What are soulbound tokens, and how do they work?

Vitalik has found this video game feature quite interesting to implement in the web3 ecosystem, which also proves several potential use cases in the real world. As such, he, with his other partners, has formulated the concept of Soulbound tokens, which are digital identity tokens representing an individual or entity. These tokens involve unique traits, characteristics, or background that makes up the person or the organization.

Through this article, let us learn more about Soulbound tokens, their potential use cases and how they may improve the web3 infrastructure to aid in establishing a decentralized society. This article includes the following:

• What are Soulbound tokens (SBTs)?
• History of Soulbound tokens
• Benefits of Soulbound tokens
• How do Soulbound tokens work?
• Use cases of Soulbound token
• How to recover your soul if lost?
• How can SBTs improve the present web3 ecosystem?
• Do any Soulbound tokens exists so far?
• Soulbound token development services offered by LeewayHertz

What are Soulbound tokens (SBTs)?

Soulbound tokens, or SBTs, are digital identity tokens representing a person or entity’s characteristics, features, traits and achievements. Built on blockchain technology, it takes NFTs applications to the next level.

NFTs are linked to a blockchain via their unique identification code, and they cannot be falsified or replicated but can be sold or transferred. However, when an NFT is minted to act as a Soulbound token, it can never be transferred from your Soul. In this instance, the Soul refers to your private wallet. SBTs aims to change the concept of NFTs into something beyond money and bragging rights to a one-of-a-kind and non-transferable token.

Soulbound tokens are, thus, non-transferrable NFTs that represent your identity. They are tied to a blockchain network, holding the unique identifying information of a person or entity, involving personal data and history, such as age, qualification, education, health records and work achievements.

How can individuals and entities utilize SBTs?

People can possess multiple Souls representing different aspects, traits and achievements of their lives. For instance, a person can have an “education Soul” for their educational background, a “medical Soul” for their health records or a “credential Soul” for their work history. Souls and SBTs enable people to develop a certifiable, digital web3 reputation based on past experiences and actions, increasing their credibility. In simple terms, SBTs are similar to our CVs, which are self-certified.

In the case of entities, Souls can represent entities allocating SBTs. In this scenario, SBTs held by one Soul can be attested or issued by other Souls, who act as counterparties to this relationship. These counterpart Souls can include companies, individuals or organizations. Companies, for instance, can be Souls that issue SBTs representing work experience to employees who possess their own Souls. The work experience SBT you received from the company can be added to your “Credential Soul,” where you also store your previous SBTs representing your educational qualifications and others. Similarly, an online club can leverage SBTs to verify its membership status.

History of Soulbound tokens

The idea of Soulbound tokens was first mentioned in January 2022 by Ethereum’s co-founder, Vitalik Buterin, in a blog post. In the post, he discussed about strong “Soulbound items” found in the popular fantasy game World of Warcraft, which have the unique trait of not being able to be sold or traded with another player once acquired. He said that “NFTs in their current form have many of the same properties as rare and epic items in a massively multiplayer online game.”

Later, in May 2022, Buterin and his companions, namely, E. Glen Weyl, an economist and social technologist and Puja Ohlhaver, a lawyer, developed the concept in a paper titled “Decentralized Society: Finding web3’s soul” into a more elaborated manner. The paper defined Soulbound tokens as digital non-transferrable tokens developed for social identity in a decentralized society. According to the paper, the Soulbound tokens represent “commitments, credentials, and affiliations.”

Benefits of using Soulbound tokens

• SBTs prove to be of great assistance in digital verification and documentation. As SBTs are bound to their Souls, they cannot be forged, guaranteeing the document’s authenticity.
• They can be helpful in the process of hiring the most qualified individual for a position.
• SBTs enable the creation of more reliable connections in decentralized power structures.
• SBTs can help prove one’s identity to access specific metaverse projects.
• The implementation of SBTs can greatly improve voting procedures in DAOs.
• SBTs enable decentralized lending platforms to offer unsecured loans.

How do Soulbound tokens work?

Although no formal Soulbound token specifications exist so far, the basic functioning of SBT can be outlined from the whitepaper published by Vitalik and his partners.

One of the core and unique features of SBTs is their non-transferability. Contrary to the present NFTs and token standards like the fungible ERC-20 or the non-fungible ERC-721, Soulbound tokens are not developed to have a market value and thus cannot be sold or transferred to another wallet. This is precisely because they are linked to the Souls. So, what exactly are “Souls”?

SBTs are issued by and stored within accounts called Souls. As Souls hold SBTs, they are utilized to establish provenance and reputation. As mentioned previously, Souls can represent individuals, organizations, companies or other entities. Notably, Souls are not expected to have a 1:1 representation of humans, which means that an individual can have multiple Souls in a decentralized society (DeSoc).

For example, an individual can possess several Souls representing their identity (holding a driver’s license or passport), credentials (stores educational and work background), medical records and so on.

Use cases of Soulbound token

Although the concept of SBTs has been formulated so far, and the development of Soulbound tokens is still in its infancy, it finds potential use cases in specific domains. Let us explore its practical applications in daily life.

Education history

One of the significant use cases of Soulbound tokens is issuing a person’s educational history. In a traditional learning system, when a student graduates, educational institutions issue a certificate that proves the completion of their courses. In the context of decentralized identity, the educational institution could be a Soul issuing the SBTs to its students, and the students themselves would be Souls on the receiving end. The SBT would contain a student’s credentials, authenticating their relevant qualifications and proving their university membership. SBTs can, thus, act as proof of attendance.

If SBTs replace traditional degree-issuing processes and proof of attendance in the upcoming years, it can ensure that no one forges their educational details and qualifications. Because SBTs are non-transferable and cannot be sold to others. Also, it can be issued only by training providers and universities.

Job applications

Similar to its use case in the educational industry, SBTs can be leveraged to store work history and professional certificates. Companies can issue their employees’ work experience, projects they have worked on, details of their achievements and other information in the form of SBTs, which the employees’ can later produce while hunting for other jobs or during interviews. In this case, SBTs will act as proof of skill certificates.

Health records

SBTs in the healthcare domain holds a person’s medical records. The primary benefit of introducing SBT for health records is that it can accelerate the process of switching doctors or healthcare providers. Theoretically, SBTs can replace the generally slow process of filling out paperwork, validating your medical history and the continuous task of approaching different people.

Other than the use cases mentioned earlier, SBTs have practical applications in the following:

• Driver’s licenses can be issued as Soulbound tokens on the chain.
• SBTs can be utilized to prove lending credit. For instance, it can be issued to represent a loan you took, and when the loan is paid off, the issuer can revoke the SBT to send you proof of payment SBT.
• SBTs can be leveraged as a digital CV in web3 platforms adding to your credibility in the DeFi space.

Now that we have seen the practical applications of Soulbound tokens in daily life let us look into SBT use cases in the web3 ecosystem.

NFT trading

SBTs can filter out bad apples who misuse the names of famous artists to sell NFT collections to unsuspecting buyers. So, how does this work? Legit NFT artists can tie SBT to their NFT collection and their Soul. NFT collectors can then compare the SBT of the NFT collection with that of the artist’s Soul. If the SBT matches, the buyers can purchase the NFT; if not, it can be confirmed as a counterfeit NFT. As such, SBTs help verify whether an NFT collection is legit.

Governance

DeFi protocols award early users with airdrop tokens for trusting and supporting the project. These tokens serve as voting rights. But, in the current scenario, any wealthy person or entity can buy these tokens from the early users, influencing voting rights without actually earning them. Often, people willing to spend a lot to buy governance rights often stand to benefit directly by influencing the vote. Giving non-transferrable Soulbound tokens to early users can ensure that the control stays in the hands of users who genuinely care about the protocol.

How to recover your Soul if lost?

One of the downsides of Soulbound tokens includes losing your Soul. There are chances of losing your keys to your Soul and losing the data or the SBT stored in such cases. However, Buterin has proposed a recovery solution to it.

SBTs enable a recovery method called “community recovery,” which is similar to social recovery. It is a robust method that ties a Soul’s recovery to its memberships across various communities, providing a broad range of real-time relationships for security. SBTs represent a person’s memberships in different communities, some of which may be off-chain, like membership in a club or church, while others may be on-chain, like participation in a DAO or protocol governance. In a community recovery model, recovering a Soul’s private keys would require consent from a qualified majority of the Soul’s communities.

In simple terms, members from the Souls communities can help you recover your keys.

How can SBTs improve the present web3 ecosystem?

Trust is a significant challenge impacting the web3 industry. How can you place your faith in someone’s reputation in a system that is meant to be trustless? For example, similar to traditional bank credit scores, SBTs could track users’ DeFi borrowing history and other metrics that determine their risk profile.

SBTs are another substitute that has been put out for voting in decentralized autonomous organizations (DAOs). DAOs could issue SBTs that assign voting power depending on members’ engagement with the community, as opposed to the existing governance model based on how many tokens a member possesses. This concept would provide the most devoted users with the best reputation and the greatest voting power.

SBTs have the potential to enhance DAO voting integrity by protecting against Sybil attacks, which pose a serious danger to the present DAO governance architecture, in addition to establishing a reputation-based voting mechanism.

In a Sybil attack, bad actors can manipulate voting proposals by purchasing a majority of governance tokens. The public and verifiable nature of SBTs could help prevent corruption and Sybil attacks in a DAO by allowing for the detection of bad actors who may try to manipulate voting proposals for their own benefit. This helps ensure that the project’s direction is determined by those with the most legitimate interests and not just by those with the most voting power.

Do any Soulbound tokens exists so far?

As of August 2022, SBTs are still in the conceptual stage. However, Glen Weyl, a co-author of the original SBT whitepaper, believes there will be early SBT use cases by the end of 2022.

Binance has become the pioneer in SBT deployment, where it launched its own SBT, called Binance Account Bound (BAB), on September 8th of 2022, which is the first SBT to be issued on the BNB Chain. BAB aims to address identity verification issues in web3 by serving as a digital verification tool for Binance users who have completed KYC. It is non-transferable and has no monetary value.

Soulbound token development services offered by LeewayHertz

With more than 15 years of professionalism in software, blockchain and web3 development, LeewayHertz is a reputable software development firm. Our developers have deep expertise and skills in various web3 development services, including token development services.

LeewayHertz offers a wide range of Soulbound token development services, including:

• Soulbound token development
• Soulbound token development consulting
• Soul-backed DAO development

Conclusion

Vitalik Buterin considers Soulbound tokens a building block to a decentralized society. By establishing digital identity and provenance, SBTs are proving beneficial in developing a DeSoc. While the concept of a decentralized society may seem abstract, its practical applications are still worth considering. SBTs, with their many use cases in web3, DeFi, and even daily life, is an emerging phenomenon that is likely to revolutionize the web3 ecosystem and elevate the concept of NFTs beyond owning pieces of art and bragging rights.

If you want to build a Soulbound token for your business entity, connect with our experts.