Souls and soulbound tokens. No, you haven’t accidentally landed on r/Warhammer; these two co-opted gaming terms are part of a revolutionary concept in the nascent decentralized Web3 landscape.
Soulbound tokens are permanent, non-transferable NFTs (thankfully, we’ve eschewed the mouthful PNTNFTs). A Soul is the account or wallet of a user that can hold soulbound tokens. A Soul can be a person, institution, or any entity. While you can theoretically have as many Souls as crypto wallets, you can only hold a specific soulbound token in one Soul and it cannot be transferred to another Soul. The concept was first discussed in a paper by Vitalik Buterin (a creator of Ethereum), E. Glen Weyl, and Puja Ohlhaver.
Souls of the decentralized
A soulbound item in gaming is an item you can only get through completing a quest or defeating a monster. The item cannot be bought or sold, so you'll still need to tackle the mission no matter how much real or in-game money you spend. If you see a player with the item, it’s proof that they have completed the quest.
What are soulbound tokens?
Soulbound tokens are issued to a Soul (or wallet) and then they become non-transferable. Soulbound tokens can be proof or evidence of anything; attendance at university, medical records, a local Dungeons and Dragons membership, credit history, a badge that shows you won a hot sauce competition, voting rights in a DAO (Decentralized Autonomous Organization), an “I went to bitcoin2023, and all I got was this lousy SBT” proof-of-attendance token, decentralized KYC for an exchange, the list goes on and on.
What makes them proof is that they are non-transferable and revocable. If I hold an SBT that shows I graduated from a university, you can see the university in question issued it and that it hasn’t ever been traded, sold, or transferred to anyone else. If I do anything that would cause me to lose my degree, the university can revoke my token.
SBTs allow us to prove who we are without disclosing our identity or having a central authority vouch for us. And they have no significant financial value. The value they provide is proof of the Souls' history, relationships, or communities. We can use them to supply a valid and native decentralized Web3 identity. Individuals can even have multiple anonymous but verifiable identities known as Souls using SBTs.
You could have a credentials Soul that holds your education history, qualifications, employment history, and achievements that you could display to potential employers. You could also have an identity Soul that proves you are a verified human being. And an online Soul to showcase your digital identity as separate from your IRL identity. Rather than Soul=Human, it's Soul=Identity.
What are the use cases of soulbound tokens?
Souls and soulbound tokens have emerged in response to the over-financialization of Web3 by a handful of bad actors.The visionaries, Buterin, Weyl, and Ohlhaver, are attempting to move the focus from DeFi (Decentralized Finance) to DeSoc. DeSoc is the term they have coined for a decentralized society. This would be a richer (in non-economic ways!) society with less focus on the financial possibilities created by crypto.
Rather than merely focusing on financial opportunity, the concepts of Souls and soulbound tokens allow us to measure and show social value and trustworthiness. We’re going to explore some of the ways SBTs can be employed to create a more nuanced and valuable Web3 and DeSoc.
Introducing equity to credit scoring
One of the topics discussed in the Soulbound whitepaper is credit scoring. Currently, credit scoring is, at best, inefficient and, at worst, discriminating. Unless you incur a debt and then pay it back, your credit score won’t go up.
Many lower-income people can’t afford the added interest rates of repaying debts or having a credit card. Others simply fall behind under the weight of so many fiscal responsibilities. Years of paying rent or bills on time will usually do nothing to improve your credit score. This often leaves people unable to get a loan or apartment even though they've never been in debt.
And it'll shock no one to learn these credit scores often have a racial bias. Minorities are typically discriminated against and suffer from disproportionately low credit scores.
Vitalik Buterin and co. suggest having a history of payments and debts displayed through SBTs. When you incur a debt, you receive an SBT from the creditor. Once you pay, this token is revoked by the creditor and replaced with a new SBT that proves payment. You could also have SBTs that show a history of paying rent and utilities on time. Your borrowing history can be easily accessed by you, the owner of these non-transferable tokens.
You could show this credit Soul holding all your payment history as part of a loan or mortgage application. It could enable DeFi to offer uncollateralized lending, something that has proven difficult to offer within a decentralized pseudonymous society. The immutable records of your credit history could bring an element of trust to trustless interactions.
Social media and bot manipulation
If you followed the “Elon buying Twitter” saga, you’ll have seen discourse surrounding the number of bots on Twitter. While Twitter claims this to be around 5%, you only have to look at any social media platform to see the influence bots and farms have on these websites and society as a whole. While many platforms work hard to identify these bots using algorithms and analysts, they’re often one step behind the latest scam. A potential use for SBTs is to create a “human-only” social media platform.
While a user can create several Souls, only one can be tied to their IRL identity. This could be done using a passport or similarly-issued proof of identity. Projects are already working on using this concept of Proof-of-Humanity or Proof-of-Personhood for digital identity tokens.
By verifying that you hold evidence of your identity in your Soul (wallet), you can still have an anonymous profile or social identity verified as a human linked to your wallet. With one account per person, you could have a social media platform that eliminates bots. For some platforms, you could even require users to display their IRL identity to combat the harassment that occurs online.
Know Your Customer (KYC) requirements
While DeFi charges forward into the future of finance, regulatory bodies are trying to catch up. As governments enact legislation involving the centralization of stablecoins and Know Your Customer (KYC) credential requirements, users of crypto have concerns about their privacy and data. While KYC requirements may be here to stay, soulbound tokens offer a solution. Binance is set to lead the way with the unveiling of their first soulbound token, BAB.
The Binance Account Bond token is an SBT used for online verification that the account holder has passed Binance's KYC process. Users can display the BAB token in their wallets, and third parties can use it as part of their verification process. While the initial use case of the BAB token is to verify that they have undergone the Binance KYC process, it's likely the use cases will expand as identity verification tokens become more widespread in DeFi.
KYC tokens could be used to prevent bot access to financial services or to offer flash loans at a lower rate of collateral. Knowing that the user has passed a KYC check can introduce a higher level of trust into the DeFi landscape.
Meanwhile, the BAB token or other verification tokens would not display a user's personal data. All that third parties would see is that they have been verified. This offers privacy to individuals while still being able to confirm that they have passed identity checks.
Tickets and POAPs
Currently, NFTs (non-fungible tokens) are seeing significant adoption as both event tickets and POAPs. POAP stands for Proof of Attendance Protocol, and they are given out as NFTs to attendees at events. NFT tickets have become popular as they are not easily forged, and the proof of authenticity is stored on the blockchain. NFT issuers can receive royalties from any reselling of a ticket. They're also seen as digital art collectibles or memorabilia that can give you access to exclusive content or access to future events.
However, NFTs have limitations that could be solved by using soulbound tokens. As the tokens are non-transferable, this could stop ticket scalping and the resale of tickets at extortionate prices. Also, as POAP tokens and tickets can be transferred, simply holding one doesn’t prove that you attended an event. Holders can resell them to people who can then claim they attended the event and receive any associated benefits. Making POAPs non-transferable would prove that any token holder participated in the event.
Event organizers can then issue Souldrops to every SBT holder for future events or exclusive content. Holders of SBTs from previous events could receive discounts for future events. SBTs could become a way to identify and connect with people who have similar interests in the community.
Cooperatives and shared assets
Soulbound tokens could help with the organizing and running of local cooperatives. These autonomous associations are ideally suited to adopt SBTs. Co-ops already function as democratic and somewhat decentralized organizations with common economic and social values. Memberships could be proven using an SBT, allowing holders of the SBT to participate in voting and governance.
For co-ops that run stores, holders of the co-op token can receive discounts in-store. Building associations already use a form of shared equity that can mesh well with tokenized real estate. Ownership of any assets held by the co-op can be managed by tokenizing the assets. Credit unions, another popular cooperative organization, can issue uncollateralized loans to members based on the financial history shown in their Soul wallets.
NFTs could be converted to soulbound tokens after a period to show verification within an online community. Users could receive an NFT as they sign up, showing their membership status. Over time, if their contributions are verified and valuable, the community could turn their token into an SBT that they could display. Platforms could automate this using smart contracts or by recording and analyzing users' activity to score their digital reputation.
This could be for social media—a period of engagement and activity that is distinguishable from bot activity could result in a user being verified on that social media platform. Or a history of providing useful answers on forum topics could result in becoming a top contributor with an SBT to prove it. Or, for wikis, a user whose contributions have been consistently approved by other members could earn an SBT for being a verified member without having to provide their personal details. These reputation tokens would have to be issued by the community or platform and only revocable by them.
Voting in many countries is still done using the traditional method of marking an X on a page and dropping it into a ballot box. The result is obtained by people counting boxes of ballots one by one. While this may seem inefficient, it has proven challenging to employ a fully electronic method of voting that reduces electoral fraud.
As a voting system becomes more complex, the opportunities for error and interference increase. There is also concern that the results could be manipulated by any government controlling the voting machines' software. Verifying that a voter is who they say they are is difficult and costly to do electronically. SBTs could offer a way to verify identities easily and adopt some of the voting mechanisms currently used by blockchains and DAOs.
Municipalities could issue their SBTs to individuals with a verified identity in their Souls. Individuals could only hold one voting SBT at a time, and if they moved, they would need to have their old SBT revoked before receiving a new one. These SBTs could function like governance tokens from a DAO. One SBT token would be equal to one vote. Only holders of the SBT could vote. For larger districts or countries, voting power could expand to any holders of municipality SBTs in that area.
Having an easily verified token would simplify the e-voting process. Voting could be done on-chain or off-chain depending on the preferred method for each area. On-chain voting would record the votes directly onto the blockchain (without disclosing the holder's identity), which could assuage any concerns of vote manipulation.
Early days for soulbound tokens
While soulbound tokens and DeSoc could improve many facets of our lives, it's important to note that the concept is still evolving. Even in the whitepaper, the authors note that SBTs can be misused, and there are kinks still to be worked out in their current form.
If tokens are non-transferable, this can cause issues with Souldrops or SBTs being issued to an unwilling recipient. If I send you a token saying that you owe me money and you can’t destroy the token by sending it to a burning wallet address, that could affect your credit score negatively with no recourse. However, if we make SBTs removable or hideable, this can mean that any company carrying out a credit assessment may not receive all the details of a customer's financial history.
For any identity verification SBT, we need to be sure it comes from an accepted organization. If I hold an SBT declaring I am the President of the United States, it should be pretty clear whether or not it’s been issued by the White House. However, for other organizations, it may be possible to forge an SBT that is harder to verify. This could be used to lie about credentials or manipulate credit scores.
One of the main caveats crypto users offer to newcomers is the importance of managing your keys and wallet. If you lose access to your digital wallet and keys, you can't just ring up your bank and have new keys sent out. Once your digital assets are inaccessible, they're gone forever.
If SBTs are adopted for identity verification, medical history, or academic credentials, we need a way to recover our keys in case of an emergency. However, this must be done without a centralized authority. Hence the common crypto adage “Not your keys, not your coins.” Handing over the details of your private wallet to a third party is a bit like reinventing the wheel—it's just new variations of the same old problems. We need a way to regain control of our wallets through a decentralized network.
For the significant adoption of SBTs and the radical transformation of our world into a more decentralized society, these wrinkles and many more will need to be ironed out. If done right, soulbound tokens could help create a fairer, privacy-focused society that is designed around people, not central authorities.