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Soulbound Tokens: What are They and How do They Work?

Posted August 29, 2022 3:34 pm
4 min
By Yehia El Amine

In May 2022, Vitalik Buterin (co-founder of Ethereum), lawyer Puja Ohlhaver, and E. Glen Weyl (an economist and social technologist) co-authored a paper entitled “Decentralized Society: Finding Web3’s Soul.” 

It laid out the foundation of a fully-decentralized society (DeSoc) governed by its users and how Soulbound Tokens (SBTs) could function as the credentials we use in everyday life.

What are Soulbound Tokens?

SBTs are non-transferable tokens representing a person’s identity using blockchain technology. These wallets, called Souls, hold everything from medical records to work history.

People could have multiple wallets (or Souls) representing a different part of their life. For example, someone could have a “Worker Soul” for their work history and a “Medical Soul” for their health records. These Souls and Smart Contracts would allow people to build a verifiable, digital reputation based on their past actions and experiences.

In contrast, a Soul can be the entity that allocates Soulbound Tokens. For example, a company could be a Soul, issuing SBTs to each employee. A digital country club could use SBTs to verify membership status.

The logic behind soulbound items originated in the popular online game World of Warcraft. Players cannot sell or transfer soulbound items—once picked up, they are forever “bound” to the player’s “soul.”

Soulbound Tokens are a way of turning the NFT concept into something beyond money and bragging rights. While NFTs represent assets and property, an SBT represents a person or entity’s reputation. It is important to highlight that SBTs hold zero monetary value and cannot be traded once issued to someone’s wallet.

How can Soulbound Tokens be used?

SBTs have a wide range of potential applications. Here are some examples that could be useful in everyday life.

  • Education history: When university students graduate, they receive a certificate proving their completion of the required courses. The university is like a Soul issuing SBTs (spiritual birth certificates), and the students are Souls receiving them.
  • The SBT would store the student’s credentials, proof of the qualifications a person holds and membership in the university. The SBT would function as a kind of electronic dog tag.
  • Job Applications: All you need to do is submit all your prior work history and certificates using official SBTs issued by previous companies. In this way, they could prove their skill sets and work histories.
  • Health records: A doctor switchboard that holds your medical records could speed up the process of finding a new doctor. Simply upload your health record from your doctor, and you’re set!

How do SBTs work in Web3?

They don’t. The main challenge affecting the Web3 industry is trust, but that’s not the only thing affecting it. In a world that’s increasingly moving toward being trustless, how can you trust a person’s reputation? Let’s use lending money as an example. Similar to traditional bank credit scores, SBTs could track a user’s DeFi borrowing history and other metrics that determine their risk profile—and thus whether they can get a loan or not.

Additionally, Soulbound Tokens are also a proposed alternative to DAO voting. In the current governance model, voting power is based on a member’s number of tokens. But SBTs could assign voting power based on users’ interactions with the community instead of their holdings. This model would prioritize votes from more dedicated users with a strong reputation.

Beyond creating a reputation-based voting system, SBTs may improve the integrity of DAO voting; namely, they can help defend against Sybil attacks—one of the biggest threats to the current DAO governance model.

During a Sybil attack, a group of bad actors can purchase the majority of governance tokens in a DAO and therefore manipulate voting proposals to their advantage. Publicly visible SBTs will help prevent bad actors from entering the DAO and deter corruption, preventing Sybil attacks.

Examples of Soulbound Tokens in action are still theoretical. The co-author of the original whitepaper, Glen Weyl, believes that some early use cases for SBTs will appear by the end of 2022.

Binance recently announced its own SBT called Binance Account Bound (BAB). Unlike other tokens, this SBT has no monetary value and is non-transferable. It aims to tackle identity verification issues in Web3 by serving as a digital verification tool for Binance users who have completed KYC.

It will be interesting to see if and when Soulbound Tokens gain traction and if the world is ready for them. We’ll keep you updated as this story progresses. Stay tuned for more coverage of NFTs and gaming on our news hub.

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