What Are Soulbound Tokens (SBTs)? The Next Big Thing in Crypto?

Soulbound tokens (SBTs) are blockchain-based tokens that are non-transferable and can be publicly visible. Such tokens can represent credentials such as your educational certificate, birth certificate, and national identity. 

SBTs can also be affiliations, commitments, and memberships that serve as proof that you work or have worked with an organization or attended a conference. It is very much similar to your curriculum vitae (CV) where your experiences are documented.

Simply put, SBTs are a form of non-fungible tokens (NFTs) that cannot be sent to another user, hence the name “soul-bound.” All SBTs are stored in a wallet dubbed Soul.

In this SBT guide, you will learn: 

• What are Soulbound Tokens (SBTs) And How Do They Work?
• Difference Between SBTs and NFTs
• How to Invest in SBTs
• Are Soulbound Tokens the Next Big Thing?

What Are Soulbound Tokens (SBTs) and How Do They Work?

Soulbound tokens are non-transferable and publicly visible NFTs that represent credentials, commitments, and memberships unique to an individual user. 

The concept was first mentioned by Ethereum founder Vitalik Buterin on his website. There, he noted that the idea of SBTs sprung from the popular multiplayer online game, World of Warcraft. Within the game are soulbound items that are issued to players who have completed a particular task. While other items issued to the user can be sold in the gameverse, the soulbound items are unsellable.

Buterin, developing on that concept, co-authored a whitepaper with Glen Weyl and Puja Ohlhaver, explaining Soulbound tokens and their use cases.

SBTs were created to solve some real-world problems. The use cases behind the tokens constitute an ecosystem dubbed the Decentralized Society (DeSoc). Here are some key use cases the SBT concept was created for:

• Promotion of Scarcity, Authenticity, and Reputation

Soulbond tokens were designed in a way that allows users to trace an SBT to the Soul of its original issuer, similar to how public blockchain allows people to trace crypto transactions. Users can also identify the authenticity of the Soul, thereby making it easy for “deep fakes” to be readily identifiable.

This means that artists can build a reputation and intended scarcity for their artworks through their Souls. They get to issue the SBTs to the users themselves and can even choose to also issue another token that will serve as authentication for the issued tokens. This use case applies to services that involve scarcity, authenticity, and reputation.

• Facilitate Lending Services

There are currently provisions for cryptocurrency lending and borrowing services. Most of these services involve users locking a portion of their crypto holdings as collateral to facilitate a loan. Soulbound tokens seek to enable uncollateralized lending services for users.

When a user wants to initiate a crypto-based loan, Souls containing educational background, work history, and other relevant credentials can serve as proof of a valid history and reputation for the wallet owner. Soul owners can then stake the relevant reputation to secure a loan. 

When the user secures the loan, the lending firm can issue a soulbound token representing the exact loan agreed upon, into the Soul of the user. This serves as proof that the user has initiated a loan service and is still indebted to the firm. When the loan has been fully repaid, the SBT representing the loan can be burned or the company can issue another SBT to show that the loan payment has been completed.

With this process, no user can transfer the loan SBT as a way of hiding or escaping from the existing debt. Also, any user who tries to ditch the Soul containing the debt to create a new one will lack the needed soulbound tokens to stake their reputation elsewhere, as their relevant credentials are in the indebted wallet.

• Wallet Recovery

Knowing that very important credentials will be stored in an individual Soul, it is crucial that the wallet remains safe and easily recoverable by the owner. Buterin introduced the idea of a social recovery wallet in a January 2021 report.

Social recovery entails that a wallet owner ties in three or more guardians, where a majority of guardians are required to approve a transaction. With this feature, the content of a wallet can be accessed in a case where the original wallet holder loses his device or access to the wallet, or in the eventuality of death.

It is ideal that the guardians do not know each other’s identities, but transaction approvals can be carried out by an agreed procedure. The wallet owner has the ability to change or remove a guardian at any time. However, a guardian change takes one to three days to be activated.

Applying the principle behind social recovery to SBTs, Buterin and his partners noted that Soul owners can have guardians from off-chain relationships – those with an employer, club, college – and on-chain relationships – those acquired in decentralized autonomous organizations (DAOs). 

With the provision of these guardians, the Soul holder can easily have access to the tokens stored in the wallet.

• Souldrops

Airdrop is a common event in crypto and it involves distributing free digital assets to users who meet certain criteria. For instance, some projects require users to have a specific amount of crypto to qualify while others expect users to have spent up to a particular amount on digital assets.

In the two examples above, the Matthew effect is encouraged. The Matthew effect is a process where people with economic advantage keep amassing more wealth as a result of their existing advantage.

Soulbound tokens sought to solve the problem with the introduction of Souldrops. Souldrops are simple airdrops issued to Souls as a result of the existing SBTs within them.

To illustrate this, imagine a protocol whose aim is to build houses. The project can airdrop its tokens to Souls that have specific types of SBTs such as architectural-related SBTs, civil engineering tokens, and possibly other tokens that prove that a Soul holder has some experience in the mission of the protocol.

• Establishment of Sybil-resistant DAOs

A decentralized autonomous organization (DAO) serves as a platform that enables users working towards a particular goal to achieve their aim without a central authority. Community members vote on decisions that affect the ecosystem through a governance process that requires users to hold a special token that gives them voting rights. 

This process, however, is susceptible to a Sybil attack,  an occurrence that allows a user or a small group of users to create multiple accounts so as to dominate a network. With the Sybil attacks, the result of votes carried out in a DAO can be manipulated in favor of the bad actor(s) conducting the attack.

With soulbound tokens, Sybil attacks can be mitigated in various ways. One way involves the issuance of more voting power to Souls with significant credentials such as certifications, work documents, or licenses. Another method involves the issuance of “proof-of-personhood” SBTs.

Sybil attacks on the voting process can also be reduced when correlations between the tokens held in various Souls are verified. This entails that when a number of Souls all share the same type of SBTs, it is likely to be a Sybil attack. Even if it is not, the voting power of such Souls is reduced. Souls with diversely different tokens will be more advantaged with voting power.

Difference Between SBTs and NFTs

While soulbound tokens and non-fungible tokens are both blockchain-based, they have their differences. Here are some key differences between SBTs and NFTs:

SBTs are:

• Non-transferable from one user to another.
• Stored in a wallet dubbed Soul.
• Publicly visible to anyone, but cannot be tampered with.

While NFTs are:

• Non-interchangeable, but can be sold and sent from one user to another.
• Stored in any crypto-based wallet that supports NFTs

Advantages of SBTs

Considering the use cases of SBTs, we can see that they have the following advantages:

• They enable all users to have equal opportunities, removing the dominating power of the rich.
• They facilitate uncollateralized loans, making it easier for users to secure funds for their ventures.
• They prevent Sybil attacks, enabling users with diverse tokens to have more voting power in DAOs.
• They allow anyone to validate the authenticity of tokens by tracing the source.
• They allow users to have all their valuable credentials stored in one location for easy accessibility. 

How to Invest in SBTs

The concept of SBTs is still new, however, there are ways you can invest in SBTs and be a step ahead in the global crypto market. We find the following moves helpful:

• Back SBT-related startups

A key way to invest in any concept is to invest in a startup that is building towards that same goal. As the adoption of SBTs increases, search for startup companies that are developing products that bolster the use of Souls. 

You may invest in such companies by buying shares or participating in funding rounds, giving you a stake in the firm. You may also choose to partner with the firm in an effort to promote the adoption of the SBT concept..

• Integrate SBT-Related Infrastructure (Within Your Business When It Launches)

You can set up a company that supports the use of soulbound tokens, either as a requirement for employment, or serve as an institute that issues tokens to workers and customers. 

If you have an existing business, you can choose to establish a unit that facilitates the adoption of SBTs. This could involve setting up structures that enable users to verify themselves via SBTs. Souldrops can also be conducted to bolster the use of Souls.

Are Soulbound Tokens the Next Big Thing in Crypto?

As SBTs are in their early stages, no definite answer can be given to the question.

Notwithstanding, existing blockchain concepts, such as decentralized finance (DeFi), NFTs, play-to-earn, and move-to-earn, all started in a small way, but they have garnered a massive adoption today. If soulbound tokens follow the same pattern, they could become the next big thing in the crypto space.