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What are Soulbound Tokens (SBT)?

Soulbound is the latest idea from Vitalik Buterin. Given the success of Ethereum, this is already enough to make us take a closer look at the concept.

Web3 and blockchain are more than crypto

Decentralization is a trendy buzzword these days. Closely related to Web3, it is supposed to provide a new, better version of the Internet. More democratic, less dependent on digital giants, emphasizing the needs of users. It’s a beautiful vision, but for now we see decentralization mostly in DeFi and cryptocurrencies. There’s nothing wrong with that, however, wouldn’t it be worth taking it a step further?

That step is to be the development of a decentralized society, from the English acronym referred to as DeSoc. Unlike DeFi, it is not to be based on trustless protocols. On the contrary, it is supposed to build networks of trust, just as it happens in the real world.

People we can trust are the foundation of how we function in society or business. Family, colleagues at work, a reliable plumber, a neighbor. We don’t need a guarantee to lend them a kilo of sugar or ask them to water our flowers while we’re on vacation.

But can these trust mechanisms, operating on a small scale, be taken to the next level? This is where a new concept comes onto the scene.

What is Soulbound?

The basic building blocks for building DeSoc are to be Soulbound tokens (SBT). They were proposed in early 2022 by Ethereum creator Vitalik Buterin, economist E. Glen Weyl and lawyer Puja Ohlhaver.

SBT are intended to act as a kind of digital curriculum vitae of the user, documenting a person’s achievements, experiences and connections. Unlike NFTs and cryptocurrencies, which can be traded on the market and transferred to another wallet, SBTs are meant to be irrevocably tied to a single account.

Soulbound idea comes from the game World of Warcraft, in which some earned items are permanently tied to the player. Users cannot sell them to other players or exchange them for anything. Likewise, Soulbound’s non-transferability ensures that their holders cannot trade their social status online. For that, more and more of them appear with each new experience, and the user’s reputation slowly crystallizes.

Some SBTs can act like achievement badges, similar to computer game achievements. However, instead of getting a badge for defeating an enemy, you get SBTs for earning a degree, participating in a project or supporting some community.

SBT, however, can validate more than just our activity. They can be linked to a myriad of other characteristics and personal information, such as name, date of birth or medical history. The possibilities are endless.

That’s why accounts or wallets hosting Soulbound NFT are known as “Souls.”

SBT vs NFT

To clarify the situation, let’s write out how these two categories of tokens differ:

  • Transfer: SBTs are non-transferable, NFTs we can freely trade.
  • Use: SBTs are used to prove who you are, NFTs prove ownership of items.
  • Recovery: SBTs can be recovered with the help of the community, NFTs are impossible to recover.

In summary, SBTs show more similarity to the POAP tokens discussed earlier than classic NFTs.

What SBT give us

As we have already mentioned, Soulbound can have a myriad of applications. For example:

  • Creditworthiness. Aave or Compound will not give us a loan without collateral exceeding its value. Soulbound can enable DeFi protocols to offer unsecured loans. That is – secured by our reputation, the loss of which can be very painful.
  • Documentation of achievements. Universities, schools and other educational institutions can use SBT as proof of attendance at classes or a certificate of acquired qualifications. This will help verify the skills of job applicants, for example.
  • Authorization of collections. NFT holders often rely on third-party companies like Twitter or OpenSea to document the legitimacy of their collection. If we mint NFT using their Soulbound account, the problem of their credibility disappears.
  • Security against hostile takeover. A concern for many organizations, especially DAOs, is the possibility of losing control. If someone comes into possession of 51% of DAO tokens, they can do anything. If votes are based on SBT, assigned to community members’ accounts, such a risk disappears.
  • Fair airdrops. Quite a few crypto projects reward early users with airdrops. Unfortunately, a sizable portion of these airdrops goes to whales, not involved in the development of the project, but owning sizable shares, previously bought for nothing. The discharges directed to SBT holders solve this problem.
  • Special entitlements. Some events, such as specialized conferences or early rounds of funding, are available only to those with a proven track record. SBT can be a kind of guarantee that a person is qualified to enter that club.

Problems with Soulbound

Soulbound have characteristics similar to a tool – used skillfully they do a lot of good, but they also have the potential to cause a lot of trouble. Let’s think:

  • SBTs can reveal a lot of sensitive information. Do we really want everyone we know to have access to tokens related to our health or religious beliefs? And if we think we are being spied on by Google or Facebook, then using SBT means giving them literally everything on a platter.
  • Trouble in authoritarian states. Soulbound tokens can be used to identify and punish members of specific communities. Holders of a particular SBT can be denied access to medical or educational facilities or have their passport revoked, for example.
  • The trouble with unwanted SBTs. If someone decides to compromise us and sends a souvenir Soulbound from Adolf’s birthday celebration or an ISIS ID, we may have a lot of trouble explaining that, after all, we never….
  • Identity theft is possible. If SBTs are a record of our digital lives, losing them can be very painful. Even worse if someone uses them to commit a crime.
  • A lot of competence requirements. While the idea is simple for those familiar with blockchain, the average citizen may have problems with it. As a test, ask your father how he likes the NFT you just sent him ;).
  • SBT is a new concept. We have no idea what problems may arise once it is rolled out. In the case of DeFi, for example, there are thefts with Flash Loans. Who knows what unlucky people will experience here?

Soulbound – yes or no?

It is necessary to start by stating the obvious – Soulbound tokens are, for now, a loose concept rather than a polished project. The idea is fresh and evolving all the time, and yesterday’s rules may be changed tomorrow. However, it is worth the temptation to take stock, although it is not easy.

After all, it is difficult to unequivocally assess a project that could have such far-reaching effects. On the one hand: SBTs can prevent fraud, distribute profits fairly, protect DAOs and other organizations from hostile takeovers. Allow borrowing without collateral. Make our lives easier, give us new opportunities, signal who we can trust and who better not.

On the other hand… they come dangerously close to the concept of “social credit,” intensively developed in China. In theory, it is supposed to reward productive and law-abiding individuals; in practice, it serves to repress those who don’t quite toe the party line. And if you think such things only happen in China, think again.

Anyway, just look at Italy. At a press conference of the mayor of Bologna on March 29, 2022, a “Smart Citizen Wallet” was presented, awarding points to citizens who have demonstrated “desirable behavior.” For now, there’s no mention of punishment for undesirable behavior… but perhaps let’s still wait with delight.

Vitalik and company probably have pure intentions, but as the saying goes, “hell is paved with good intentions.” Soulbound looks interesting, but until solid privacy protection mechanisms are implemented, it is better to look at this project with some reserve.

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