Soulbound Tokens for Beginners

Soulbound tokens. If you played the game World of Warcraft in the past, soulbound tokens will sound familiar to you. WoW used to have ‘soulbound’ items. Those were rare artifacts in the game that a player owned forever. 

In cryptocurrency, there is a similar concept. Let’s learn more about soulbound tokens in this post. 

Soulbound Tokens Definition

The concept of soulbound tokens came from Vitalik Buterin. Together with economist and social technologist, Glen Weyl and lawyer, Puja Ohlhaver they presented a paper about Soulbound Tokens (SBT) in May 2022. 

Their paper, “Decentralized Society: Finding Web3’s Soul”, outlined how SBT will act as the foundation for a Decentralized Society (DeSoc). They defined Soulbound Tokens as non-fungible tokens that are publicly verifiable and non-transferable tokens. SBTs represent the identity of the participant and can hold a variety of highly-sensitive information such as employment history or medical records.

Souls are the wallet addresses or accounts to which the tokens are permanently bound. These wallets facilitate both the holding and issuance of SBTs.

Given these points, SBTs aim to transform the concept of NFTs into something more substantial than just spending money and acquiring bragging rights.

Soulbound Tokens (SBT) Mechanism

Soulbound tokens (SBTs) act as identity verifiers using the reputation of Web3 participants. This goes beyond the initially established structure that relies on money to authenticate the integrity of Web3 users.

In our last post, we discussed the decentralized autonomous organization (DAO). SBTs play a major role in improving the building blocks of DAO’s governance system. Decentralized autonomous organizations distribute voting power among its members depending on the amount of tokens they hold. 

But when they decide to use soulbound tokens, the investor’s reputation will be the primary criterion over the number of tokens they possess. Furthermore, since the DAO is a decentralized group, their members are responsible for verifying the souls’ reputations and their interactions within the community. 

How do Soulbound Tokens (SBTs) Work?

Protection against Sybil Attacks

A Sybil attack is a form of cyber threat wherein a single user attempts to take control of the network through the creation of multiple fake identities. The fabricated fake accounts will help the hacker overthrow the balance in the network. 

Sybil is derived from the 1973 book about a woman, Sybil Dorsett, who was diagnosed with multiple personality disorder, also known as dissociative identity disorder. In the technology space, Brian Zill first coined this term and John R. Douceur first discussed it in a presentation. Both of them were part of the Microsoft Research Team.  

Because the majority of a certain crypto network has been taken over by fake profiles, the hackers can now block the genuine users or nodes. This prevents them from making any transactions on the blockchain network. 

Additionally, a 51% attack may happen because the malicious actor holds more than half of the network’s hash rate. Double spending may happen that will lead to network disruption. 

Soulbound tokens help protect the blockchain network against hackers. Since users with good reputations have voting power, they will act to safeguard the blockchain network and its integrity.

Soulbound tokens help preserve decentralization in Web3 by holding people accountable for their actions because their reputations or ‘souls’ are at stake.

Real-Life Uses of Soulbound Tokens

With its design, there is a promising future. There are several instances where soulbound tokens can be used. 

Proof of Education

Universities can issue SBTs containing the academic records of their students. The universities act as the issuing souls and the students are the receiving souls. In other words, the SBT becomes their proof of attendance.

Employment Search

When applying for jobs, potential employers can check the veracity of a student’s curriculum vitae by checking his Soul Wallet. They will be able to authenticate the applicant’s educational status and credentials.

Medical History

We all know the lengthy paperwork involved in one’s medical records. There are many signatories and verification processes. When you transfer from one hospital to another, it takes some time to transfer the records. However, with SBTs, healthcare providers have better access to the records and can make decisions faster. 

Proof of Integrity

One’s digital reputation is of utmost importance to be able to participate in the decentralized finance community. DeFi loans can use the reputation of an investor to determine if he is eligible for a loan and it will also set the interest rates. 

If the investor successfully builds an excellent credit history, then they will qualify for lesser collaterals and loan value ratio in the future.

SBT Benefits

The main benefit that soulbound tokens bring to the crypto community is its link to the identity of the user. Through this, credentials can be verified before allowing an individual access to a blockchain’s services. 

SBT will increase confidence among the crypto community because money has no influence on soulbound tokens. Web3 projects will be more than just cash bags because these digital IDs cannot be sold or traded. 

SBT Drawbacks

Since soulbound tokens are reputation-based digital tokens, it may provide too much information about a person and endanger their safety. 

There is also an issue of losing your soul. As of now, there is no established community recovery method to regain the lost souls. 

Lastly, when credit structures rely on soulbound tokens, it may lead to a dystopian system because cliches and sub cliches will arise based on shared soul characteristics. Some groups will end up being excluded. 

Final Word

There are no real-life soulbound tokens as of August 2022. It is truly an impressive concept and takes decentralization to the next level. 

However, developers need to take into consideration the risks that it poses to users. It still needs more adjustments for it to be effective in proving a user’s credibility and integrity without compromising their privacy and safety.