What is SoulBound Token (SBT)? How SoulBound Token works

What is SoulBound Token (SBT)?

SoulBound Token (SBT) is a concept describing a type of token that is a public non-transferable NFT tied to one wallet as its “Soul”. NFTs are unique but transferable, while SBTs are NFTs, but non-transferable.

Simply put, SoulBound Token represents the key to unlocking access to a group that needs members to prove their identity. A group can refer to a society, a channel, a government, and so on.

Each SBT-based group decides how to build governance models, which can be decentralized or centralized.

3 following authors coin the concept of SBT:

• Glen Weyl, the founder of Radicalxchange and a researcher at Microsoft, is the co-author of Decentralized Society: Finding Web3’s Soul.
• Puja Ohlhaver is the second author of the DeSoc concept. She is currently a builder at Flashbots.
• Vitalik Buterin, the founder of Ethereum, depicted the blockchain space with SBTs where participants have crypto wallets as Souls that can store SBTs corresponding to credentials, memberships, etc. Simply put, SBTs are similar to a Web3 CV for the holders.

How SoulBound Token works

In general, SoulBound Token’s working principle is similar to that of NFTs, except for the non-transferable feature. SBTs are unique and non-fungible.

Furthermore, they can carry credentials, memberships, certificates, affiliates, historical data, etc.

Each crypto wallet is described as a “Soul” where it can store SBTs. Soul wallets are responsible for verifying the data of SBTs before issuing them for storage since SBTs are non-transferable. SBTs come with the Soul forever.

SBTs are public on blockchains, so everyone can look them up for different purposes.

Furthermore, Vitalik Buretin also proposed a wallet recovery feature that recovers the lost Souls. If the consent is met, Soul recovery will be facilitated. Each Soul can select their close-knit Souls who can do the verification for the wallet recovery. They have access to the information of the soul wallet.

Limitations of SBTs

SBTs are public: As mentioned above, the notion of SBTs is similar to something of a Web3 CV working as proof of the owner's character. Some crypto wallets holding SBTs are potentially getting unwanted eyeballs only because of their reputation.

Therefore, Vitalik and other coauthors of SBTs consider adding more functionalities as options, such as SBT burning or SBT hiding.

The concept is socially unproven: SBTs are NFTs that are non-transferable, which might enhance governments’ control over the crypto space. Souls with higher credentials might gather together to form a “superior” group for good doings, but there is a concern that the group might steer toward anti-social behaviors. It is a double-edged sword.

Interoperability: Despite the effort and advantage, SoulBound Token is still a question mark for the community whether protocols accept its implementation. Crypto projects have concerns about the reliability of SBTs issued by third parties. To realize the vision of a DeSoc cited by Vitalik and his two colleagues, the adoption of SBTs must be wide enough, like NFTs.

SoulBound Token use cases

Identity

Identity will be one of the most notable use cases of SBTs. Each Soul (a crypto wallet) stores the holder's data, such as credentials, certificates, memberships, etc., in the form of SoulBound Tokens.

Digital identity is a big pie that allows governments or states to manage in seconds. For example, citizens in DeSoc are able to use their data to build a self-governance system.

NFT

After years of growth, NFTs have come to the stage where they are an indispensable part of the crypto world. Many NFT collections are worth millions of dollars, such as Bored Ape Yacht Club and CryptoPunks. However, many limitations and copycats still haunt NFT artists or even users. According to Vitalik Buretin, SBT is the solution since it is non-transferable, empowering the artists’ ownership.

Imagine an NFT artist releases his first collection to the market, and immediately an SBT is issued for him as proof of ownership. The artist can not send the SBT to other artists, and he can build a reputation around NFT collections.

DAO

A decentralized autonomous organization (DAO) is a blockchain-based social model that mobilizes the community power to sail the growth path. Despite decentralization, some DAOs have big whales who own the majority of governance tokens. This creates an asymmetric bias to the future growth of the protocol.

With SBTs, voting power is equally distributed. Each Soul wallet is able to cast a vote, which other Souls verify. In addition, SBTs are non-transferable, so it is almost impossible to accumulate voting power in a centralized entity.

Optimism, an Ethereum scaling Layer 2 solution, is one of the pioneering projects using SBTs by introducing the Optimism Collective. It rewards contributors for creating and sustaining goods. Each Optimism citizen is granted a SoulBound non-transferable token that grows over time as the Optimism ecosystem grows. Therefore, long-term citizenship comes with a lot of benefits from Optimism Collective.

Souldrops

Souldops are the exclusive airdrops that distribute to a specific group of people who own the SBTs representing their eligibilities. Imagine graduating with a university degree; each member in the Soul group also receives it. An airdrop can be easily conducted for all members who hold that degree in the form of SBTs.

Distributing airdrops for holders with specific amounts of SBTs is convenient for token issuers who want specialization.

Undercollaterized lending

Undercollaterized lending is still a big challenge for lending protocols in crypto. Lending protocols have to put lenders’ sake above all since they are loan owners. The collateral ratio (collateral/loan) is often more significant than 100%, meaning overcollateralized lending.

This principle secures the benefit of lenders because liquidation is triggered when the collateral declines to a value smaller than the loan.

Banks or lenders use credit scores in traditional finance to lend someone money. Despite that, a high level of bad debts still exists in banks, increasing inefficiencies.

With SBTs, undercollateralized lending is facilitated. SBTs represent the owner’s credentials and historical data. Lenders can be determined by looking at proof of identity given by SBTs. Therefore, a borrower can take a bigger loan with his collateral.

When will SoulBound Token be released?

Viltalik and the other two co-authors incubate the SBT concept for the vision of a decentralized society (DeSoc) in 2024. Therefore, it is expected to go mainstream by 2024.

At the moment, SBTs are only on paper, not available for usage. Before its launch, the concept of SBTs is amendable, and it is just the beginning of a new token concept.

According to an interview participated by Jason Levin and SBT’s co-author Glen Weyl, SBTs will be available for early users by the end of 2022. To solidify the vision, he also reckoned that the narrative would be vital for SBTs by 2024.

FAQs about Soulbound Token (SBT)

Will SBTs replace NFTs?

Many discussions that SBTs might potentially replace or outnumber the current roles of NFTs. Vitalik and other colleagues coined the term that serves different purposes.

NFTs are transferable, and the market determines their value. On the other hand, SBTs are non-transferable and represent owners.

Are SBTs permanent?

SoulBound Tokens are non-transferable once they are minted and stored in the crypto wallet called Soul. Holders can not transfer SBTs among Souls, but an ongoing proposal allows the owner to delete or hide SBTs.

SBTs are yet to be released at the time of writing, so it is hard to predict what SBTs will look like.

Conclusion

SoulBound Tokens are seeded by Vitalik and two other co-authors to realize a vision of a Decentralized Society (DeSoc) where citizens are equally granted rights.

Crypto wallets act as Souls, which contain SBTs representing various information, including personal data, credentials, etc. SBTs unlock many use cases that NFTs can not facilitate. To reiterate, SoulBound Tokens still have a long road ahead to mass adoption.

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