Soulbound Tokens' idea is a strategy to stop the current hyper-financialization of the Web3 ecosystem. They believe that moving closer to a DeSoc will create social affinities of trust.
Soulbound Tokens can exclusively be used by the owner of the address they are bound to, and cannot be transferred or sold to anyone else (non-financialized).
SBTs will help form the building blocks of the web3 ecosystem.
SBTs could provide a new form of censorship resistance to act as social credit scores (creditworthiness), allowing protocols to make uncollateralized lending.
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Soulbound tokens (SBTs) are digital assets that are bound (soulbound) to a wallet. This means that they can exclusively be used by the owner of the address they are bound to, and cannot be transferred or sold to anyone else (non-financialized). However, the issuer can sometimes revoke it.
What SBT aims to achieve
While it is still just a concept, SBTs are expected to verify the owner's non-tradeable identity-relevant information such as; commitments and achievements, track memberships, institutional affiliations, DeFi lenders, academic credentials, and many more. This project was proposed by Vitalik Buterin–the Ethereum co-founder, Puja Ohlhaver, and Glen Weyl, who believe it will serve as an important component of the Decentralized Society (DeSoc).
According to the creators, the SBT idea is a strategy to stop the current hyper-financialization of the Web3 ecosystem. They believe that moving closer to a DeSoc will create social affinities of trust.
How SBTs Work
While the Web3 ecosystem has disrupted the current norms in many sectors, the ecosystem faces challenges. PoW, PoS, cryptography, and smart contracts have attempted to solve some of these challenges. However, the ecosystem is currently lacking in the trust factor, since most services within the industry, such as uncollateralized lending and personal brands, are established on persistent and non-transferable affinities.
SBTs will form the building blocks of the web3 ecosystem. Their most distinctive feature is their non-transferable nature, which makes it easy for users to generate social identities based on trust while preserving privacy. This means that they are not intended to have market value and can’t be moved to another wallet, unlike NFTs.
Souls, referring to a wallet that hosts SBTs, can issue self-certified SBTs to themselves. However, a typical procedure is when SBT producers or other Souls allocate an SBT to another Soul's address. The Soulbound Token, its issuer, and the Soul's address can be validated on the blockchain. As a result, any individual may easily follow or verify the trust networks of a specific Soul. Note that a community or a firm might be a Soul that creates SBTs for individuals associated with it.
SBT Use Cases
Do SBTs have real-world use cases, or are they just meme tokens? The creators of the SBTs have defined some potential use cases in the released white paper. Some of them are as follows:
DeFi Lending: Most DeFi Lending platforms, like Aave, cannot offer uncollateralized loans because unlike, traditional finance, which uses centralized credit scores, DeFi does not have this system in place. That is where SBTs come in, to provide a new form of censorship resistance to act as social credit scores, allowing protocols to make uncollateralized lending.
Sybil Resistance Attacks: The governance of most DAOs exposes them to Sybil attack risks. Soulbound Tokens, given their non-transferable nature, address this issue by representing the voting rights in DAOs. Thus, no single entity will be able to acquire the necessary tokens to execute a Sybil attack. In addition, Souls with similar SBTs such as academic credentials, licenses, and endorsements might be granted voting rights.
Digital CV: It can be difficult to confirm a candidate's claim on their CV sometimes. SBTs address this problem as they can function as a publicly-verifiable digital CV. Thus, the SBTs that were obtained from other firms or institutions, such as universities/colleges and affiliated institutions, may be used to make employment decisions.
NFT: The NFT industry has expanded because artists and creators are selling their works as non-fungible assets. This has enabled new and innovative functionalities, like royalties. The use of SBTs will allow creators to establish their reputation and market participants to distinguish a genuine NFT, putting an end to frauds and scammers, and allowing the NFT business to grow more trustworthy eventually.
Pros & Cons of Soulbound Tokens
SBTs have the potential to revolutionize a number of industries by enhancing trust networks and making it easier to verify information. However, they are still a relatively new invention and adoption may be challenging.