Soulbound Tokens Explained
Issued by “Souls,” which represent blockchain accounts or wallets, Soulbound Tokens (SBTs) are digital identity tokens that cannot be transferred. They represent the unique traits, features, and achievements that define a person or entity.
Basics
In May 2022, Vitalik Buterin, the co-founder of Ethereum, along with lawyer Puja Ohlhaver and economist and social technologist E. Glen Weyl, released a whitepaper titled “Decentralized Society: Finding Web3’s Soul.” The paper proposes the concept of Soulbound Tokens and how they can function as the credentials for a fully-decentralized society (DeSoc) governed by its users.
What Are SBTs?
In the proposed DeSoc, blockchain technology is used to create a fully decentralized society governed by its users. One of the key components is the use of Soulbound tokens, which represent a person or entity's identity and cannot be transferred. SBTs can be issued by wallets, called Souls, which hold records such as medical records or work history.
An individual may have multiple Souls representing different aspects of their lives, allowing them to build a verifiable, digital Web3 reputation. Additionally, entities such as companies or digital country clubs can issue SBTs to employees or members, verifying their status or membership.
The concept of Soulbound tokens was inspired by the online game World of Warcraft, where players cannot sell or transfer soulbound items. SBTs aim to turn the NFT concept into something beyond money and status, representing a person or entity's reputation. Unlike NFTs, SBTs hold no monetary value and cannot be traded once issued.
How Can SBTs Be Used?
After a student graduates from university, SBTs could be issued by the institution to the student's wallet or Soul. This would act as proof of attendance and verify their completion of required courses and qualifications.
SBTs can also be used for job applications instead of traditional resumes. Official SBTs issued by previous employers or educational institutions could be provided by job applicants as proof of skill certificates.
Moreover, SBTs are useful for storing health records. Rather than filling out paperwork and verifying medical history when changing healthcare providers or doctors, an SBT could store a person's medical records. This would make the process more efficient and eliminate the need for constant communication with healthcare providers.
How Do SBTs Work?
The Web3 industry faces a significant challenge when it comes to trust. How can you trust someone's reputation in a system designed to be trustless? For instance, when lending money, SBTs can keep track of a user's DeFi borrowing history and other metrics to determine their risk profile, similar to traditional bank credit scores.
A proposed use case for SBTs is also to provide an alternative solution for decentralized autonomous organization (DAO) voting. With SBTs, DAOs could assign voting power based on users' interactions with the community, giving dedicated users with strong reputations more voting power.
SBTs may also help to prevent Sybil attacks, one of the most significant threats to the current DAO governance model. During a Sybil attack, bad actors purchase the majority of governance tokens, allowing them to manipulate voting proposals and steer the project's direction in their favor. The public and verifiable nature of SBTs could detect and prevent bad actors from entering the DAO, thereby deterring corruption and Sybil attacks.
Conclusion
As Web3 gains popularity, SBTs have emerged as a highly discussed topic. One potential application of SBTs is creating a digital reputation system on the blockchain. This would allow individuals to establish their reputation and evaluate others' reputation in the Web3 ecosystem. Whether SBTs can function as Web3's version of the "identity card" is yet to be determined.