Basically everything in crypto has been tradable thus far. After monetary (fungible) tokens came NFTs, unlocking a market for unique, non-fungible online assets. But some things are not tradeable, yet still vital to a functioning (online) society. Anything that has to do with identity and reputation. Can those assets also go on-chain? Enter: Soulbound Tokens on Ethereum. Will this be the use case of the next bull market?
What is a Soulbound Token?
The Soulbound token (SBT), exists only on the drawing board and can be viewed as a type of NFT that cannot be traded. Why not? Because it is inextricably linked to a particular identity, or ‘Soul’. A white paper co-authored by Ethereum founder Vitalik Buterin introduces this new type of token.
Consider the following items, of which it would be nonsensical or even illegal to trade them:
- Your university degree
- Your driver’s license
- Your credit score
Collecting these personal credentials is valuable in real life, so these should also be valuable in a decentralized economy. But as mentioned, the fact that something has value doesn’t mean it should necessarily be tradable. Some things are bound to the ‘Soul’? What is the Soul? It is a wallet to which SBTs can be transferred that represent such non-tradable properties.
SBTs can be:
- issued to a wallet (Soul)
- made revocable by the issuer
- public or private
The creators of the concept believe that crypto needs these kinds of tokens to take a new leap forward. And there’s some merit to that idea. Bitcoin solved the double spend problem for online money. But it wasn’t designed to solve the problem of duplicating personal identity – by bots, for example.
What Inspired the Idea of Soulbound Tokens?
It is known that Vitalik Buterin, the founder of Ethereum, is not a big fan of NFTs as a speculative financial instrument. In his view, owning a pricey NFT doesn’t tell us much more about the owner than that he or she is wealthy.
Inspired by World of Warcraft (WoW), where players can win Soulbound items, Vitalik got to thinking. In WoW, killing a powerful monster is the trigger for getting a ‘Soulbound’ reward: it stays tied to you as the player. No other player, no matter how much money they have, can buy it from you. You killed that dragon and no one else. So while a traditional crypto wallet shows how much money you have, a Soul shows what you have achieved as a person.
Use Cases of Soulbound Tokens
In the white paper, the authors call this principle of non-transferability essential to building a Decentralized Society (DeSoc). A society where the achievements of individuals and the relationships between them are encoded on the blockchain through these Souls.
In the above diagram (thanks to Leo Glisic for the image), you see an example of the sort of tokens that go into a Soul. It also makes clear that a person can have more Souls. After all, they are wallets.
The top use cases listed by the authors of the whitepaper are:
- Establishing provenance (origin)
- Unlocking undercollateralized lending markets through reputation
Let’s discuss these.
Use Case 1: Establishing Provenance
Take the example of an artist who wants to combat deepfakes imitating his art. The artist has a large number of relevant SBTs in his Soul. He or she can mint NFTs from that Soul. The presence of the SBTs…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
