Soulbound tokens are non-transferable NFTs. Designed by Vitalik Buterin, the original purpose of the SBTs is to prevent Web3 from being subject to today’s “excessive financialisation”.
What is Soulbound Token?
Soulbound tokens are one-of-a-kind and publicly verifiable tokens, a kind of non-transferable NFT. However, they differ from NFTs in some points. NFTs are unique assets belonging to an unknown wallet while SBTs are unique data records belonging to a unique entity. Unlike NFTs, which can be freely traded for financial gain, SBTs have no financial value and cannot be traded as the owner is clearly identified.
Designed by Ethereum founder Vitalik Buterin in a blog post, the tokens are intended to facilitate the transition to a decentralized society. For better understanding, Soulbound tokens can act as tokenized examples of a resume or represent connections, credentials, achievements, and memberships.
SBTs are not 1:1 representative. Instead, they are tied to an individual, an organization, or an entity. Specifically, they are tied to a wallet for its lifetime. For example, SBTs can show an individual’s historical record, such as employment history. However, the same person (or organization) may have another SBT representing their unprofessional affiliation. For this reason, it is possible to have more than one “soul”.
How to Use SBTs
SBTs have several interesting use cases. NFTs are not the only ones among these usage areas; it also has wide uses such as unsecured lending and proof of assets.
NFT Art
NFT holders still need centralized platforms like OpenSea to highlight their digital collections. With SBTs it will be possible to prove the origin of a unique token by linking it to the holder’s Spirit (aka unique wallets).
DAOs
DAOs can become “soulbound” and greatly improve social coordination mechanisms. In its current form, DAOs are vulnerable to Sybil attacks, which are spam attacks that allow hackers to create multiple wallets to gain more voting power. With Soulbound tokens, DAOs will be able to distinguish between real Souls and fake wallets.
Also, Souls with several SBTs can be given more voting power as their trust record will be higher.
Unsecured Lending
The privacy-oriented nature of crypto loans means that lending money is not a social credit feature. Thus, the exercise of trust takes place economically, i.e. through over-collateralization. Such a social credit feature will be introduced with SBTs. Vitalik Buterin used the following statements on the subject in his white paper:
“Loans and lines of credit can be represented as non-transferable but revocable SBTs, so they can be established as a type of non-enforceable reputational security to the repayment.
SBTs offer a number of useful security features. Among them, non-transferability prevents the transfer or storage of outstanding loans, while a rich SBT ecosystem ensures that borrowers trying to evade their loans (perhaps by creating a new Soul) are deprived of SBTs that will meaningfully put their reputations at risk.”
Thus, Soulbound tokens can provide a tokenized, transparent and decentralized version of credit scores.
Certificates and Documents
Another potentially promising area is certificates and documents currently collected “behind closed doors” in central ledgers. For example, academic records or certificates that do not apply to a universal standard will be recorded by SBTs, creating a tamper-proof “past proof”.
Proof of Existence
Evidence of attendance records of real-life or digital events and meetings would be equally interesting. For example, academic attendance can be recorded with a Soulbound icon, which is linked to a student’s academic record and then to the employment record.
Digital CV
As a result, SBTs can facilitate employment registration and increase their transparency. Even today, it is difficult to verify the accuracy of an applicant’s employment record. This is even more so if you take into account registrations in different sectors or countries. Soulbound tokens will provide a verifiable digital CV that enhances the applicant’s reputation.
Benefits of Soulbound Tokens
Soulbound tokens have several benefits. First of all, they can increase trust in the Web3 domain. Because Web3 still relies on Web2 tools to solve representation and trust issues. For example, you need Twitter or Instagram (to show them as profile pictures) and OpenSea (to trade them) to unlock all the functionality of NFTs. Other examples are DAOs that rely on Discord voting to prevent Sybil attacks, or DeFi credit markets that rely on overcollateralization to build counterparty trust.
However, with SBTs you can support an individual or organization after doing business with them. Likewise, by tying a loan to a verifiable asset, it will reveal a social aspect of the loan and enable undercollateralized loans.
Thus, Soulbound tokens provide a better representation of honesty, trust and loyalty. In other words, it enables Web3 to evolve from a money-oriented framework to a reputation-based and collaborative framework.
How SBTs Work on Web3
The way SBTs work in Web3 is similar to NFTs but differs from NFTs in some points. NFT assets are transferable while SBTs are not transferable.
Also, NFTs are not tied to a wallet or a single person. However, SBTs contain verifiable information about certain documents, such as medical records, certificates, and are tied to a single Soul. A Soul can have several SBTs containing qualitatively different pieces of information.
