So, what are soulbound tokens, and how do they work?
What Are Soulbound Tokens?
NFTs are tied to a blockchain with their unique identification code. They can’t be replicated or falsified but can be transferred or sold.
Soulbound tokens, however, take NFTs to the next level. When an NFT is said to be soulbound, it cannot be transferred from your soul. In this case, a soul is your private wallet.
These tokens are non-transferable and represent your identity. They can be tied to unique or identifying information, including your personal data and history, like age, education, qualifications, work achievements, and health records.
Soulbound tokens were first propounded in May 2022 by Vitalik Buterin, co-founder of Ethereum; Puja Ohlhaver, a lawyer; and E. Glen Weyl, an economist. Together, they published Decentralized Society: Finding Web3’s Soul, a paper discussing the limitations of NFTs and introducing the idea of SBTs becoming the bedrock of a decentralized society.
How Do Soulbound Tokens Work?
The idea of soulbound tokens came from the popular game World of Warcraft, where several items are soulbound. These items cannot be traded or exchanged between players as they are permanently assigned to a particular player.
So, while regular NFTs represent an individual’s wealth, SBTs show identity and information. SBTs can only be linked to one private wallet for the duration of their entirety.
For you to have an SBT from an organization that shows you occupy a certain position, the organization would have to grant your wallet (soul) permission to possess an SBT. This adds an extra layer of security and trust to SBTs that other NFTs don’t have, granting authenticity and improving trust.
4 Applications of SBTs
Though not fully incorporated into the NFT world, there are already several applications that SBTs would be useful for.
1. Art Certification
For NFT owners to certify their ownership of any non-fungible collectible, they require the services of decentralized platforms like OpenSea. With the creation of SBTs, this won’t be needed as it would be quite easy to link each token to its owner’s soul.
2. Catch Scammers
Another advantage is the ability to fish out scammers that duplicate the names of popular NFT projects and project owners to deceive unsuspecting buyers. With SBTs, it would be easier to recognize each artist through their unique tokens and souls.
3. Digital Documents and Records
When an individual completes a program at a university or gets a driver’s license, the resulting documents can be issued as SBTs, and they can’t be sold, lost, or stolen by a third party. In addition, the SBTs given out by the organization contain an unalterable proof of history.
SBTs can also be used as proof of attendance at an event, with each person receiving an SBT as a certificate of participation. Additionally, SBTs can help verify employment records or the authenticity of a CV and a job applicant’s qualifications.
4. Loans and Lending
SBTs can also be measures of a reputation for loans and overdrafts. Buterin suggested using SBTs as a form of attachment to the private wallets of loan seekers.
Once an individual takes a loan, an SBT can be attached to his private wallet to see that he has yet to fulfill a loan agreement. This could prevent the individual from receiving other loans until the previous one has been taken care of.
When this happens, the SBT is destroyed automatically, and a new one could also be sent to the mail, showing the loan fulfillment and increasing the chances of qualification for other loans.
How to Recover Your Soul If It Is Stolen
SBTs might be great, but there is also a security concern. After using SBTs to safeguard and verify your identity, what would happen in the event of identity theft or if your soul/private wallet is hacked or you misplace the login details of your wallet?
Recovering a wallet with such important information is a priority, and Buterin proposed a Social Security Model. This recovery model involves having a set of highly trusted individuals, called guardians, who would have access to your private wallet, enabling recovery when access to your wallet has been blocked.
The Loopring and Argent wallets are the two most popular ones that have included social recovery thus far. In addition, Loopring can also make Ethereum gas fees cheaper.
How the Social Security Model Works
When your wallet is compromised, your guardians will help change the keys to the wallet. For the key to be changed successfully, it has to be approved by a majority of the guardians.
This model has its drawbacks. There might be cases where most of the guardians are dead or inaccessible. Another concern is the relationship between the wallet’s owner and its guardians; what if you’re no longer on speaking terms with your guardians at the time of need?
And coming back to theft, there is also a possibility that the guardians might decide to conspire against the owner to claim the wallet for themselves. But even with all these, having outside parties that can help with your account recovery is a welcome idea, totally trumping the other option of having no one to help with the recovery process.
When Can You Use Soulbound Tokens?
There is no doubt that SBTs have their drawbacks. There might be SBTs you want to avoid but have been added to your wallet for public view.
To tackle this problem, Buterin proposed that SBTs should be able to be destroyed by the owner or at least have the option of being hidden from the public. Also, as the SBTs are forever tied to a single person, some governments, people, and organizations might decide to use this particular feature; by discriminating against a certain part of the populace using SBTs as a yardstick.
Buterin gave the end of 2022 as an estimate for when SBTs would be in full swing.
Soulbound Tokens Are the Future of Web3
Souls and SBTs have the potential to be a strong foundation for a decentralized society in which human relationships and social interactions are essential building blocks for your Web3 identity. In addition, soulbound tokens can establish provenance and reputation, which can go a long way toward fixing Web3’s trust issue.
Soulbound tokens can’t be sold or transferred, which should make it harder for dishonest people to cheat the ecosystem by buying prestige or exaggerating their achievements. In addition, the increased difficulty in stealing identities and passing them off as someone else may reduce the prevalence of Web3 scams.
