Non-fungible tokens (NFTs) prove ownership of digital or physical assets. Given their uniqueness, replication is impossible, and people buy NFTs to claim ownership of the underlying asset. Soulbound tokens are a form of NFTs that promote trust and reputation without lifting the veil of pseudonymity.
Read on to learn more about soulbound tokens, how they work, and what they could be used for.
What Are Soulbound Tokens?
Soulbound tokens (SBTs) are non-transferable digital tokens permanently tied to a private wallet. They can show proof of achievement, personal information, and other factual information crucial to creating a digital identity.
There are two types of soulbound tokens.
- Self-certified SBTs: They include personal information that the owner may deem relevant to others in their networks.
- Soul-issued SBTs: Souls, in this context, represent institutions, companies, and other individuals who may issue SBTs as proof of credentials, affiliations, or memberships.
The concept of SBTs relies on the rare Soulbound items in the popular role-playing game, World of Warcraft. In the game, players earn rare items after battling and executing tasks. Once earned, transfer or selling to other players is not possible. The idea is to ensure one gains the upper hand in the game through effort and not simply purchasing items from others.
In the Web3 ecosystem, establishing a social identity is left to centralized Web2 structures. SBTs present an opportunity to create such identities within the ecosystem. However, they don’t have market value by design since users cannot trade them.
How Do Soulbound Tokens Work?
Soulbound tokens seek to establish the credibility of their holder in regard to what the particular token represents.
When you mint an NFT as a soulbound token, it adds the non-transferability feature to existing NFT features. Recording the soulbound NFTs to the blockchain establishes a unique identity, preventing replication. As such, Soulbound tokens become permanently linked to the initial private wallet, acting as a type of digital identity verifier for web3 users.
Soulbound Token Use Cases
The idea of soulbound tokens originates from Ethereum founder Vitalik Buterin. He expresses Web3 limitations on provenance, key management, and Sybil resistance issues. Based on this idea, there are several use cases for soulbound tokens.
Many crypto projects issue governance tokens to their communities in the early stages. These tokens have voting rights and control the project’s decision-making. If a creator mints such tokens as soulbound tokens, their non-transferability feature ensures that only the initial owners can influence decisions.
A malicious actor with means can’t corrupt the project’s decentralized decision-making process by buying enough governance tokens. Such actions lead to influence from people who haven’t earned the right and have selfish interests contrary to the community’s wishes. Communities can use soulbound tokens to ensure they are always in control.
Soulbound tokens could offer verification of the holder’s skills or experiences. For example, a lender could issue an SBT that indicates the holder has taken a loan. Once the borrower clears the loan, the lender can issue another SBT that indicates payment. Over time, the holder can build a profile that builds trust with organizations seeking to minimize risk. Crypto lending projects can even use such profiles to offer loans without collateral.
One concern that has cropped up in the NFT art space is certain players capitalizing on the artists’ reputations to launch NFT collections. High demand for such collections lies in the perception that the artists are involved in the project.
Artists could link soulbound tokens to their legitimate NFT collections. Anyone wishing to buy NFTs in that collection can verify the artist’s identity. This helps filter out scammers who want to take advantage of famous names to gain revenue.
Educational institutions could issue credentials as SBTs. Other institutions could also give SBTs to verify the holder’s background. Using various SBTs, a person could potentially build their web3 resume without lifting the veil of anonymity.
Limitations of Soulbound Tokens
The idea behind soulbound tokens is certainly a novel one. It seeks to address the problem of trust and network building that has limited the growth and independence of the crypto world. While the tokens are non-transferable, users can still transfer the private wallets linked to the tokens, so the idea is not foolproof.
Additionally, losing private keys is a genuine concern. The proposed community recovery model relies on building relationships within one’s networks to ensure those people can help you regain access to your wallet.
Soulbound tokens present an opportunity for established identities within the crypto world. The potential use cases are promising, but implementation may prove challenging. Souls promise to centralize information on one identity, which may not appeal to some who wish to embrace the principles of decentralization. How the concept develops in practice will determine its success in the near future.