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Exploring the origins, advantages, and use-cases of Soulbound tokens - a solution to the “hyper-financialization” of NFTs and the future of digital identity ownership.
Beyond the Hype
Non-fungible tokens (NFTs) took the world by storm in 2021. From celebrities and global corporations, to crypto-enthusiasts and newcomers, it felt like the whole world was digging up spare change to get a hold of these digital art pieces. Take the image above for example - CryptoPunk #5822 - which sold for a staggering $23 million in early 2022. NFT collections like the Bored Apes Yacht Club and CryptoPunks sold for millions of dollars a piece at their peaks, instantly becoming digital signals of wealth and status.
A common criticism of Web3 is the sizable amount of money thrown into the space, creating an unsustainable culture grounded in hype, trends, and status. There are growing concerns that ownership of select tokens have detracted from appreciation of the art itself, and instead feed into a desire for demonstrating status and social value. But what if NFTs could signal more than just wealth, something beyond the hype and more substantial than the desire for social recognition or financialization? That's where Soulbound tokens come into play.
What are Soulbound Tokens?
Video gamers are likely familiar with the term soulbound items, typically used to describe digital assets in games like World of Warcraft, which are bound to a specific player account. As such, these items cannot be sold or traded to any other players. Given the absence of transferability, soulbound tokens are highly sought after items with a high value in online gaming ecosystems. A significant investment of time and effort is required to unlock these items, keeping games challenging and encouraging gamers to remain engaged over longer periods of time. Inspired by the value of soulbound tokens in gaming, Vitalik Buterin, Glen Weyl, and Puja Ohlhaver introduced the concept of Soulbound Tokens (SBTs) in a white paper, Decentralized Society: Finding Web3’s Soul, early last year. In Web3, SBTs are publicly verifiable, non-transferable NFTs representing unpurchasable digital assets like an individual’s credentials, affiliations, and accomplishments. Much like in the gaming world, SBTs are locked to a soul, in this case a specific wallet or account. We further discuss the advantages of SBTs in the next section.
Soulbound Tokens - What Good Are They?
While NFTs are great for transferring value and ownership, their core function is limited to proof-of-possession, also known as proof-of-ownership. NFTs are essentially a secured, blockchain-based certificate that confirms (proves) ownership of a specific asset. These tokens are encoded, or “minted,” on the blockchain through smart contracts that assign ownership and manage the transferability. Ownership is further managed through the unique ID and metadata that can’t be replicated by other tokens. While thousands of digital assets have been minted as transferable NFTs, there is still a lack of effective models and projects using non-transferable NFTs. The true potential of soulbound tokens is yet to be widely realized and adopted. For blockchains to function like collaborative ecosystems, it is important for use cases to focus more on building community and establishing identity than making money. Soulbound tokens distract users from the financialization of NFTs, and instead, are focused on representing your “commitments, credentials and affiliations” as explained by Buterin. This moves NFTs away from “hyper-financialization” and discourages the use of NFTs as symbols of wealth and status. SBTs, which would be issued by individual or organization accounts called “souls,” aren’t supposed to carry any intrinsic market value. Rather, SBTs are representations of who you are, your hard work, and earned accomplishments: the things money can’t buy. The graphic below outlines the key differences between SBTs and NFTs, courtesy of cointelegraph.com.
Beyond the discouragement of hyper-financialization, Soulbound tokens provide a great deal of advantages compared to regular NFTs. If executed correctly, SBTs provide individuals with maximum control over their personal records and data, shifting dependence away from the centralized structures in Web2 and encouraging greater data privatization and ownership in Web3. Data could be stored in a tokenized form instead of on a centralized database, and Soulbound token holders would have the capability to manage who can access their data and who can’t. Furthermore, SBTs foster a greater sense of confidence among token holders and the wider community because authenticity cannot be purchased. Information cannot be falsified as it is permanently replicated on the blockchain, preventing individuals from buying status, lying about achievements, or impersonating others. In the next section, we discuss four potential use-cases of soulbound tokens: proof-of-attendance protocol, proof-of-completion/skill, online identity verification, and proper DAO governance.
Soulbound Tokens in Action
Proof-of-Attendance Protocol (POAP)
Proof-of-attendance protocol (POAP) is a prime example of an NFT that would benefit from being Soulbound. POAP demonstrates an individual’s attendance at a conference or an event, represented as an NFT much like a digital badge or collectable. With Soulbound properties, individuals would be unable to buy, sell, or change the ownership of these NFTs, forcing them to be earned through participation. This ensures authenticity, validating that token holders did indeed attend conferences, and could open up exclusive opportunities or discounts for previous attendees with undeniable proof-of-attendance.
Proof-of-Completion or Proof-of-Skill
Soulbound tokens could put certificates, diplomas, and resumes on-chain much like POAP. Imagine a world where your previous work history, accomplishments, and endorsement letters are attached to your identity and represented in a token. Your credentials would be publicly verifiable and acknowledged, making it easy to apply to job openings with a singular submission. As an employer, there will be no need to worry about applicants falsifying their credentials and lying about their work history. Those with earned certifications and reparations will be recognized, and those who attempt to falsify their applications will go unrewarded.
Online Identification
Much like the previous use-case, soulbound tokens would be incredibly useful for identity verification processes. SBTs could store digital ID cards, medical records, and even credit profiles. Soulbound tokens would serve as proof-of-Know-Your-Customer (KYC) credentials, eliminating the pain points associated with verifying one’s identity. This would help prevent impersonation and identity theft, along with speeding up or eliminating KYC processes. One specific area with great potential is DeFi borrowing, where one’s reputation could act as collateral for getting an uncollateralized loan. Soulbound tokens could serve as a credit profile, tracking and verifying a borrower’s credit history, making the DeFi lending and borrowing process seamless for both parties.
DAO Governance Rights
Currently, the transferable nature of governance rights of many DAOs - typically with coin voting systems - could lead to serious consequences. Sybil Attacks are a key concern for DAOs, given the fact that an individual could gain control over the protocol if he/she accumulates 51% of the tokens. Currently, there are not enough effective solutions stopping highly determined individuals from buying a majority of the rights. Transferability is counterproductive for governance because rights can be easily accumulated, and power-hungry DAO members, or even outside attackers, could abuse their power for personal gain by obtaining a majority of the governance rights. Soulbound tokens, however, open up an avenue for power to be properly distributed and appropriately held, conditional on reputation and participation over wealth. The non-transferable nature of SBTs greatly limits the ability for any particular individual to buy the tokens required for a Sybil attack, and DAOs can hand out voting rights based on merit and reputation.
Challenges facing Soulbound Tokens
Much of blockchain technology has been designed to maximize transferability therefore making the adoption of Soulbound tokens a little more difficult. SBTs would likely require a tradeoff to be made between security and convenience. Listed below are three concerns regarding the widespread adoption of SBTs.
Lack of Recovery Methods
Given the non-transferable nature of SBTs, misplacing or forgetting login credentials to a wallet would ultimately lock the token in. For users who establish their on-chain reputation through SBTs, a loss of access to an account would ultimately result in a loss of digital identity. With users unable to transfer tokens themselves, new recovery mechanisms would need to be implemented. Potential solutions include the use of “guardian” accounts, which would be chosen by the owner of the key as an account to help recover locked up tokens. Issuers may also need to implement processes that allow for SBTs to be revoked and reassigned to new accounts in the case of theft or wallet change. Finally, community recovery mechanisms could be a potential recovery model outlined by Buterin in his whitepaper. This model would recover a user’s private keys by requiring that user’s communities to consent and authorize the recovery. Ultimately, practical mechanisms that facilitate easier recovery of locked or stolen wallets must be well developed and implemented to encourage the widespread use of SBTs.
Security Concerns
Privacy is an important aspect of making Soulbound tokens successful. SBTs and the information contained within them are public and available for all to see by default. In most cases, the underlying asset or information SBTs are representing are already public information. However, there are many cases in which personal information and data would be better if privatized. For example, digital medical records and vaccination history. The last thing we need is a system which automatically advertises everyone's vaccination history, and as a result, influences medical decisions and puts pressure on individuals into conforming with their social circles. To avoid these outcomes, implementing privacy as a core part of the design is critical. Plausible solutions include off-chain storage, leaving only the hash of the data on-chain. This gives token holders the ability to decide where to store their data off chain, either in their own device or on IFPS. Another potential but more complicated solution is using zero-knowledge proofs which could cryptographically prove ownership of SBTs without disclosing data.
Automated Redlining
SBTs may provide a means to automate redlining, in other words, be used to target and limit specific communities and token holders. For example, SBTs could lead to repressive ecosystems in which individuals or communities holding specific soulbound tokens are automatically denied voting privileges or access to facilities among other things. SBTs may give rise to more nightmarish applications of blockchain technology such as social credit systems. This type of “social” credit system is an absolute violation of our rights, privacy, and freedom, and is being implemented as a system of control and enslavement. Although only theoretical, the possibility for SBTs to track our every move, click, and purchase, and then use that data to restrict and jeopardize certain freedoms, is an incredibly frightening thought. It is critical that beneficial use-cases of SBTs become developed and widely adopted before potential dystopian scenarios like the one above take precedence.
Moving Forward
NFTs have the potential to represent more than status through money, but status through achievement, completion, and reputation. By discouraging the hyper-financialization of NFTs, Soulbound tokens could drive Web3 towards a future of things that matter: community building, authentic digital identities, and the recognition of credentials that are earned, not bought. This would transform the way we apply for jobs and loans, own our data, and interact with others. SBTs uncover a plethora of opportunities to move away from centralized databases, to individual ownership of our identities, and all the accolades and experiences that come with it. It promises an exciting future, built on collaboration and engagement, instead of money and status.
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