Until now, Web3 has been a largely anonymous experience for its users. Primarily by design, privacy and decentralization have been part of its founding principles. However, the inability to identify individuals, their credentials, or known associations has limited commerce and effective governance. Soulbound tokens (SBTs) will help to overcome this lack of native web3 identity and offer a way to establish trustful relationships.
Soulbound tokens are issuable by any organization, including DAOs, educational institutions, DeFi companies, or employers. The SBTs can represent membership, certifications or degrees, or attendance to an event. And soulbound tokens can leverage these connections between people and other entities to provide a clearer view of distinct user identities and their origins.
SBTs transfer credibility from the issuing entity to the wallets or souls holding them. And the higher the quality of the issuing entity, the greater the reputation of the soul possessing a soulbound token. The individuality and reputation of distinct souls are further enhanced as more entities connect to a user. It is this constellation of connections that soulbound tokens leverage to assemble verifiable identities of souls.
These connections between established entities and SBT holders create an augmented sociality. They represent the building blocks for constructing the identity and reputation of Web3 users. And their public accessibility allows for greater transparency and awareness of those associations.
Self-certification is possible through affiliations, credentials, employment history, or personal creations represented by SBTs. A soul displaying these SBTs creates, in essence, a CV, or a digital resume for Web3.
More significant, however, is the impact of the attestations by the individuals or institutions presenting the SBTs. These endorsements are not only non-transferable, but they are also revokable. These terms create leverage over and accountability for the souls holding these SBTs. And this represents the social mesh that others may use to infuse their trust in specific souls.
With soulbound tokens aiding in identifying distinct users, several powerful use cases present themselves for Web3.
Reputations, Identities, & Brands
At the heart of soulbound tokens is the ability to create a verifiable identity or reputation in Web3. It is this capability that unlocks all other SBT use cases. Offering individuals, companies, and organizations a way to build trustful relationships extends from art and finance to education and governance.
Artists creating digital works and selling in NFT form have been at the heart of Web3’s birth and growth. However, second-hand buyers of that art still had to rely on centralized marketplaces to establish the legitimacy of such NFTs.While these platforms can offer some aid in determining the origin, if not the authenticity, of a work, fraud remains an issue.
Soulbound tokens offer collectors clear visibility of an NFT artwork’s source when minted through the Artist’s soul. Whether part of a collection or as a stand-alone item, the SBT offers proof of origin. Other information regarding the work, such as scarcity limits, can also be easily traceable through the soulbond token.
This element of provenance extends beyond art. Photos, videos, or informational citations requiring authentication of their source and author are possible via soulbound tokens. This digital validation roadmap will aid in the fight against disinformation and deepfake technology, which is currently on the rise.
Soulbound tokens, as a verification tool, represent a modern-day watermark from trusted sources. With the origin of a video clearly discernable through its soul, fact-checking is simplified, and credit for the author is easily satisfied.
Soul Lending
One of the driving forces behind the advent of soulbound tokens is DeFi lending. Web3’s anonymity places lenders in challenging positions. With borrowers unidentified, and credit checks impossible, DeFi lenders grant far less credit toward pledged collateral. Most crypto loan terms offer 50% or less loan-to-value (LTV) ratios, or just fifty cents on every dollar, given the added risk involved. And for borrowers, much smaller loans on crypto assets reduces their leverage and liquidity.
Soulbound tokens will offer DeFi lenders critical identifying information on potential borrowers. In addition to any outstanding loans a borrower may have open, previous lending activity and history might also be contained in SBTs. These features offer the type of repayment history found in credit bureau reports that traditional finance relies on but is absent in Web3.
Soulbound tokens can provide a clear lineage to communities, organizations, and even employers connected to a borrower’s soul. This network of trusted entities delivers information usable to determine creditworthiness or other facets of a distinct soul. And with more precise data on a borrower’s identity and history, lenders might offer more credit on collateral.
By enabling higher LTVs for collateralized loans, the DeFi companies of Web3 can increase overall liquidity for NFT investors. And for investors, increased liquidity and an ability to increase returns on investment will encourage growth in the market and fuel additional outside investment.
Certifications, Awards, and POAPs
Soulbound tokens will allow holders to demonstrate their achievements, certifications, and participation in the same way that POAP (Proof-of-Attendance Protocol) tokens already do. Unlike POAPs, however, SBTs are non-transferable and fully revocable.
SBTs create accountability and attestation between a soul and the community they interact with. The community or issuing organization can monitor compliance, membership, or other terms related to their tokens.
Third parties can use this information to determine the credibility and trustworthiness of a specific soul. Since accolades comprised of a soulbound token cannot move to other wallets, it conveys a degree of assurance that the holder is a known person. And by making the SBT revocable, the soul is bound to uphold any terms or conditions involved with its possession.
Souldrops
Like traditional airdrops, souldrops are tokens distributed to wallets to build or encourage community participation. The difference, however, is that souldrops are directed to recipients based on the SBTs already held in their souls. Using data to determine like-minded or interest-based users allows communities to target potential members instead of spraying tokens to the public at large.
The ability to target and reward specific community members involved with or contributing to a group can create more robust engagement from its membership. Instead of distributing tokens to anyone that presents their wallet address, projects can concentrate their marketing on souls that are more likely to remain engaged.
Analyzing the SBTs in a community member’s soul can offer insight into which souls are more likely to help build and remain involved in a community. These souls can then be engaged and incentivized directly by souldrops. This sort of targeted marketing is only possible with more definitive information about wallet holders than previously available.
Another benefit of targeting users through soul drops is an improved pool of souls involved in governance. Concentrating souldropped tokens and their associated voting rights to active and involved community members will reduce the number of speculative participants involved with decision-making.
Non-Transferable Rights and Services
The ability to identify and validate distinct entities with whom you’re about to conduct business has been almost entirely absent from Web3 until now. Companies offering services, event tickets, or rentals can use soulbound tokens to identify their customers and bind them to the terms and conditions of their transactions.
Conversely, soulbound tokens can aid buyers in validating services, tickets, and products purchased online. With the ability to discern the reputation and authenticity of sellers, purchasing decisions become less risky for both buyer and seller in Web3 transactions.
DAO of Souls
Distributed autonomous organizations (DAO) are communities built around common interests or purposes. While governed by their users, they are vulnerable to sybil attacks in which a single party acquires enough tokens to hold most of the group’s voting power.
Using soulbound tokens, a DAO could issue a Proof of Personhood to its members and deny voting rights to bots or non-approved wallets. Like souldrops, voting rights are distributed to those actively involved in a Web3 community. Likewise, voting power is denied to those simply speculating and not contributing meaningfully.
A distinct soul’s reputation, involvement, or associations can be used to designate governance powers and responsibilities through soulbound tokens. This alternative creates advantages over the one-token, one-vote scheme that has seen numerous communities overrun by anonymous and unscrupulous operators.
Just The Beginning
Souldrop tokens represent a critical evolution of NFT standards and functionality. Their adoption and use will allow Web3 to identify and qualify users without diminishing privacy or the decentralized nature of governance.
Soulbound tokens will also enable companies and communities to attract and reward engagement from a targetable audience. Trust and accountability can be discerned and leveraged by examining the constellation of connections within its users’ souls.
DeFi lenders will use soulbound tokens to identify and qualify borrowers, and to make stronger credit-risk decisions. This enhanced transparency will move DeFi lending toward a more fully collateralized model, with an opportunity to increase liquidity and rates of return for borrowers and investors. Bereft of distinct identities and traditional credit history reporting, credit decisions are based almost solely on using low loan-to-value ratios to mitigate risk.
Soulbound tokens have yet to be developed or implemented to any significant degree. Ternoa, however, has been deeply committed to the development of soulbound tokens since they were proposed by Ethereum co-founder Vitalik Buterin in early 2022. And the release of fully functional soulbound tokens on Ternoa has just shipped, making us one of the first to build SBTs using Substrate. 🎊
Soulbound tokens are a perfect accompaniment to the industry-leading cache of Ternoa’s Augmented NFT products. Ternoa is fostering the mass market adoption of NFTs across the digital development landscape. We stand ready to support creators, developers, and investors in building their products and solutions through our Augmented NFT products and blockchain services.
