What are Soulbound Tokens?
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Soulbound Tokens (SBTs) are essentially web3 tokens awarded to people upon completing a particular task or reaching a certain achievement. This is akin to earning badges for reaching certain levels in a video game, or POAPs for attending IRL web3 events.

Thing is, SBTs aren’t just limited to trivial achievements or proof.

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💡 Soulbound Tokens can act as a record of legitimacy with important activities IRL, including your University Degree, Employment History, among others.

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SBTs reside in “Souls”, which are just your crypto wallets. They are non-transferable, preventing the trade of SBTs; thus also preserving the legitimacy of Soulbound tokens.

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But Why The Need For SBTs?

So, why the hassle of even creating Soulbound tokens in the first place? There are a couple of reasons highlighted in the whitepaper, so allow me to break down the two most pressing issues.

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The Heavily Web2 Reliant Web3

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The first problem is the obvious elephant in the room. We talk about the ease of crypto adoption, but yes, whilst using centralized exchanges like Binance and Coinbase. Metamask is much, much more complicated.

NFT traders talk about how JPEGs on the blockchain provide them with the freedom to draw, be creative and sell. Ignoring the fact that NFT marketplaces like OpenSea control the entire trade process. The amount of market share OS captures alone is frightening, almost comparable to a central authority.

And DAOs talk about decentralized governance - all the while relying on social networking systems like Discord and Telegram to facilitate discussions, web2 applications no doubt. SBTs aim to make web3 less reliant on web2. Whether it can actually do so is yet to be proven.

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Web3 Undercollateralized Lending

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Upon the creation of an anonymous, decentralized system; the prevalence and widespread of scams would be expected. So, who would be stupid enough to lend funds in the web3 space, even more so, without collateral? SBTs are a viable solution to this conflict.

By creating a community-verified social identity for different “souls”, trusted wallets can participate in the undercollateralized lending space, bringing the level of trust to the next level. Of course, as with all things that involve the human element, nothing is 100% “safe”. However, SBTs have a good chance of minimizing the risk of lending, whilst venturing into this lucrative trade.

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Souldrops and How Soulbound Tokens Work

Since Soulbound Tokens are non-transferrable, how do they come into existence? One way to understand it is like minting an NFT. Another is that SBTs are airdropped (or Souldropped) to wallets, very much like how POAPs work. Upon entering a “Soul”, SBTs become part of your identity. These are visible to the public, and verifiable by the organization that initiated the Souldrop, meaning that SBTs make up your profile.

In this sense, creatives can attain SBTs for a piece of stunning work they’ve done, experts can be officially legitimized with SBTs, and POAPs can even be upgraded with SBTs. This essentially prevents scams and the hidden trade of buying and selling SBTs to fake legitimacy. Since SBTs are bonded to a Soul, forever, the idea is that forgery of certificates will not happen.

But wait, doesn’t this mean that malicious actors can plant SBTs in your “soul”, that you’d very like not to be affiliated with yourself… fret not! SBTs can be revoked as well - you still get to decide how you portray yourself to the world.

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Use Cases of Soulbound Tokens

As outlined in the whitepaper, Soulbound Tokens have a handful of use cases; around 8 for now. At the end of the day, SBTs help build what they call a Decentralized Society (DeSoc). Allow me to expound on this with 3 of the more striking use cases.

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A Decentralized Record & Proof

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Fakes exist. Tons of them. SBTs can act as proof and social records that help identify the legitimate, original creator of a piece of work. We can think of Souls as a means for creators to build up their reputations. By issuing SBTs whenever creating a tradeable NFT artwork, users can better link different NFTs to the same artist - allowing them to gain credibility and a certain reputation behind their work.

SBTs give us this “social provenance”, knowing where a piece of work originated, so any deep fakes will not pass as legitimate. Using the power of blockchain and SBTs, fakes can be completely eliminated with our contextual knowledge of both timing and social provenance.

Over time, this builds trust in a decentralized network of Souls, establishing a closely intertwined community - and is the first step towards a DeSoc.

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Lending

The typical person has to jump through many bureaucratic hoops to reach the ultimate goal of lending a sum of money. All this, IRL. Well, Soulbound tokens could make it easier for these individuals to obtain funding.

The traditional world of finance places a heavy emphasis on credit and lending. Home loans, car loans, school loans - all variations of loans are based on the likelihood of you paying them back, someday.

As such, TradFi tends to measure what is known as a credit score. This is both centralized and has many flaws - with minorities and the poor usually at the shorter end of the stick.

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While Soulbound tokens may not solve this problem completely, they can help some out of this situation. As mentioned earlier, SBTs become part of the Soul, meaning that their reputation can be verified by SBTs, such as employment and education history, technical qualifications and licenses, etc.

SBTs can be a way for Souls to connect with others, thereby forming decentralized social communities, where trust runs high. People can identify other individuals with relevant skill-set and talents which would be useful in a lending group, through SBTs. It is most likely that lending would take the form of “community loans”, P2P loans within a community through an open-source lending protocol. And if the person runs away with the loaned amount, perhaps credit providers can gain access to their “soul”/SBTs and extract value?

SBTs open the door to the countless opportunities in the lending domain, definitely an attractive proposition for forming a workable DeSoc.

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DAO Governance

DAOs, or decentralized autonomous organizations, form with a common purpose, working through the blockchain and deployment of smart contracts to execute “trustless” governance. But… are DAOs truly trustless, if bots can manipulate the results of a poll?

With the introduction of SBTs, souls with low to no SBTs who show unusual behavior in the space may be identified as bots. Or what I like to call “shell-souls”, wallets used to accumulate voting power with malicious intent. Those with more SBTs and greater reputation in the space, or who have more specific experience with the matter at hand can be granted more voting power, while those with little subject authority will have their voting power adjusted down.

Of course, this is also prone to manipulation from the get-go, so DAOs have to be transparent with their governance protocols.

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Soul Recovery

There have been too many instances of people being scammed in the web3 space. From newbies unknowingly sharing their private keys, to even the veterans slipping up with malicious smart contracts, nobody is safe from scams.

We always think it won’t happen to us… until it does. Luckily for me, it’s not happened yet - but I feel that the question is not a matter of if, but when. And the numbers are staggering. Chain Analysis reported a total of over $14 billion stolen in cryptocurrency in 2021 alone. Just imagine the figure we’ll face at the end of the year.

So in such cases, it may be better to find a cure first, and strive for prevention later. Soul Recovery using SBTs could be the first step to wallet recovery from scams, also known as soul recovery.

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Social Recovery & Community Recovery

The first step to soul recovery is social recovery. Social recovery refers to a mechanism of relying on a person’s closest and trusted relationships to recover a soul.

The gist of the works is that a person can appoint several “Guardians”, granting them the permission to change the keys of a wallet, by the will of the majority. These Guardians can be trusted friends IRL, organizations, etc. Of course, the flaw herein is the assumption that relationships won’t sour along the way. Guardians won’t die and communications between Soul & Guardian will stay strong and smooth; which is obviously unfeasible and unlikely.

Social Recovery is the first step to soul recovery, but because of it being taxing in nature and heavily reliant on IRL relationships with Guardians, ultimately not a viable solution.

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Community recovery is a promising solution that could enable soul recovery. Recalling that SBTs are basically proof of memberships to different IRL and on-chain organizations, a soul has its identity embedded in these various places.

As such, this widens the pool of people and groups to help recover a lost soul, and make sure that every facet of a person’s social network has a representation in soul recovery. After all, a person’s identity is shaped by those they associate with - community recovery allows representation of all aspects of the person in question.

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SBTs: Not A Dystopian Social Credit System

In the Whitepaper that inspired this article, the authors pointed out a rather dystopian side of SBTs - where social lending takes the form of a social credit system and enhances discrimination in the web3 credit industry as well.

This, as highlighted by other concerned readers too, draws similarities with the alleged CCP’s social credit system. Even worse, SBTs awarded which are “politically incorrect” can cause further segregation of communities in web3, leading to cyberattacks and possible intensification of hate crime. But even in the free and anonymous wild west, there are ways to circumvent this problem.

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One way is the ability to revoke SBTs. This means completely rejecting a certain SBT or hiding it from the public eye, not letting your personal beliefs interfere with the chances of yourself building credibility in the space.

Even then, with the risk of predatory “Souldrops”, I still strongly feel that the pros outweigh the cons. SBTs will bring about an experiment of social identity fully on web3, after all, what’s the worst that can happen?

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Wrap Up

Soulbound Tokens is simply a concept, an ambition, and a vision for the future. Yes, there’s only a whitepaper outlining how SBTs may work, some use cases, and the purpose of it all. As someone who prefers to stay anonymous, yet connect with a trusted community and hang out on web3, I’d say SBTs are certainly the future. And there we have it, another use case for NFTs and tokenized drops, SBTs!

That aside, we must be wary of the possible complications that will come with SBTs, and explore if this concept truly puts the issue of scams and hacks behind us.

Until then, stay safe, and keep learning about SBTs!