Soulbound Tokens (SBT) in Web3
Are they really the key to a Decentralized Society?
“Right now, almost all the things that happen in the Web3 ecosystem are purely financial objects: They’re transferable and saleable wrappers, like wallets of transferable saleable assets, like tokens and currencies, there’s no actual such a thing as a person. All there is, is a financial holding account”
— Glen Weyl, Founder of RadicalxChange
Ironically, there is no way to objectively prove one’s identity in the Web3 space as of today, which is why people are relying on centralized authorities in Web2 such as LinkedIn and Twitter to verify their identity. The road to Web3 has reached stalemate, and we are currently stuck somewhere between the two Web phases. This is why on May 11th, Co-Founder of Ethereum Vitalik Buterin, Economist Glen Weyl, and Flashbot Researcher Puja Ohlhaver published a paper (Decentralized Society: Finding Web3’s Soul), introducing a standardized system for personal identification in the Web3 space: Soulbound Tokens (SBT).
Soulbound Tokens?
Soulbound Tokens are publicly visible, non-transferable tokens, which can be issued to wallets that are called Souls. Once issued, the tokens are bound to the “Soul”, thus enabling personal identification that was not possible in the past only with NFTs. It may look small, but the “non-transferable” attribute opens a whole new possibility towards a true Decentralized Society (DeSoc). SBTs can be used to prove affiliations, qualifications, educational background, or maybe various rights such as voting rights, property rights, access rights, etc — the key point is that you can create your own on-chain Résumé to show who you are whether it may be something positive or negative.
Where can we use them?
DeFi would be one of the sectors where we may see the most usage cases of SBTs. For example, SBT will allow others to check your past financial history and credit score, thus allowing under-collateralized loans possible (Currently, loans on DeFi are mostly over-collateralized, so you cannot borrow more money than you already have). A community-based credit system will also be possible, in which people may lend/borrow with community-issued SBTs as collaterals. Thus, identification of a specific wallet or a Web3 account will open the door to numerous financial services that were not possible in the past and allow a real-world DeFi implementation.
Real Estate transactions via blockchain by verifying an individual’s credit or history will also be possible through SBTs. And the interesting part is that SBT will allow the subdivision of property rights — which opens new possibilities in the real estate sector. For example, renting an apartment normally gives the renter the right to use, but not the right to sell, destroy, or transfer the right. This kind of subdivision was not possible with NFTs, but with SBTs the owner is able allow the renter to use the land, but not sell or sublease it because the SBT acts as a proof.
DAO and governance tokens can be effectively operated with Soulbound Tokens according to Vitalik. Currently, there exists a problem of the centralization of power in DAOs. Because voting power is based on the number of tokens held, power is easily centralized, thus leading to many problems such as the recent Merit Circle DAO issue. However, if there is a governance model that uses SBT to identify active participants and give them the right to vote, a more efficient DAO would be possible.
Other cases might include preventing plagiarism by issuing an NFT from your Soul or managing your medical record with a Medical Soul that holds your medical history.
Downsides?
Though Soulbound Tokens might seem like a stairway to a DeSoc, there are many questions that should be answered before being implemented to our society. One major problem would be privacy issues — SBTs are publicly visible, people might be discriminated by information containing their race, religion, gender, etc. So, privacy protection of individuals, and the problem of trust regarding the institutions that issues SBTs will be an important issue in the future.
Also, one person may have numerous Souls (Medical Soul, Education Soul, POAP, etc.) — there must be a way to bridge those to represent a person’s whole identity. And lastly, if an individual might lose their Soul for some reason, how would they recover it? — Vitalik proposed a social recovery model for this case, but implementation would be somewhat difficult at this stage.
So What?
SBT is still just a recently developed concept that could be a key to Web3 and a true Decentralized Society. There are still many problems that must be resolved to be fully implemented, but we must agree that it is truly a fascinating idea that could change our world. Glen Weyl predicts that SBTs will be available for early uses by the end of 2022, so let’s sit tight for now and see how it all turns out later this year.
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