievable at scale (like uncollateralized lending). It will be interesting to see how SBTs develop in practice.

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