crypto strategy

What are Soul-Bound Tokens (SBT) and how do they work?

By creating an alternative financial system with extraordinary flexibility and innovation in less than ten years, Web3 stunned the world. Economic and cryptographic primitives such as smart contracts and consensus mechanisms helped create an open source system for performing and authorizing financial transactions.

However, the decentralized finance (DeFi) ecosystem cannot support simple contracts like an apartment lease because a native is missing Web3 Identity. This article aims to demonstrate how even modest advances towards representing social identity with soul-bound tokens could circumvent these constraints and redirect Web3 towards an authentic and more transformational path.

What are Soul-Bound Tokens (SBT)?

Projects and use cases that focus on social identities and communities rather than money are needed for blockchains to be at the heart of collaborative and compelling ecosystems. To resolve this problem, Vitalik ButerinEthereum co-founder, along with Puja Ohlhaver, strategy consultant at FlashBots, and E. Glen Weyl, political economist and social technologist, introduced the concept of soul-bound tokens in an article titled “Decentralized Society: Finding Web3’s Soul”.

According to the authors, soul-bound tokens form the basis of a decentralized society (DeSoc), which is a co-determined sociality in which communities and souls come together bottom-up as emergent characteristics of each other. others to co-create goods and plural network elements. intelligence at different scales. A soulbound token is publicly verifiable and non-transferable. non-fungible token (NFT) which represents an individual’s qualifications, 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 soul-related NFTs? Wallets or accounts to which SBTs or non-transferable tokens are permanently linked are called Souls. For example, a soul can represent an individual’s work history, which can be self-certified like the information in their resume.

But, when the SBTs possessed by one soul can be emitted – or attested – by other souls who are counterparts (e.g., individuals or organizations) to those relationships, then the true power of the mechanism is revealed. For example, the Ethereum Foundation could be a soul that awards SBTs to those who attended an Ethereum conference. According to the paper, the concept of “plural network clusters” refers to interactions and communications within networks and are the most critical drivers of economic growth.

How do soulbound tokens work?

Soulbound tokens can help Web3 networks use non-transferable tokens as reputation indicators rather than relying on money-centric frameworks to achieve the same. For example, the lender is currently checking the borrower’s bank account balances, credit scores, and repayment history to offer an undersecured loan.

However, with SBTs representing its credentials, reputation will act as collateral to secure an under-secured loan. Now if you remember the fundamental concept of NFTs, they represent goods or assets with a certain monetary value. But how do you check someone’s reputation in a trustless blockchain-based system?

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

Nonetheless, SBT-issuing DAOs could prioritize reputation over member-owned tokens. Reputation can be verified through user interactions with the community. For example, the trophies won by Kusama Governance Rewards Program for each referendum on the channel, members’ votes 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 Spotted DAOs, which can now constitute sufficient security for an under-secured loan. Additionally, a reputation-based voting system can defend DAOs against Sybil attacks.

A Sybil attack involves one or more malicious actors taking control of the majority of governance tokens to redirect project direction in their favor. Soulbound tokens being publicly verifiable, can prevent DAOs from falling into the trap of bad actors. For example, souls holding respectable SBTs can be given 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 used in the Web3 world, which are described in the section below. But. when will soulbound tokens be available? Linked Binance Account (BAB) will be the first SBT issued on the BNB channel by Binance. The BAB token will have no monetary value and cannot be transferred.

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

How can soulbound tokens be used?

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

NFT Property

Artists can get rid of dishonest individuals selling NFT collections under the guise of famous artists by linking soul-bound tokens to their artist profile. SBTs would allow buyers to trace social provenance, while the inclusion of blockchain would let them know when a specific work was created.

For example, a tradable 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 non-soulbound token. fungible. As a result, Souls would develop a publicly verified on-chain staking method and develop a reputation around an item’s provenance and rarity.

Jobs

Soulbound tokens representing a candidate’s credentials, such as professional degrees and certificates and work history, can be used as proof of competency to meet an organization’s human resource needs.

Games

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 upgraded through 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 credit history of borrowers

Traditional credit reports can also be represented by SBTs, allowing lenders to access a borrower’s entire credit profile. And, the SBT can be replaced with payment documents or removed once the loan is paid off. As a result, people cannot hide their ongoing obligations.

soul drops

Web3 has been mostly dependent on token sales or airdrops to attract new communities, but both methods yield poor results. As an alternative, Souldrops can be issued using SBT, for example, to developers with 5 of the last 10 conference attendance soulbound tokens serving as a Proof of Stake 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 benefits of using soul-bound tokens for credential verification purposes is that since the information is continuously replicated on the blockchain, no one can tamper with it. Additionally, all awards and certificates obtained by an individual can be publicly verifiable through the SBTs. Additionally, since authenticity cannot be purchased via soulbound tokens, it builds trust among token holders and the general public.

Additionally, protocols will be able to check borrowers’ credit history and assess their credit scores to determine how much they can borrow, thanks to soul-bound NFTs. Additionally, SBTs prevent Web3 projects from becoming an exchange by making digital representations untradable. That said, an individual cannot buy NFTs; instead, they have to put effort into earning them.

Are there any risks associated with soulbound tokens?

Apart from lucrative advantages, soul-bound tokens also have disadvantages. For example, the current combination of wallets 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 scattered across multiple communities to recover lost souls.

A solution to the above is a community retrieval strategy, in which a soul’s private keys can be obtained if the consent of a supermajority of one of the communities (to which the soul belongs) is received. .

However, some people or organizations may recognize interests that conflict with their own ideology, which could theoretically lead to harassment, violence, or even trolling, indicating a privacy concern when the personal information of an individual are exposed.

Theoretically, SBT-based credit systems could lead to dystopian ecosystems (where freedom and independent thought are restricted) like The Chinese social credit systemwhere specific social groups are automatically excluded due to the presence of specific soul-bound tokens.

SBT vs. NFT

Non-fungible tokens can be bought and sold via NFT marketplaces, while soulbound tokens are non-transferable NFTs because they are soulbound. A summary of the differences between SBTs and NFTs is listed in the table below:

SBT vs. NFT

Although NFTs cannot be modified or duplicated, they are easily transferable, which could cause problems if used by someone with access permission without first being granted to a holder. Therefore, soul-linked tokens are tied to a particular soul address and can be verified via on-chain credentials, preventing anyone from modifying them.

The Future of Soulbound Tokens

The concept of soulbound tokens, while interesting, is quite new and cannot replace the NFT ecosystem. Instead, it can serve as an alternative means of identity checks, allowing DAOs, for example, to better interact with members of their community.

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