Is Ethereum’s Future Soulbound?

Unlocking NFT value by removing transferability?

In online gaming, one of the worst things that you can do to gain instant disrespect is called “twinking.” The idea is simple. Instead of paying your dues and “grinding” through the levels, you automatically get a high-quality item that gives you an instant boost.

This item is usually a hand-me-down from a more experienced player. To reduce the number of “twinks” in the game, world-of-warcraft (WoW) came up with an ingenious solution — soulbound items.

What is soulbound?

Soulbinding is a mechanism by which an item gets tied to a player “for life.” You can’t trade or send this item to another player. As such, it has been designed to reduce twinking. You can no longer hand down your leveled-up equipment to your friends and guildmates.

Ethereum co-founder, Vitalik Buterin, extended the same logic to NFTs. Why not have NFTs that are bound to a particular wallet for life? If you think about it, that’s a pretty genius concept. There are many things in life that you want to be unique and non-transferable. Here are some use-cases of Soulbound tokens (SBTs) that I can think of.

#1 Certification

For quite some time I have been a proponent of using NFTs for digital certification. I believe that non-fungibility is the perfect medium to represent certification. A class of NFTs called POAP or “proof of attendance protocol,” can be a great way to put ID cards, driver’s licenses, and even university degrees on-chain.

However, there is a major issue here.

NFTs are transferable. The ERC-721 and ERC-1155 token standards both have provisions to allow holders to transfer their NFTs to someone else. However, this can be a bit of a problem.

Imagine a job posting that requires the candidate to have a Ph.D. degree. A dishonest candidate goes to an NFT marketplace and sees someone auctioning their Cambridge Ph.D. as an NFT. So they buy the degree and use it to apply for the job.

Degrees and licenses are meaningless if anyone can just go online and buy them, right? They are supposed to show that you spent a certain amount of time perfecting a craft. Not that you have money lying around to randomly buy certificates.

SBT fixes this.

#2 DAO voting

DAOs or decentralized autonomous organizations will gain more traction in the near future. The idea is brilliant. Instead of depending on a centralized governance body, a DAO relies on a network of stakeholders voting for various proposals using a medium like a governance token. DAOs, as we know them today, have three weaknesses when it comes to governance:

• A whale can have multiple wallets and fix votes accordingly.
• Someone can use a flash loan to get a large number of tokens and influence voting (like BProtocol and MakerDAO).
• The majority of the voting power could be with folks who aren’t that interested in the protocol itself.

With SBT, it could be possible to make voting rights non-transferable, reducing the probability of a whale tampering via multiple wallets. Plus, making governance dependent on SBT instead of governance tokens removes the effects of flash loan tampering.

#3 Credit history

Despite numerous financial innovations like flash loans, the current Web3 ecosystem doesn’t have a good credit check mechanism for reliable undercollateralized loans. The reason for this is pretty simple. We don’t have reliable means to establish one’s reputation in web3.

With SBTs, we can represent a person’s identity and reputation in a pretty reliable way. As this thread by PastryEth points out, with SBTs, you can reliably prove your education credentials, work history, previous loans, and rental contracts, which could serve as a persistent record of credit-relevant history.

My thoughts on SBTs

One of the things I just love about working in crypto is the sheer amount of innovation happening all the time. It seems like we are continuously creating new problems and finding a million solutions for each. SBTs are the perfect solution in cases where we require a certain NFT to be non-transferable.

Along with the cases explained above, SBTs can help reduce twinking in crypto, as well. For example, imagine someone bought a bored ape for ~$10 million and then gifts it to a friend who has an average income. This friend can then use the ape to build up false social capital since people online will think he is well to do. Obviously, this may not sound like a big deal, but social capital is precious in a space where people tend to be anon.

Lately, we have talked a lot about creating NFTs with utility. But, looking at the space, it’s more about wealth-signaling or acquiring social capital (as mentioned above). With SBTs, it will be possible to create NFTs that are more substance than style.

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