“Marks of shame” and other use cases for soulbound NFTs
Singapore High Court has authorized sending out soulbound NFTs to market wallets associated with a hack. Using soulbound tokens as a mark of wrongdoing is an exciting use case — but there are others.
Soulbound tokens 101
A soulbound token (SBT) is a token that is forever linked to one wallet. Once it’s minted to an address, you can’t transfer it to another wallet or sell it on a marketplace. Usually SBTs are NFTs, though they don’t have to be.
On the level of Solidity code, a soulbound token can be created overriding the function _beforeTokenTransfer. It’s possible to give the owner the power to burn an SBT, though.
Vitalik Buterin was the first to propose SBTs in January 2022, drawing inspiration from the game World of Warcraft where the most valuable artifacts are soulbound.
In this post, we’d like to talk about some unexpected applications for SBT NFTs: from ways to celebrate a person’s achievements to making life more difficult for criminals.
SBTs as red flags: you can’t freeze a wallet, but you can mark it forever
In ancient Rome, runaway slaves and gladiators were branded with a hot iron on their forehead. In England, branding using tattoos was a legal form of punishment until 1879, with a whole system of codes: “T” for “thief”, “M” for “manslaughter”, and so on.
Soulbound tokens could become the Web3 form of branding — and we’ve just seen the first case of such use.
iSanctuary (Intelligent Sanctuary) is a company that helps track, freeze, and recover stolen blockchain assets. It was approached by an entrepreneur who had had $3 million in crypto stolen. iSanctuary’s experts located most of the funds, spread across a number of wallets, and even identified several suspects.
The company presented the evidence to Singapore High Court, which issued a worldwide injunction order and agreed to iSanctuary’s request to use NFTs as a way to deliver it.
Indeed, how else do you deliver a court order to an anonymous owner of a blockchain wallet? By placing an asset in it that can hold the required information — an NFT. Together with Mintology — a provider of gasless NFT minting services — iSanctuary designed soulbound NFTs containing the court order and delivered them in the suspects’ wallets.
It’s not possible to freeze a non-custodial wallet — that’s the power of blockchain. But now everyone — including exchanges — will be able to see the NFTs and know that the account owner is a thief. (iSanctuary will also track any transactions by those accounts and try to recover the funds if they end up on a CEX.)
Using soulbound NFTs as red flags to mark malicious accounts seems like an exciting idea, but it can also backfire. A malicious agent could mint a bunch of such NFTs into bona fide addresses to create an impression that they are guilty of something.
If this use case is to become widespread, the industry needs to come up with a standard shared system for issuing such “red flags”. There should be a way for everyone to know that a “mark of shame” was issued by a bona fide institution or DAO and on serious grounds. We’ll also need some sort of a database of all such SBT NFTs, with info on why each of them was issued.
SBTs as a mark of recognition: real achievements can’t be traded
The 1980 Olympic champion in ice hockey Mark Wells sold his gold medal for $300k in 2010 to pay for his medical treatments related to a rare genetic disease. However, owning that medal didn’t make the buyer an Olympic champion, right? Mark Wells remained the holder of that achievement.
In Web3, though, achievements can become detached from their original holders if they are represented by NFTs. A good example is POAP (Proof of Attendance Protocol) allows users and companies to mint NFT badges marking specific events. For example, you can distribute such NFTs to the attendees of a conference, or to those Discord users who have unlocked a certain level. Adidas used POAP when it opened its first virtual location in the metaverse.
POAPs are regular transferable NFTs, however, not SBTs. This creates a lot of possibilities for POAP trading: say, if a conference badge gives you access to exclusive content that you don’t need, you can sell the NFT to someone who needs it. Or let’s say that a collector wants to own POAPs issued by various famous brands — but can’t be bothered to attend the required events.
This can erode the value of such NFT badges, though. An example: you are building an exclusive gaming club, and you want only top-tier gamers in it. You don’t want some random person to buy their way in.
Here’s where soulbound NFTs will come in handy. If you see some sort of a “gold medal” in a wallet, you will know that the person earned it, not bought it.
Soulbound NFTs for reputation and identity
Digital identity theft is a common crime in Web2: a hacker can get hold of your passwords. In Web3, we use Web3 domains (Unstoppable Domains, ENS etc.) as a form of identity, but they can be sold.
An SBT could serve as an inalienable proof of identity. It could be used by digital artists, influential personalities, celebrities etc. — for example, to prove that a certain action was indeed taken by them and not someone else. For instance, when buying an NFT artwork, you could check the address which minted it to verify that the artist’s SBT “signature” is there.
Soulbound NFTs as credit scores
Lending is one of the most popular DeFi services, but borrowers have to face overcollateralization: the required deposit can be as large as 150% of the loan. That’s because there are no credit histories: you can’t be sure that the borrower is trustworthy.
But what if there is a way to build a credit record for Web3 using SBTs? Users could get leveled-up SBTs after successfully repaying a number of loans. Upgradable soulbound NFTs would make it even easier, with new info added when loans are repaid.
The challenges of SBTs
Before you get too excited about soulbound NFTs, consider these challenges:
1) Risk of losing access to a wallet
What if you lose the seed phrase and thus the access to your SBT? All the achievements you’ve accumulated will be lost, including access to various member-only services.
2) Risk of hacks
Nobody can steal the SBT itself, as it can’t be transferred out of your wallet. But someone can get hold of your seed phrase and thus take control of the wallet itself — than undertake various actions using your identity.
3) Having to change wallets
If you discover your wallet has been compromised, you should move all the assets into a new one. But you can’t move an SBT.
Various solutions are being proposed, most hinging on some sort of a committee or DAO that you can apply to in order to recover the private keys to the wallet containing an SBT, or to mint a replacement one and burn the original one. All these tools have yet to be tested in real-life conditions, though.
Soulbound NFTs are an exciting field of experimentation, and we at XP.NETWORK are watching them with interest. SBTs can’t be bridged, since they can’t be moved — but who knows, perhaps multichain SBTs will become a reality soon.
We will report the new developments in this blog, so keep following XP.NETWORK!
