In previous blog articles, we’ve covered a broad view of cryptocurrency, NFTs, and profiled Bitcoin, Ethereum, several other altcoins and various NFT collections. 👀 In this article, we’ll take a closer look at soulbound tokens, which are essentially permanent, non-transferable NFTs. Here is our brief guide to get you on a clearer path to understanding.
❓ WHAT EXACTLY IS A SOULBOUND TOKEN?
👉 The concept of soulbound tokens (or SBTs) was proposed in May 2022 by Ethereum co-founder Vitalik Buterin, lawyer Puja Ohlhaver, and E. Glen Weyl, an economist and social technologist, in a whitepaper entitled, “Decentralized Society: Finding Web3’s Soul”. Buterin describes soulbound tokens as non-transferable NFTs that can help represent a person's social identity and achievements in web3. SBTs would form an essential building block for a proposed “Decentralized Society”, or DeSoc. These non-transferable tokens represent credentials and affiliations within DeSoc, and are linked to Souls – a type of wallet address that establishes provenance and holds or issues SBTs. These Souls represent the “commitments, credentials and affiliations” of an individual holder.SBTs can be "self-certified", like adding education or employment history to a resume📜. They can also be issued by Souls representing individuals, companies, or institutions, similar to a diploma🎓 awarded by a university.
⚙️ HOW DO SOULBOUND TOKENS WORK?
Soulbound tokens’ most distinguishable feature is non-transferability🚫💫. Unlike today’s most popular token standards – namely, fungible ETH tokens and NFTs like Bored Ape Yacht Club, SBTs are not designed to have a market value and cannot be transferred to another wallet.SBTs can be used in web3 networks to represent reputation rather than relying solely on financial indicators. For example, SBTs can act as collateral for undercollateralized loans, where reputation serves as the assurance instead of traditional financial data.
They can also be utilized for decentralized autonomous organization (DAO) voting🗳️, assigning voting power based on users' community interactions and reputation, rather than token ownership. This approach prioritizes dedicated users with a strong reputation.
⚔️ SBTs vs NFTs
Soulbound tokens go beyond monetary value💲 and bragging rights. They represent a person or entity's reputation, unlike NFTs, which represent assets. SBTs are one-of-a-kind and non-transferable, with zero monetary value and cannot be traded🔐 once issued. Also, NFTs can be bought and sold via NFT marketplaces, whereas SBTs are non-transferable NFTs because they’re bound to the Soul.
👻 SBTs: POTENTIAL USE CASES
At the time of writing, the concept of soulbound tokens and its use cases are still being researched.According to the white paper, SBTs could help propel web3 forward by lessening the dependence on centralized structures in web2, such as custodial wallets managed by centralized exchanges.
SBTs also seek to move web3 away from the hyper-financialization of crypto and discourage the use of NFTs as status symbols. SBTs can also help navigate the trustless and largely pseudonymous nature of web3 by creating socially verifiable reputations.
Further examples of how SBTs can be used include:
- Managing medical records🏥📂
- Storing digital ID cards or memberships
- Certifying achievements🏅 (e.g. job history, skills acquired, certification or education)
- Verifying attendance to an event🎟️, similar to a Proof of Attendance Protocol
- Allowing people to build verifiable, digital reputations based on past actions, such as their DeFi borrowing history and traditional credit reports
- Introducing reputation-based voting🗳️ for decentralized autonomous organization (DAO) governance models
- Using social recovery🔎 to gain access to an individual’s lost private keys🔑
- Digital web3 artists🎨 can verify their identity and the authenticity of their NFT collection
In June 2023, Azuki held a party for its NFT holders to celebrate the release of its Elementals drop. Azuki and BEANZ NFT holders received a special airdrop of SBTs to commemorate their time in the Garden (an exclusive metaverse area for Azuki holders).
🔮 SOULBOUND TOKENS: FUTURE OUTLOOK
Soulbound tokens have the potential to be a strong foundation for a decentralized society in web3, emphasizing human relationships and social interactions🤝. They can establish reputation and provenance, addressing trust issues. SBTs are also non-transferable🚫💫, reducing the risk of manipulating the ecosystem through status purchases or false achievements. Privacy and coexistence with NFTs remain challenges, but SBTs could serve as alternative identity control for DAOs. The future of SBTs is yet to be fully explored and implemented, but they hold promise for a decentralized world🌐.
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The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website's content as such. Bloom does not recommend that any cryptocurrency or NFTs should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.