Guide to Soulbound Tokens (SBTs)

NFTs are majorly seen as tokens that one can buy, sell, flip, and make money out of. But what if this very functionality that allows NFTs to be traded among various users was taken away? Though it may appear to be limiting, Ethereum’s co-founder Vitalik Buterin published a blog post talking about the potential this can have. These non-transferable NFTs were called “Soulbound tokens.”

What are Soulbound Tokens?

Soulbound tokens primarily represent social identities in the web3 space. The decentralized society that Vitalik and others envisioned will have accounts called “Souls” to hold these soulbound tokens that will represent the “commitments, credentials, and affiliations” of an individual holder. Some examples can be a person’s academic record, medical record, and other personal data.

These tokens are of immense importance but should only be held by the original owner, which is where the non-transferable function comes in.

But it’s not like SBTs are isolated from the rest of the network. Meaning that they can either be self-certified, like in the case of a person adding their details to it or can be issued by someone else, like some educational institution granting a degree.

How do they work?

SBTs do not have any market value. They’re made to become the real reputation indicators in the web3 space rather than relying on the current money-centric frameworks. But how would you assess someone’s reputation on a decentralized, trustless system like blockchain? Let’s understand with an example.

For example, the voting power in a DAO is usually based on how many tokens you hold. But DAOs that issue SBTs could base voting power on reputation instead. This reputation could be represented by things like the number of rewards earned from participating in the community. These rewards will act as a visual representation of your activity within the DAO and prove your loyalty to the community. This system will give equal opportunities to everyone, regardless of the amount of capital they own. It will also protect DAOs from Sybil attacks.

A Sybil attack is when some anomalies gain control of the majority of governance tokens and use this power to manipulate the project for their benefit. Since SBTs are publicly verifiable and represent reputation rather than wealth, they can help prevent this kind of attack.

Use cases

Some of the potential use cases of SBTs are as follows:

1. NFT Ownership: Artists can use SBTs to prove their identity and prevent others from selling fake NFTs in their name. The SBTs can be linked to the artist’s profile, allowing buyers to verify the authenticity of the NFT.
2. Job Vacancies: SBTs can represent a candidate’s qualifications and work history, serving as proof of their skills for potential employers.
3. Credit History Verification: These tokens can represent traditional credit reports, giving lenders a complete view of a borrower’s credit history. The SBT can be replaced or removed once the loan is repaid.
4. Souldrops: Instead of traditional token sales or airdrops, Souldrops can be issued using SBTs to attract new communities. For example, developers who have attended certain events could receive Souldrops as proof of their participation.

Even though the idea of SBTs is still relatively new, a platform called Idexo claimed to have created SBTs way back in April 2021 before the concept was even named. Regardless of whether that’s true or not, there’s a clear distinction between SBTs and the standard NFTs. The main difference between the two is that NFTs are primarily made to be traded while SBTs are non-transferable. Instead of being bought, they are earned through certain actions.

Conclusion

With SBTs, we can expect to see more decentralization with everyone getting equal opportunities to claim a certain asset or position. However, it should be noted that they’re not going to replace the standard NFTs. Rather, the two will coexist and play their part in growing the ecosystem in their way.