In May of 2022, Vitalik Buterin released a document outlining Soul Bound Tokens (SBTs) — a new type of token to be released at the end of 2022 on the Ethereum network, which would allow for a more personalized and social experience within the Ethereum ecosystem. For many, this led to confusion about what SBTs are, how exactly they will be implemented and used, and if they will improve the user experience within the blockchain ecosystem. In this article, SBTs will be explained along with their use cases and Buterin’s proposed Decentralized Society (DeSoc) will be examined to provide a better understanding of how this new technology will impact the blockchain ecosystem.
WHAT IS A SOUL?
To initially understand this technology, some of the terminologies must be understood. Souls are the term used to reference individual wallet addresses which participate within the ecosystem uniquely. There is no stipulation that one Soul is tied to a singular person in real life, or that a Soul cannot be sold or traded to another person; however, for the simplicity of explanation, consider that a Soul is an identity and the exceptions to this rule will be discussed in later parts of the article.
WHAT IS AN SBT?
By definition, an SBT is a publicly visible, non-transferable token which can be both self-issued or issued by a counterparty and has the ability to be revoked by such counterparty. Until now, all forms of value within a blockchain ecosystem have been transferable. NFTs and tokens are swapped constantly, and although they may reside in one wallet at any given time, there is nothing binding them to remain there. The main function of an SBT and its main value proposition lies in the bond that an SBT has to a given wallet. Since the SBT cannot be transferred, it serves as a social indicator of the Soul’s actions and would indicate what type of actor that Soul is. To provide more context, consider this comparison:
If a wallet has ETH in it, there is no telling what the ETH is for or if the Soul gained the ETH with malicious intent (for the most part). The Soul might exchange this ETH, use it for gas, purchase an NFT etc.
However, if a wallet holds an SBT, there is a clear indication of what the Soul did to gain the SBT and what the SBT signifies. The SBT could signify an outstanding debt which must be paid off, an apartment lease, a college diploma; any type of data which is specific to that Soul and can not be transferred with another one.
As alluded to before, the simplest form of SBT can be self-certified. This may take the form of a resume where personal information is shared on a public level and verifiably belongs to a certain Soul.
However, counterparty-certified SBTs are where the real value and functionality of SBTs can be realized. In Buterin’s paper, the example used was that of a loan whereby the actor providing the loan would issue an SBT to the Soul receiving it to publicly indicate that the receiving Soul is in a debt. Because this is a non-transferable token, the SBT will remain with the Soul until the loan is repaid at which point the actor who provided the loan may revoke the initial SBT and issue a new one, indicating the credit-worthiness of the Soul who was able to pay off a loan.
Through this example, it is easy to see how SBTs can demonstrate a personalized aspect of the blockchain ecosystem which is yet to exist. SBTs allow for the quantification of social nobility in avenues such as lending, DAO votes, and real-world events. In addition, SBTs can now verifiably ensure scarcity in sectors such as art and tokenized real-world assets; two use cases which will be discussed later.
WHAT IS DeSoc?
DeSoc is an ecosystem whereby each Soul has a culmination of SBTs which outline how they act within the network. Based on an SBT or the combination thereof, Soul’s can interact with each other or protocols on a more personalized basis. Personalized lending rates, voting power in DAOs and quadratic funding are all capabilities if DeSoc exists. Fundamentally, DeSoc would incentivize good stewardship within the blockchain ecosystem and disincentivize negative behavior (such as avoiding loan payments) as this would be publicly visible.
In addition, DeSoc would be able to create bridges between the real-world and the blockchain space as users can create a secure system through social attestments on the blockchain about real-world events.
APPLICATIONS OF SOUL BOUND TOKENS:
To truly understand the value proposition of SBTs, it is essential to understand the various applications which they can have within a blockchain ecosystem. In this section, many of the main applications published in Buterin’s article of SBTs will be discussed, providing more context to the way in which SBTs will integrate with the current blockchain landscape.
ART:
Currently, artists use very centralized platforms such as OpenSea to publish their NFTs to ensure scarcity and demonstrate provenance of the collection. However, SBTs would allow artists to self-issue NFTs, and verify that a piece is both in a collection and tied to the artist. Because SBTs cannot be transferred, it would be certain that the artist issued the NFT, and the further sale of such NFT could be referenced to the artist’s SBT showing that the piece is in fact original, and stems from the original creator. Although art, specifically NFTs, is used in this example, it is important to note that this ideology applies to all markets built upon scarcity as a form of value.
LENDING:
Throughout Buterin’s paper, lending may be the most discussed application of SBTs; specifically uncollateralized lending. This is for good reason as legacy financial markets have been able to offer uncollateralized lending services based on social criteria, which has not been available in the blockchain space.
To put this into a more palatable context, consider a credit card. You are able to spend money you do not actually have, with the assumption that you will pay it back at a later date. This transaction is able to occur because creditors use credit scores to determine the creditworthiness of a customer. If you have a very low credit score and credit history (along with other financial factors such as income etc.), you will likely have a lower credit limit with the lender if you have one at all. On the contrary, someone with an established credit score and history will be able to take out much larger loans as they are more likely to pay them back.
Now, how do SBTs bring this application to the blockchain? With an SBT, you are able to log the credit history of a Soul by issuing debt obligation SBTs as well as debt repayment SBTs, which would paint a picture of the credit history of a Soul. For instance, suppose a Soul has taken out and repaid five separate loans on different occasions, a decentralized lender would be more likely to give the Soul an uncollateralized loan as the Soul is likely to pay the lender back.
What if the Soul does not pay? Couldn’t they just run away with all the money? Because SBTs are non-transferable, there are two safety nets to this concern. Firstly, the SBT signifying a debt obligation would stay tied to the Soul and other decentralized lenders would not lend to this Soul any longer. As an extension, if a full DeSoc does come to fruition, many other services within the blockchain ecosystem may refuse service to a Soul with a bad SBT record. Secondly, loans would be given based on the record of SBTs, which means that one Soul could not simply transfer money to another fresh Soul and hope for the same lending opportunities. A reputation of the new Soul as a trustworthy borrower would need to be established before a decentralized lender would consider giving an uncollateralized loan.
Although uncollateralized loans are the main point of the discussion above, the same logic can be applied to discounts on interest rates, size of collateral required, and which tokens you may be able to borrow; all based on the record of SBTs a Soul has. SBTs have a profound application in the lending industry, and would allow the decentralized ecosystem of blockchain to allow for legacy banking services, which rely on trust and social nobility.
SOULDROPS:
Airdrops have been an essential part of many protocol releases and have allowed projects to easily distribute tokens to users. However, some of the drawbacks with airdrops are the ability for a single user to create multiple wallets to amalgamate tokens as well as the lack of criteria needed to receive an airdrop. However, with SoulDrops, tokens could be distributed to Souls who possess certain SBTs, signifying their engagement with a project. As well, this allows builders to do weighted drops based on the number or type of SBTs that each Soul holds; rewarding the most active members of a community.
Finally, SBTs would allow protocols to drop tokens as SBTs, which may later vest into transferable tokens after a certain amount of time or after certain actions are performed by the user.
DAO OF SOULS:
DAOs are notoriously vulnerable to sybil attacks, whereby one actor will influence the DAO through various wallets in a way that benefits them. However, the use of SBTs may solve this problem. Ultimately, DAOs want decisions to be made that are in the best interest of all members of the DAO; hence, it is in the best interest of the DAO to have votes which represent the widest array of opinions within the organization. Using SBTs, DAOs can weigh votes based on a Soul’s collection of SBTs, and they can use a correlation score between the SBTs of all voters to then apply a weighted vote; ensuring the most diverse opinion possible. This implementation of a correlation score would ensure that there is never a group of actors influencing the DAO, or a single user attempting to run a DAO from multiple Souls.
An additional application which is closely related to this is that of determining decentralization in a DAO or the network as a whole. Using SBTs to determine affiliations between Souls allows for the determination of how authentic an ecosystem is, and if it is truly decentralized. This determination can then be applied as needed.
PLURAL PROPERTY:
This section in Buterin’s deemed “plural property” may better be expressed as asset interaction between multiple actors. This is because the section does not necessarily discuss the partial ownership of an asset, but rather the different interactions that Souls might have with the same asset. The example of an apartment which is leased is very effective in illustrating this interaction:
When looking at an apartment lease, you have two main actors — the landlord, and the renter. The landlord owns the asset (apartment) and earns on it (via rent), while the renter gains the functionality of the asset (a place to live).
These are two very different interactions with the same asset so how would an SBT be able to express that? The answer would be through an SBT with permissioned access. In this example, the landlord would issue an SBT which specifies that a certain Soul is allowed to use the apartment that they own. There may also be another SBT which certifies that the landlord does indeed own the property, and has the right to collect rent or sell the apartment if they so wish. Another question that may be asked is; why can’t NFTs be used to do this instead of SBTs? When you are renting an apartment or conducting some sort of exchange, you do so with a certain person or corporate entity. If the permissioned access was transferable to a property, this would mean that the renter would be able to sell their lease to someone else; someone the landlord may not be willing to rent to. However, because it is done with an SBT, the agreement between the landlord and the tenant is exclusive, allowing for a singular exchange of value to occur.
PERMISSIONED ACCESS:
Permissioned access has a further use case than just the interaction with assets. Permissioned access can also be invoked as a way to control personal data on the blockchain. As we move to a more digital world, data is becoming a more valuable asset, and there is a value in protecting personal information which you may not want the whole world to know. Health documents, property titles, and legal documents may all be things that you would want to keep private. With SBTs, you are able to determine which data is accessible and which data is not. For example, if you were interacting with an exclusive art vendor on the blockchain and they wanted to see the rest of your art collection to ensure you are a serious collector, you could issue an SBT which grants the vendor access to only your art portfolio data. Although a simple example, it demonstrates how the user would have full autonomy over their own data, and how only the necessary data can be provided to people who may need it.
SOUL RECOVERY:
One aspect discussed in Buterin’s article was the notion of community wallet security. This is a system whereby a set of guardians are chosen by the user (people they would know in real life), and by majority. These guardians would be able to change the keys to a wallet if they were ever lost. This practice would deter the theft or transfer of a Soul, as the new user would need to maintain the relationships with the guardians in real life to ensure the stability of their keys. Although incredibly useful in theory, there are multiple pitfalls of this practice such as the unreliability of guardians, and the requirement of maintaining relationships with guardians. Nonetheless, the practice does allow the network to shift towards one of more social responsibility and genuine interaction.
PLURAL NETWORK GOODS:
SBTs by nature are used to show provenance. Because of this, data can be collected and can be determined “verifiably unique” based on the SBT portfolio of a Soul. Plural Network Goods refers to the practice of incentivizing the use of provenance-rich data in the construction of AI, the implementation of quadratic funding, and plural sensemaking — all of which rely on unique users.
CONSIDERATIONS
Although the technology of SBTs is undoubtedly promising and will change the way in which users interact within the blockchain ecosystem, there are some things to consider. Firstly, the privacy of the user is now a question. Too many SBTs may reveal too much information about a person, and data stored on-chain may be used for malicious intent. There are some solutions to this such as Zero-Knowledge Proofs, which would only partially reveal data; however, the large influx of personal data onto the blockchain will undoubtedly have social implications.
Additionally, SBTs allow for the easy identification of certain groups based on the combination of SBTs tied to their Souls. Although this may be a net positive as it would unify social groups, it would also identify them for malicious intent.
Finally, there is the question of how to successfully implement this system. Do the Souls supersede the SBTs? Will users still be able to participate in an ecosystem without the necessary SBTs, or will gaining SBTs become a requirement to effectively participate in a decentralized ecosystem? Only time will tell and in the months following the launch of SBTs, it will be very interesting to see not only how users react, but how protocols and dApps change their platforms (or don’t) to adapt to the new SBT token.
CONCLUSION
Technological growth is necessary to stay relevant and competitive, especially in an industry as fast-paced as blockchain. Introducing SBTs may be the step forward that the Ethereum network needs to start competing with legacy financial systems, and allow for more real-world functionality to take place on its network. Financially, SBTs open an incredible amount of doors and through the use cases discussed, present opportunities for new dApps to flourish within their ecosystem and for existing ones to optimize the way they function. SBTs also demonstrate a shift towards blockchain becoming a more social infrastructure, whereby a user’s actions and history play into their future interactions and opportunities within the ecosystem.
