This article aims to provide an overview of Soulbound Tokens (SBTs). If you are unfamiliar with cryptocurrency tokens, do read our introductory articles on crypto, blockchain, and tokenomics before reading this article.

An Introduction to SBTs

The concept of Soulbound Tokens (SBTs) was first introduced in May 2022 through a whitepaper co-authored by Ethereum co-founder Vitalik Buterin, Puja Ohlhaver, and E. Glen Weyl. The term “Soulbound” is adapted from the non-transferable items in the renowned video game, World of Warcraft. The whitepaper posits that the growing Web3 narrative is governed by users, and in this process, SBTs can contribute to social identity as a form of credentials. 

What Are SBTs?

Soulbound Tokens are permanent and non-transferable digital tokens that represent individuals’ identities or credentials. SBTs can exist in the form of medical records, educational certificates, licenses, and even work credentials. The accounts or wallets that hold these SBTs are known as “Souls”. 

An individual can own more than one Soul to hold SBTs from different aspects of life, from users’ medical history to work history. They can even own a Soul just to hold their own artworks or writings. 

How Do SBTs Work?

SBTs are issued to participants by organizations or entities such as institutions or companies. An example would be a university that issues graduation certificates in the form of SBTs to its graduates. Companies can also issue SBTs as work credentials to their current or past employees. 

SBTs hold zero monetary value and cannot be transferred a second time once issued to someone’s Soul. This is fundamentally different from the standard non-fungible tokens (NFTs), which often represent monetary rights and club memberships and are transferrable. SBTs are a form of self-certification, similar to accreditation found in one’s curriculum vitae (CV) in Web2 systems.

Applications of SBTs

Medical Records

Traditionally, medical history is recorded in hospitals and government databases. Similarly, SBTs can be issued by relevant health authorities to a patient’s Soul. This can remove common problems, such as long processing time and the risk of human error during the transfer of information between entities.

Institutional Certificates

Institutional certificates are issued to participants upon completing a course or a program in an institution. These institutions can be seen as Souls that issue SBTs to participants who have successfully completed the programs. 

Web3 Example

Companies such as Binance have started to introduce SBTs to their customers as a part of their know your customer (KYC) process. In September 2022, Binance launched its first SBT, the Binance Account Bound (BAB) token, on the BNB Chain. It can be used as proof of identity for Binance customers, allowing them to participate in building multiple projects and earning rewards. Other projects on the BNB Chain can also leverage this verification method to filter and validate users.

What Are the Benefits of SBTs?

Credit and Reputation

In traditional finance, financial institutions support many forms of uncollateralized lending. However, they mainly rely on credit scores to gauge user credibility, and such scoring systems have many flaws. These scores are based on factors that might not directly correlate to one’s creditworthiness, and are biased against minority groups with insufficient information to elevate their credit score. 

SBTs can serve as an unbiased and bottom-up substitute to traditional credit scoring systems. In addition, their non-transferable property, coupled with the transparency of the blockchain, makes it difficult for defaulters to take loans again.

Decentralized Autonomous Organizations (DAOs)

SBTs can also act as an alternative for voting in a DAO. This is helpful because DAOs are highly susceptible to Sybil or 51% attacks, which is when a single user or entity uses multiple wallets to hoard tokens to obtain at least 51% of the voting power. The whitepaper suggests that more voting power can be conferred to users who have more reputable SBTs such as work credentials, licenses, or certifications.

What Are the Disadvantages of SBTs?

Loss of Privacy 

An issue with SBTs is that their permanence and public nature can lead to a loss of user privacy. For example, employers might gain visibility of information that potential candidates would rather remain private, and it could lead to biased decisions. However, privacy issues that revolve around SBTs can be solved in two different ways:

  1. Apply zero-knowledge technology to SBTs so that the holders can decide how, when, and what information to reveal
  2. Set different parameters to variations of SBTs such that after a certain period, the SBTs can become transferable or completely revoked

Risk of Hacks and Theft

As with social identity documents currently used in existing systems, SBTs risk getting hacked, stolen, or lost. The former is especially prevalent in the world of Web3. The whitepaper suggests that there should be a “Social Recovery Model” whereby users can appoint a set of individuals as their guardians. These guardians will have the authority to recover or change the keys of a user’s wallet. The downside to this solution is that its effectiveness depends on the relationship between the users and their guardians. For instance, this recovery model can break down if the guardian passes away or if the relationship turns sour. 

Dystopian Scenarios 

There is a possibility that dystopian scenarios or situations may arise, where holders of certain SBTs can be denied access to healthcare, voting rights, or even the ability to purchase homes. Bad actors can sabotage individuals by airdropping SBTs to them without their knowledge. On this note, the whitepaper emphasized the importance of flexibility in allowing users to destroy or hide certain SBTs.

The Future of SBTs

SBTs are an up-and-coming innovation in the crypto space, and we envision many Web3 companies or institutions adopting them in the near future. Along with verifiable credentials (VCs) and proof-of-personhood projects, the mechanics and concepts behind SBTs will be essential for the advancement of decentralized digital identity in the crypto space.

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Disclaimer

This publication is provided for informational and entertainment purposes only. Nothing contained in this publication constitutes financial advice, trading advice, or any other advice, nor does it constitute an offer to buy or sell securities or any other assets or participate in any particular trading strategy. This publication does not take into account your personal investment objectives, financial situation, or needs. Treehouse does not warrant that the information provided in this publication is up to date or accurate.