What are Soulbound Tokens (SBTs) and How Do They Function?

Crypto fans are familiar with the web3 world and are aware of the constant stream of advances. Soulbound tokens (SBTs) are one of these modern developments.

Soulbound tokens are non-transferable and specific to an individual, preserving essential information like educational background, career history, and affiliations with clubs, among other things.

Consider a traditional wallet that contains a driver’s license, a library card, and a membership card for a local sports team; however, this information will be saved in a digital wallet as SBTs.

What are Soulbound Tokens (SBTs)?

For web3 users, Soulbound tokens (SBT) can serve as a form of CV by listing a person’s memberships, qualifications, and affiliations. They are non-transferable, publicly verifiable digital tokens.

The inspiration came from the well-known computer game World of Warcraft, which gave players “soulbound” rewards they couldn’t trade or sell to other characters.

In their whitepaper, Glen Weyl, Puja Ohlhaver, and Vitalik Buterin characterized the idea of SBTs as a way to avoid the web3 ecosystem’s “today’s hyper-financialization” and instead transition to a decentralized society that “encodes social ties of trust.”

Soulbound tokens, as their name suggests, are irrevocably tied to a wallet or account for the duration of its life, in contrast to NFTs and other cryptocurrencies that can be sold on the open market and moved from one wallet to another. The term “Souls” refers to these wallets or accounts that house soulbound tokens.

Imagine having a blockchain account called Soul that contains immutable records like a person’s work history, employment history, and educational credentials. SBTs, which function similarly to a CV, can aid in establishing a user’s online standing with web3 solutions.

But when one Soul can issue another Soul an SBT (that can be attested by other Souls), their real potential is revealed. For example, a community may be a Soul that issues SBTs to natives or a business that provides SBTs to shareholders.

Additionally, a person or thing could be a Soul that recommends someone else after doing business together effectively. This idea enables web3 networks that aren’t exclusively focused on money-oriented frameworks but are based on provenance and reputation, allowing a soul to display integrity, trust, affinities, and legitimacy.

How Do Soulbound Tokens (SBTs) Work?

Except for their non-transferability, soulbound tokens operate similarly to NFTs, which is also why Vitalik Buterin, the inventor of Ethereum, refers to them as non-transferable NFTs. Each token is distinct and non-transferable, making them non-fungible, or not exchangeable.

Self-certified SBTs can be issued by Souls to themselves. However, a typical procedure is when other Souls or SBT makers send an SBT to the address of another Soul. On the blockchain, it is possible to publicly verify the SBT, its issuer, and Soul’s address. As a result, anyone can quickly discover or demonstrate a Soul’s trust circles.

What purpose does a token serve if it can never be transferred?

In a short period of time, Web3 and its ecosystem of decentralized solutions have experienced significant growth, offering various innovations that are challenging the status quo in several global businesses. Web3 is still constrained by a number of issues that are keeping it from progressing further despite its considerable development.

Some of these problems have been resolved because to ideas like proof of work, proof of stake, smart contracts, and public/private keys, but others are still present in the ecosystem.

The lack of trust in web3 is one of the main issues.

Every human connection and economic transaction depends on the amount of trust among the parties involved, but web3 suffers in this area due to its high level of privacy and anonymity. Because of this, Web3 protocols—which are designed to replace Web2—have become quite dependent on its centralized architecture.

For instance:

• To avoid the danger of a Sybil attack and transition away from coin voting, DAOs rely on web2 platforms like Discord.
• NFT collectors use OpenSea and Twitter to display the provenance of their holdings.
• Uncollateralized loans are not available on DeFi lending platforms.

The trust gap in web3 might be filled with the help of soulbound tokens. They can be used to create social identities that enable protocols and people to operate on the basis of confidence while also retaining privacy thanks to their non-transferability.

How Will SBTs Help Us in Everyday Life?

SBTs, or soulbound tokens, may provide advantages that change the way we now perceive social identities in the actual world.

NFTs, for instance, can be used to promote content producers, boost crowdfunding campaigns, and demonstrate what a person owns and can afford. However, SBTs build on the NFT principle by giving people a mechanism to validate their identity and reputation that goes beyond the financial incentive.

Before doing business with someone, users of SBTs can view their immutable past. SBTs, for instance, might be used to verify a candidate’s experience prior to hiring them. Before renting out a house to someone, one can observe their SBTs. SBTs have a lot of positive potential benefits for society, and they may even make it possible to realize a totally decentralized society.

When will Soulbound Tokens be available?

Many people are avidly exploring soulbound tokens because they are a novel idea, especially in the wake of Vitalik Buterin’s blog article from January 2022. As a result, numerous issues must be resolved before SBTs are made operational.

According to Vitalik Buterin, testing with the idea will start soon on the Ethereum blockchain. Since anyone can launch one earlier than anticipated, there is no set timeframe for when they will go live.

What will occur if a Soulbound Token is lost?

Since they are inextricably linked to Souls, losing soulbound tokens entails losing a Soul, which holds a wallet’s private keys.

A list of guardians, such as organizations, people, or wallets, who can assist someone in resetting their private keys, might be compiled as a social recovery technique. But there are some operational concerns with this system.

By using a “maximally broad range of real-time relationships” that a Soul has across several communities, Vitalik Buterin developed a community recovery approach in which guardians are chosen randomly. In that case, the guardians can assist in locating the Soul for its owner, hence reducing the likelihood of Soul theft or sale.

What are Some Real-World Applications for SBTs?

Provenance For NFTs 

NFT provenance relies heavily on centralized systems, which increases the chance of a single point of failure. For instance, during a brief outage in OpenSea, Twitter users’ NFT profile photos were removed.

Creators can mint NFTs straight from their Souls using SBTs. Furthermore, the more SBTs from that Soul there are, the simpler it is to establish the veracity of the NFTs, enabling makers and artists to establish a reputation for the rarity of a work.

Sybil Resistance Attack

Since a person can effectively purchase up to 51% of a DAO’s token to take control of the protocol, the present coin voting process used by the majority of DAOs puts the system at risk for a Sybil attack.

Furthermore, the majority of token holders in a DAO lack the knowledge necessary to make crucial choices.

By simulating DAO voting powers, SBTs can assist in resolving this issue. A whale, for instance, won’t be able to acquire the necessary tokens to carry out a Sybil assault because they aren’t transferrable. Additionally, Souls who possess relevant SBTs like licenses, academic qualifications, endorsement from other Souls, etc. may be granted voting privileges.

DeFi Lending

Due to the resistance of extremely privacy-focused decentralized ecosystems, current DeFi lending platforms like Aave don’t offer financial services like uncollateralized loans enjoyed in traditional banking.

By using a Soul’s real-time relationships across several groups as a social credit score, SBTs allow DeFi protocols to provide uncollateralized loans.

Digital CV 

When conducting job interviews, the procedure is sped up by checking the CVs of applicants to see if they are suitable for the position. The verification of a candidate’s statements, nevertheless, can occasionally be difficult.

Inexperienced medical staff have, for instance, lied on their resumes and eventually given patients the wrong prescriptions while employed, according to a number of incidents that have occurred in health institutions.

These issues are resolved by SBTs since they may act as a digital CV that is verifiable by the public. A Soul’s SBTs from other organizations, such as universities and associated institutions, can be used to inform employment decisions.

Souldrops

By starting airdrops or conducting token sales, crypto projects typically create new communities. But this method frequently falls victim to Sybil attacks, and it is unable to draw in the correct crowd.

By making airdrops based on calculations from the SBT or other currencies within a Soul, as described in Vitalik Buterin’s whitepaper, projects can draw in the correct communities.

For instance, a project focused on enhancing sustainability may airdrop governance tokens to Souls who have SBTs indicating their prior participation in a variety of sustainable actions.

Advantages of Soulbound Tokens

Learn about SBTs, the most recent advancement in the blockchain industry, and its benefits and drawbacks.

• In decentralized situations, SBTs make it possible to establish greater trusting relationships.
• DeFi lending platforms can issue uncollateralized loans thanks to SBTs.
• The voting processes in DAOs can be greatly enhanced using SBTs.
• SBTs can aid in hiring the best applicant for a position.

Disadvantages of Soulbound Tokens

• SBTs could divulge too much private information about a subject.
• SBTs are a novel idea, thus implementing them at this time can be challenging.
• If SBTs are introduced on proof-of-work blockchains, they can be criticized for using a lot of energy.

Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.