What Are Soulbound Tokens (SBTs)?

In May 2022, Ethereum co-founder Vitalik Buterin, economist Eric Glen Weyl, and lawyer Puja Ohlhaver published a paper entitled “Decentralized Society: Finding Web3’s Soul.” In it, they make the case for the development of a new kind of crypto token, the so-called “Soulbound token (SBT).” These tokens are designed to represent part of a person’s identity in a decentralized digital world.

According to Buterin, Weyl, and Ohlhaver, SBTs, which cannot be transferred/traded between individuals, could form the basis for the creation of a decentralized society (DeSoc). In a DeSoc, blockchain-based identity markers in the form of soulbound tokens would function as the credentials used to participate in everyday life.

So, are soulbound tokens, digital identity, and a shift towards DeSoc going to be the next big thing in crypto? Or are SBTs just a glorified version of the non-fungible token, which has already taken off in popularity?

NFTs are the precursor to soulbound tokens

Before delving into the technicalities of what soulbound tokens are, their pros and cons, and their potential use cases, it is probably wise to remind readers of what NFTs are. After all, NFTs are the direct predecessor of the SBT.

A $69 million sale of the blockchain-based ownership rights to a collection of work by digital artist Beeple back in early 2021 kicked off a Cambrian explosion within the crypto space. A new asset class called non-fungible tokens (NFTs) burst into the mainstream.

Like cryptocurrencies, NFTs are transferable across the blockchain. That means they can be bought and sold on digital asset exchanges. At present, the largest NFT marketplaceOpenSea. Unlike cryptocurrencies, no two NFTs are the same and therefore cannot be traded on a like-for-like basis. Hence, the “non-fungible” part of the name.

An NFT is a blockchain-based representation of digital ownership. Currently, digital collectibles such as art and sports cards dominate the NFT market. But there is no theoretical limit to what an NFT can represent ownership of. Tweets on Twitter can be sold and traded as NFTs. It can also be used to represent real-life property, such as real estate and clothes.

Creators and charities are already utilizing NFT technology to build new revenue streams and better connect with supporters. Meanwhile, the emergent technology promises to streamline the trade of NFTs property by removing middlemen. Imagine how much easier it could be to transfer ownership of a home if it could simply be done in a single transaction on the blockchain.

Given the promise that the technology holds, the amount of hype that has built around NFTs shouldn’t come as too much of a surprise.

Non-transferable NFTs — the foundation of a DeSoc?

Ethereum co-founder Buterin first introduced the idea of soulbound tokens, or non-transferable NFTs, into the mainstream crypto discussion back in January 2022. In a blog post at the time, he argued that “while transferable NFTs have their place and can be really valuable… there is also a large and underexplored design space of what non-transferable NFTs could become”.

Buterin referenced powerful “soulbound items” collectible in the popular massively multiplayer game World of Warcraft. These items cannot be sold or transferred to other players, yet still offer the player significant utility. From here came the inspiration to refer to non-transferable NFTs as “soulbound”.

Buterin teamed up with economist Eric Glen Weyl and lawyer Puja Ohlhaver in a May 2022 paper entitled “Decentralized Society: Finding Web3’s Soul,” where the trio expanded on the idea of SBTs.

As already noted, Buterin, Weyl, and Ohlhaver expanded on the idea of soulbound tokens in a paper published in May. According to the trio, the digital identity that SBTs help create could facilitate the development of a fully decentralized society. The trio makes the case that SBTs could facilitate economic transactions and social interaction, whilst also bolstering trust in the decentralized digital space by offering a new, secure way to validate each other’s identity, credentials, and reputation.

SBTs are held in wallets called “souls” and could be issued by souls to each other. A soul doesn’t necessarily have to represent a person. Institutions, companies, and governments could all have souls that they use to issue SBTs.

Before diving into potential SBT use cases in more detail, let’s expand open what they actually are.

What are soulbound tokens?

The idea of SBTs remains new and underdeveloped, and, as a result, no exact definition of the term has yet been agreed upon. However, there is agreement on the idea that SBTs will be similar to NFTs, but will be non-transferable. Their non-transferability means that SBTs will not have any direct market value

Rather, soulbound tokens are the building blocks of an individual’s digital identity. SBTs are tokenized, verifiable facts about an individual stored on the blockchain. These facts about an individual that make up their identity could be anything; work, volunteering and educational history, qualifications, medical history, criminal record, memberships and affiliations, and so much more.

As already noted, SBTs could be stored in wallets called “souls.” The trio noted that an individual could have a number of different unlinked souls. They might have a “credentials soul” containing SBTs relating to an individual’s employment, education, and qualification history. A little bit like a CV.

An individual might have an “identification soul” which could contain SBT versions of their passport, driver’s license, and various membership cards. An individual might also have a separate “medical” soul containing their medical history/record.

Benefits of soulbound tokens

According to Buterin, Weyl, and Ohlhaver’s paper, the introduction of soulbound tokens could help shift the emphasis in crypto away from “hyper-financialization” and toward social/societal development. For example, if individuals can build and showcase digital identity via a collection of SBTs, this may discourage them from doing things like buying certain NFTs as a status symbol.

Moreover, SBTs could help resolve issues surrounding trust in the emergent decentralized society by providing the means to verify reputation. The trio argued that this could lower the risk of crypto and manipulation by making it harder for people to lie about their status and achievements.

SBT proponents believe that by resolving issues around trust, decentralized finance could become more efficient. For example, when looking to secure a mortgage, a bank will consider an individual’s credit history. This enables them to reduce their own credit risk whilst also potentially offering the customer a more favorable lending rate. Such information could be highly useful for decentralized finance protocols and facilitate the space’s mainstream adoption.

The maturation of SBT/soul technology could also help to drive the move towards a decentralized web via reducing the dependence on centralized so-called “web2” entities, like social media, for social interaction/connection. For example, rather than relying on Facebook groups, an online community might be able to connect via a blockchain-based decentralized application that verifies community membership via an individual’s SBT holdings.

Drawbacks of soulbound tokens

There is a lot of excitement about soulbound tokens, souls, and the decentralized society that they could help build. But many worry that the mainstream adoption of SBTs could undermine privacy. For example, bad actors could use SBTs as a means of identifying those who they wish to harm/harass.

Holders of a specific type of SBT (perhaps related to a particular political or religious alignment) are potentially at risk of discrimination. Meanwhile, some critics have compared the idea to China’s totalitarian social credit-scoring system. Buterin, Weyl, and Ohlhaver gave a nod to these risks in their May 2022 paper.

They warned that SBTs could make it easier to “automate red-lining of disfavored social groups or even target them for cyber or physical attack, enforce restrictive migration policies, or make predatory loans.” Their proposed solution is that individuals must have a way to hide their SBTs.

Soulbound token use cases

Identification

Soulbound tokens could store digital identification cards, such as passports or driving/other licenses. Membership cards could also be issued as SBTs. The technology thus has the potential to streamline identity verification processes significantly.

Certification

Employers, schools, universities, and other educational/sporting institutions could issue SBTs to individuals based on merit/achievement. SBTs could thus make it easier for individuals to showcase their achievements, whilst making achievement fraud more difficult.

Medical records

Soulbound tokens could store medical records. By decentralizing this information onto the blockchain and linking it to other identity-verifying information, medical service providers may be able to serve their customers much more efficiently.

Reputation building

Soulbound tokens could form an individual’s digital reputation. One commonly cited example is that SBTs could form web3’s version of an individual’s credit history. Decentralized lending protocols could use such information to set interest rates in a more efficient manner, reducing their own credit risk and potentially lowering the interest burden for the borrower.

A strong web3 credit history, as indicated by an individual’s SBT borrowing track record, could also allow individuals to borrow using a lower collateral/loan value ratio.

Alternatively, members of a community could accumulate SBTs based on their contribution to their community.

Reputation-based DAO voting

Decentralized autonomous organizations (DAOs) are vulnerable to Sybil attacks. This is where an individual or colluding group amasses a critical number of the DAO’s governance tokens, allowing them to manipulate governance proposal unfavorably.

DAOs could mitigate the risk of this kind of hostile takeover by linking governance voting in some way to SBTs in some way.

Proof of attendance

Just as SBTs could be issued to individuals based on their accomplishments (for example, by universities), SBTs could also be issued to individuals for having attended certain events, be they physical or digital. Individuals could build up a collection of SBTs, recording and verifying notable life experiences.

SBT vs. NFT: What are the differences?

As SBTs enter the mainstream in the decentralized/crypto space in the coming years, there is likely to be significant confusion regarding how they differ from NFTs. So let’s clearly lay out the distinction.

SBTs and NFTs are both blockchain tokensNFTs are transferable between addresses across the blockchain. SBTs are not transferrable across the blockchain. That means that there is a marketplace for NFTs, and they have a monetary value. The non-transferability of SBTs means they don’t have any monetary value.

NFTs serve as proof of digital ownership. They can represent the ownership of anything that is non-fungible, be it a unique digital asset, like digital art, or a unique real-world asset, like real estate.

SBTs, meanwhile, are the building blocks of an individual’s digital identity. They are verifiable facts about an individual, such as proof that they graduated from a certain university, attained a certain qualification, worked at a certain company, attended a certain event, are a member of a certain club, have contributed a certain amount to a particular community, and the list goes on. SBTs could also store things like a person’s medical history, criminal record, and identity verification documents.

Lost souls

Cryptocurrency investors who take self-custody of their crypto assets in a non-custodial wallet risk losing access to their crypto if they don’t properly store/record their private keys and recovery phrase. In the same way, individuals may also lose access to their digital identity bank of SBTs if they lose the information needed to access their soul.

Recall that the “soul” is the proposed name for the wallet/wallets that store an individual’s SBTs on the blockchain. Alternatively, a hacker could break into a person’s soul and potentially lock them out. By gaining access to a person’s soul, thieves could take identity theft to a much more severe level.

In his May 2022 paper, Buterin and the other two propose a “social recovery model.” Under their model, users would appoint a group of “guardians,” heading them the ability to collectively reset a user’s private keys if required. Of course, the proposal is far from perfect.

Critics have pointed out that individuals with a compromised soul may have difficulties getting their guardian’s assistance if their relationships with them have broken down, or if they have passed away. Meanwhile, there is also the risk that a group of guardians could team up to manipulate a person’s private keys without their consent.

When will soulbound tokens be available?

According to Glen Weyl, early use cases of soulbound tokens could emerge as soon as the end of 2022. BINANCE appears to be leading the charge in turning the concept into reality. The world’s largest cryptocurrency exchange, Binance, recently unveiled an SBT called the Binance Account Board (BAB). It is set to become the BNB Chain’s first SBT.

It will only be available to Binance users who have completed the exchange’s Know Your Customer identification process. According to Binance, the BAB SBT aims to facilitate identity verification in the decentralized digital space.

When will SBTs go mainstream?

Soulbound tokens hold the promise of being crypto’s next big transformational idea. But for the technology to garner mainstream traction and achieve its goal of creating a decentralized society, a lot more time, research, and development will be needed.

mid-2020s could see developers deploy a foundation of usable SBT use cases. Given the idea remains at such a nascent stage, it could take well into the 2030s for SBTs to get any real mainstream usage, just as it took cryptocurrencies around ten years to get any real traction from inception.

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