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What are Soulbound Tokens?

Non-fungible tokens, popularly known as NFTs, have been an internet rave since the fall of 2021. They are a type of blockchain asset that prescribes income-making opportunities where holders are allowed to prove ownership over an item, whether real or digital, written or unwritten.

What makes NFTs unique, however, is that they can’t be replicated since a code of ownership is assigned to each one, and in most cases, this ownership can be bought and sold. Over the past months, popular NFT projects like Bored Ape Yacht Club and CryptoPunks have been resold for thousands of dollars on digital marketplaces to the highest bidder.

But what if there was a particular kind of digital token that could not be bought or sold? Would such a new invention possibly create ample ground for NFTs to fare well, addressing their current limitations and extending to other decentralized structures? These digital tokens are known as soulbound tokens (SBT) and how they work.

What are Soulbound Tokens (SBT)?

Soulbound tokens (SBTs) are non-transferable digital tokens that represent social identity in a decentralized society. This might include medical records, work history and other types of information that constitute a person’s identity.

Wallets that serve as holders or issuers of these records are called “Souls.” A person can have more than a soul representing different parts of their identity, whether regarding work or medical assessment. Souls and SBTs allow people to build a verifiable, online Web3 presence gleaned from their past experiences.

The idea of SBTs was propagated by Vitalik Buterin and his colleagues in a May 2022 paper titled “Decentralized Society: Find Web 3’s Soul.” Its logic was an offshoot of a popular online game, “World of Warcraft,” that doesn’t allow users to transfer or sell soulbound items since they are eternally bound to the player’s soul once picked up.

SBTs go beyond NFT as a symbol of status and wealth. While NFTs represent assets and property, SBTs focus mostly on the user’s reputation, hold no financial value and cannot be transacted upon once issued to someone’s wallet.

Potential Use Cases of Soulbound Tokens

SBTs are fundamentally useful in our daily life since they focus on a person or entity’s reputation. Here are a few popular examples of potential use cases of SBTs.

1. Health Records: A SBT can aid the easy transfer of healthcare personnel or providers since it can hold a person’s medical records. This would eliminate the slow, if not overbearingly frustrating, process that affects the traditional system: filling of paper works and verification of medical history.

2. Education History: Graduates are oftentimes asked to provide transcripts or certificates to prove completion of the required courses or disciplines. A university can become a Soul that issues the SBTs while the students are designed to be Souls at the receiving end. Not only does the SBT store the student’s credentials but it also functions as proof of relevance as well as attendance.

3. Job Applications: SBTs allow job hunters to submit their work history and relevant certificates using digital tokens issued by prior companies and institutions, thereby serving as proof of skill certificates.

The Future of SBTs

According to the white paper, SBTs are foundational to the “transformative, pluralist future” of a decentralized society. Hypothetically, social interactions and human relationships are mitochondria of the Web3 identity.

Trust has always been a challenging issue for the Web3 community because a person’s reputation in the system is inherently designed to be trustless. Let’s say you want to lend money, SBTs in the fashion of traditional banks’ credit scores can fast-track a user’s DeFi borrowing history which lowers the risk scores.

SBTs are potential alternatives for the current governance model based on member’s wealth. On the contrary, decentralized autonomous organizations (DAOs)can issue SBTs that assign voting power with regards to the user’s interaction with the community. This improves not just the integrity of the DAO voting system but defends the system against Sybil attacks revered as the biggest threat to the governance model. Publically oriented and verifiable, SBTs can help to detect and swerve away bad actors entering the system.

There’s no doubt that SBTs have the potential for large-scale utility within the Web3 community and decentralized spaces. Just as Vitalik Buterin posited: “While transferable NFTs have their place and can be reliable on their own for supporting artists and charities, there is also a large and underexplored design space of what non-transferable NFTs could become.”

CrossFi is a cross-chain protocol that provides liquidity for Filecoin staking and rewards.

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