What’s a Soulbound token? A Missing Piece for DeFi Mass Adoption
Introduced in a whitepaper “Decentralized Society: Finding Web3’s Soul” just a few months ago by Vitalik Buterin, E. Glen Weyl and Puja Ohlhaver they’re already here!
Here’s how soulbound token works and a few projects implementing them.
Soulbound tokens (SBT) represent a person’s identity on-chain. SBTs are like NFTs, but they are non-transferable therefore ‘bound’ to your ‘soul’.
Soulbound token concept inspiration came from items received on World of Warcraft game. Users in the game can pick up an item that is then ‘bound’ to the character’s ‘soul’. They cannot be sold or traded.
Soulbound tokens can record your educational, employment, medical or even credit history. Or serve as proof of attendance certificate.
Lack of a native Web3 identity prevents DeFi reaching the real world economy, such as an apartment lease.
According to the paper authors, “perhaps the largest financial value built directly on reputation is credit and uncollateralized lending.” By aggregating all activity from off-chain assets and credentials (educational, work history etc.) together with a on-chain records SBTs can become a non-seizable reputational collateral.
“An ecosystem of SBTs could unlock a censorship-resistant, bottom-up alternative to top-down commercial and “social” credit systems.” — V. Buterin, E. Glen Weyl and Puja Ohlhaver
In short, Vitalik and his colleagues believe that soulbound tokens is a crucial missing piece to build a Decentralized Web3 Society.
You can learn more about SBTs by checking the original paper here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4105763
When soulbound tokens? NOW!
In an interview with Jason Levin, co-author predicted that SBTs will be available for early uses by the end of 2022.
And he was right!
While it’s still early days for SBTs, here are a few projects that are experimenting with SBTs.
Goldfinch —Uncollateralized Lending
Goldfinch brings real-world investment to DeFi with uncollateralized lending.
Instead of over-collateralization, borrowers show creditworthiness based on the collective assessment of other participants. Yields on USDC are around 17%.
Goldfinch protocol has three roles: Investors, Borrowers, and Auditors. Auditors vote to approve Borrowers. They are randomly selected to provide a human-level check guarding against fraudulent activity and earn rewards.
To avoid Sybil Attacks, all participants need to pass ‘Unique Entity Check.’ These are SBTs in form of non-transferrable NFT representing (KYC), Know-Your-Business (KYB), and/or U.S. Investor Accreditation verification on-chain.
There are currently 5 types of UIDs. Type 0 dedicated to non-US individuals, who can vote and supply capital, but Type 2 non-accredited US individual can vote, but cannot supply capital.
To receive a Unique Identity (UID), a user submits an Ethereum transaction that mints the UID, which is sent to their address.
The cool part of Goldfinch SBTs, is that they can be freely used by any other protocol, so no need to pass KYC all over again on other protocols.
Masa — Creating Holistic Financial Profile
Masa Soulbound Identity aims to power mainstream on-chain credit adoption for the next billion users.
It allows people to connect their traditional and cryptocurrency accounts — creating a decentralized credit report as a ‘soulbound’ NFT.
Masa connects your Metamask, crypto exchanges like Binance or crypto addresses to create a ‘holistic financial profile’.
In contrast to Goldfinch, Masa would enable uncollateralized borrowing for individuals on top of off-chain companies.
Proof of Humanity — The Internet Of Humans
Proof of Humanity is a system combining social verification with video submission in order to create a Sybil-proof list of humans. Basically your real world identity on-chain.
Every applicant must be vouched for by an already confirmed identity.
The protocol’s UBI token is given to all users successfully registered on PoH.
Use cases include insurance, credit scoring, quadratic funding, Sybil-resistant airdrops, and human DAOs or Universal Basic Income.
It would change DeFi DAO voting switching from 1-token, 1-vote to a one-person-one-vote DAO model.
The V1 Proof of Humanity doesn’t use SBTs, but soon-to-be-launched V2 will introduce Soulbound IDentity. Each unique ID will correspond to an address of the human. And if you lose your Ethereum address, you can apply with another address for the same ID.
Binance — Binance Account Bound Token
Binance recently launched Binance Account Bound (BAB) token, a soulbound token used as proof of identity for Binance KYCed users. Users can mint BAB tokens on BNB Chain and participate in building multiple projects and earn rewards.
The benefits of owning BAB token range from airdrops and VIP benefits to newly launched feature access across BNB ecosystem.
For example ApeSwap will create a claimable NFT that represents a raffle exclusively for BAB holders, Apollox will provide BAB holders a privileged reward program.
Nexus Mutual — Membership token
NXM is not strictly SBT, but it represents a tokenized membership on Nexus Mutual decentralized insurance protocol.
To become a member, users need to pass KYC, and only they can buy NXM. What’s more, the token cannot be traded on Uniswap or any other exchange.
NXM launched a few years ago, before soulbound token concept was introduced. For this reason I included it into one of the most innovative DeFi tokenomics list.
What’s next for soulbound tokens?
It’s still early days for SBTs, but some of the use-cases are already being put into practice. I’m excited to see more protocols emerging soon to build a Decentralized Web3 Society and will follow it closely.
Update: two Learn & Earn dApps use soulbound tokens to record activity credentials and rewards users. Check the thread on Twitter.
I will be adding more SBTs token to the database table at https://ignasdefi.notion.site/
Did I miss any SBT project?
In this case feel free to comment below!
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