In this article you will get to know about Soulbound tokens SBT’s, Use cases of Soulbound Tokens and pros and cons of Soulbound Tokens.
One of the co-founders of Ethereum and well known as Vitalik Buterin is currently working on a major new Web3 project.
Decentralized Society: Finding Web3’s Soul
Buterin and his co-authors outline their vision for a completely decentralised society (DeSoc) and how we could make it a reality in a white paper titled “Decentralized Society: Finding Web3’s Soul.” Their response? That something termed “Soulbound Tokens” (SBTs) will be something we have to build.
SBTs are essentially non-transferable reputation and identity tokens. They enable people to use blockchain technologies to authenticate all of their information, including their education, employment history, credit score, medical history, professional qualifications, etc.
The concept is rather controversial.
Some contend that SBTs offer a more efficient and reliable method of information verification. Some associate it to the authoritarian social credit system in China. Which is the most accurate vision? Not exactly an easy thing to say. Here, we go in-depth and cover everything you need to know about the tokens that have the potential to alter your life.
Soulbound Tokens (SBTs)
A non-fungible token (NFT) is a blockchain-based digital information (data) token. Because each NFT has its own unique identification code and set of metadata, each one is distinct, and its data cannot be altered. Normal NFTs can be purchased or distributed without charge. They are not affiliated with any one particular individual or group, in other words.
As permanent, non-transferable NFTs, soulbound tokens cannot be transferred or removed from your private blockchain wallet.
The idea behind Soulbound Tokens appears to have been inspired by the video game World of Warcraft (WoW), which also served as the inspiration for Buterin’s creation of the Ethereum network. An item’s ability to be “soulbound” in World of Warcraft prevents it from being sold or sent to another player. With this in mind, it is simple to understand where the concept and term of SBTs originate.
What is Soul in Soulbound token ?
Soulbound tokens are permanently tied to a wallet or account, unlike NFTs and other cryptocurrencies, which can be bought and moved. Soulbound token wallets are called “Souls.”
Are Soulbound Tokens (SBTs) valuable?
SBTs let us prove our identification without revealing our identity or relying on a central authority. They have no financial worth. SBTs demonstrate Souls’ history, relationships, and communities. They provide a native decentralised Web3 identification. SBTs allow several anonymous but verifiable Souls.
Your credentials Soul might show potential employers your schooling, qualifications, career history, and achievements. An identification Soul might verify your humanity. And an online Soul to differentiate your digital and real selves. Instead of Soul=Human, Soul=Identity.
Example of Soul
Imagine having a blockchain account (Soul) that holds immutable records like education, employment, and experiences. SBTs, like CVs, can build a user’s web3 reputation.
However, its entire potential is shown when one Soul can issue an SBT (attested by other Souls) to another Soul, meaning a community could issue SBTs to locals or a firm to stockholders.
After doing business, a Soul may endorse a person. This allows souls to demonstrate integrity, trust, affiliations, and legitimacy, enabling web3 networks based on provenance and reputation rather than money.
What occurs if your Soul is lost?
What happens if a hacker steals your Soul wallet? How would you feel if you misplaced the key to your Soul address? Unfortunately, this is a ver real concern.
The NFT community is plagued with thefts, as was already reported. Therefore, it’s crucial to have adequate precautions or backup plans in place when it comes to SBTs to stop criminals from elevating identity theft to a new level.
Buterin suggested that the “social recovery model” be widely adopted as a solution to this issue. Users of social recovery can choose a group of people or organisations as “guardians.” In the event that a user’s wallet is compromised, these guardians have the power to access and modify the user’s private keys. According to this concept, obtaining a Soul’s private keys “requires a member from a qualified majority of a (random subset of) Soul’s communities to approve,” the authors write.
This doesn’t precisely address the problems, though. For instance, if the individuals designated as guardians have passed away or if the ties have ended, it may be difficult for an individual to retrieve stolen SBTs. What happens if a group of guardians decides to attack someone they disagree with? The outcomes might be disastrous.
Buterin thinks that SBTs will at least be a little bit more easily recoverable upon theft by enabling a larger community to help with the process.
Use cases of soulbound tokens
As a result of a few bad actors over-financializing Web3, souls and soulbound tokens have appeared.
In an effort to shift attention away from DeFi (Decentralized Finance), the visionaries Buterin, Weyl, and Ohlhaver are concentrating on DeSoc. They have created the term “DeSoc” to describe a decentralised society. With less emphasis on the money opportunities offered by cryptocurrencies, this society would be wealthier (in non-economic ways!).
With the use of the ideas of souls and soulbound tokens, we may gauge and demonstrate social value and reliability rather than only concentrating on financial potential. We’ll look at some of the ways SBTs can be used to make Web3 and DeSoc more complex and useful.
1- Voting Systems
In many nations, casting a ballot still involves marking an Y on a piece of paper and dropping it into a voting box. People count vote boxes one by one to determine the outcome. Although it may appear ineffective, it has been difficult to implement an all electronic voting system that prevents election fraud.
A voting system’s potential for error and interference rises as it becomes more complicated. There is also worry that any government with control over the software of the voting machines may rig the results. Electronically confirming that a voter is who they claim to be is challenging and expensive. SBTs might make it possible to quickly authenticate identities and use some of the voting techniques currently employed by blockchains and DAOs.
Municipalities could grant SBTs to those whose identities were confirmed in their souls. A person could only hold one voting SBT at a time, and if they relocated, their previous SBT would need to be cancelled before they could get a new one. These SBTs might perform as DAO governance tokens. Votes would be represented by one SBT token. Voting was restricted to SBT holders. Voting rights could be extended to all local government SBT holders in larger districts or nations.
An readily verifiable token would make the electronic voting process simpler. Depending on the preferred technique for each area, voting may be conducted on-chain or off-chain. On-chain voting would directly log the votes onto the blockchain (without revealing the holder’s identity), allaying any worries about voting fraud.
2- Adding equity to credit scoring
Credit scoring is one of the subjects covered in the Soulbound whitepaper. Credit scoring as it is now is, at best, ineffective and, at worst, discriminatory. Your credit score won’t increase unless you take on debt, pay it off, and then move on.
Many people with lesser incomes cannot afford the higher interest rates associated with paying off debts or using a credit card. Others simply fall behind as a result of having so many financial obligations. Even years of timely rent or bill payments rarely result in an increase in credit score. Even though they have never been in debt, this frequently prevents people from obtaining a loan or apartment.
Nobody will be surprised to find that these credit scores frequently reflect racial bias. Minorities frequently face discrimination and have disproportionately bad credit.
The idea put up by Vitalik Buterin and company is to use SBTs to display a payment and debt history. When you accrue a debt, the creditor sends you an SBT. Once you have made a payment, the creditor will revoke this token and issue a new SBT as proof of your payment. Additionally, you might have SBTs that demonstrate a pattern of on-time utility and rent payments. You are the owner of these non-transferable tokens, and you have easy access to your borrowing history.
You might display this credit. As part of a loan or mortgage application, a soul is holding all of your payment history. It might allow DeFi to provide uncollateralized lending, which has been challenging to execute in a decentralised pseudonymous society. Your credit history’s unchangeable records may add some measure of trust to interactions that are otherwise unreliable.
3- Know Your Customer (KYC)
Regulatory organisations are racing to catch up with DeFi as it forges ahead into the financial future. Users of cryptocurrencies are worried about their privacy and data as governments pass regulations addressing the centralization of stablecoins and Know Your Customer (KYC) credential requirements. While KYC rules might always be in place, soulbound tokens provide an alternative. With the introduction of their first soulbound token, BAB, Binance is poised to take the lead.
An SBT used to verify online that the account user has passed Binance’s KYC procedure is the Binance Account Bond token. The BAB token can be seen by users in their wallets, and third parties can use it in their verification procedures. Although the BAB token’s first use case is to confirm that users have gone through the Binance KYC procedure, it’s likely that as identity verification tokens become more common in DeFi, the use cases will grow.
KYC tokens may be employed to limit bot access to financial services or to provide flash loans with less stringent collateral requirements. A higher level of confidence in the DeFi environment can be introduced by knowing that the user has passed a KYC check.
The BAB token or other verification tokens would not, however, reveal a user’s private information. Only their verification would be visible to third parties. Individuals can benefit from privacy while still having their identification checks verified thanks to this method.
4- Bots on social media
You may have heard discussion about the quantity of Twitter bots if you followed the “Elon buying Twitter” drama. Twitter maintains that this percentage is roughly 5%, however any social media platform can show you the impact that bots and farms have on these websites and on society at large.
Despite the fact that many platforms make a lot of effort to identify these bots utilizing algorithms and analysts, they frequently lag behind the most recent scam. Making a social media network that is “just for humans” is one application for SBTs.
A user can make multiple Souls, but only one of them can be connected to their real-world identity. A passport or other similarly issued form of identification could be used for this. The idea of Proof-of-Humanity or Proof-of-Personhood is already being used in projects to create digital identity tokens.
You can still have an anonymous profile or social identity validated as a human by linking your wallet to the confirmation that you have proof of your identity in your Soul (wallet). You might have a social networking site that gets rid of bots with one account per user. To stop online harassment, some sites can even impose a requirement that users reveal their real names.
5- POAPs and tickets
NFTs (non-fungible tokens) are currently being widely used as POAPs and event tickets. POAP, or Proof of Attendance Protocol, is a type of NFT that is distributed to event attendees. NFT tickets have gained popularity since they are difficult to fake and the blockchain stores the proof of authenticity. Any resale of a ticket qualifies for royalties to be paid to NFT issuers. They are also regarded as pieces of digital art artefacts or collectibles that can get you access to premium materials or tickets to upcoming events.
However, there are issues with NFTs that soulbound tokens could address. Since the tokens cannot be transferred, this may put an end to ticket scalping and the exorbitant resale of tickets. Additionally, the possession of a POAP token or ticket alone does not indicate attendance at an event because they can be transferred. Individuals who purchase them can then claim they attended the event and received any advantages by selling them to other people. By making POAPs non-transferable, you could demonstrate that every token holder took part in the occasion.
After that, every SBT holder can receive Souldrops for upcoming events or exclusive content. SBT holders from prior events may be eligible for discounts on upcoming events. SBTs might develop into a tool to locate and communicate with neighbours who share your interests.
6- Verified contributors
To demonstrate verification within an online community, NFTs could be turned to soulbound tokens after a certain amount of time. As soon as they sign up, users could get an NFT that reveals their membership status. The community might eventually convert their token into an SBT that they could show if their contributions are confirmed and useful over time. Platforms could automate this by evaluating user behavior to rate their online reputation or by recording smart contracts.
A user might become verified on a social media network after a period of participation and activity that can be distinguished from bot activity. Or you might become a top contributor with an SBT if you have a track record of contributing insightful responses to forum subjects. Or, for wikis, a user could acquire an SBT for being a verified member without having to disclose their personal information if their contributions have been routinely approved by other users. These reputation tokens would need to be created by the platform or community, and only they would be able to revoke them.
7- Shared assets and cooperatives
Local cooperatives could be set up and managed with the aid of soulbound tokens. The adoption of SBTs is best suited for these autonomous organizations. Co-ops currently operate as democratic, largely decentralized organizations with shared moral principles. An SBT might be used to validate memberships, enabling holders to take part in governance and voting.
Holders of the co-op token are eligible for in-store discounts at co-ops that operate retail locations. An existing shared equity model used by building organizations can work effectively with tokenized real estate. By tokenizing the assets, the co-op may control who owns each asset it has. Another well-known cooperative institution is credit unions, which can grant unsecured loans to members based on the financial information displayed in their Soul wallets.
Benefits of Soulbound Tokens
Following are the benefits of SBTs, the most recent advancement in the blockchain industry.
- SBTs can aid in hiring the best applicant for a position.
- DeFi lending platforms can issue uncollateralized loans thanks to SBTs.
- SBTs have a big impact on how DAOs handle voting.
- SBTs make it possible to build stronger trust relationships in decentralized settings.
Drawbacks of Soulbound Tokens
- SBTs might face criticism for requiring a lot of energy if they are introduced on proof-of-work blockchains.
- SBTs could disclose too much private information about a subject.
- SBTs are a novel idea, thus implementing them at this time can be challenging.
Soulbound tokens and DeSoc could improve many aspects of our life, but they’re still maturing. SBTs can be misused, and the whitepaper acknowledges that they still have flaws.
If tokens cannot be transferred, problems may arise if Souldrops or SBTs are given to the wrong person. Your credit score may suffer without any recourse if I send you a token saying that you owe me money and you are unable to destroy the token by sending it to a burning wallet address. Credit assessment companies might not receive the whole financial history of a customer if we remove or conceal SBTs.
For any identity verification SBT, we need to make sure it originates from an accepted institution. If I possess an SBT claiming I am the President of the United States, it should be quite evident whether or not it’s been issued by the White House. Other groups may be able to forge a harder-to-verify SBT. This could mislead about credentials or falsify credit scores.
One of the biggest caveats crypto users advise to beginners is the significance of managing your keys and wallet. If you lose access to your digital wallet and keys, you can’t merely ring up your bank and have fresh keys sent out. Inaccessible digital assets are gone forever.
SBTs for identity verification, medical history, and academic credentials need a mechanism to recover keys in an emergency. But without a central authority. Hence the widespread crypto proverb “Not your keys, not your coins.” Handing over your private wallet details to a third party is like reinventing the wheel—just it’s new versions of the same problems. We need a decentralized wallet recovery system.
These and many other issues must be resolved for SBTs to be widely used and our world to become more decentralised. Soulbound tokens could establish a fairer, privacy-focused society that prioritises people over central authorities if done right.