Most Web3 technologies focus on hyper-financialization and commoditization, but crypto thought leaders have their eyes set on a richer model built on social identity and communities. Soulbound Tokens (SBTs) could become the building blocks of these communities, providing a type of address that establishes provenance.
Let's take a closer look at how Soulbound Tokens work, their pros and cons, and when you can expect to get one.
Soulbound Tokens are non-transferable NFTs holding a person's identity, reputation, and other information that could be key to building tomorrow's decentralized societies.
What Are Soulbound Tokens (SBTs)?
Ethereum creator Vitalik Buterin introduced the concept of Soulbound Tokens in a whitepaper titled Decentralized Society: Finding Web3's Soul. Vitalik describes a non-transferable, non-fungible token (NFT) that holds a person's identity and reputation. The whitepaper refers to the wallets that hold and issue these SBTs as Souls.
In a blog post, Vitalik points out that many NFTs (e.g., Bored Apes or Cryptopunks) have become status symbols. Others, like the Proof of Attendance Protocol (POAP), show that a participant personally participated in an event. But unfortunately, the transferability of these NFTs makes them impossible to trust – a problem SBTs solve.
Vitalik believes that SBTs could become foundational to a larger vision for a decentralized society (DeSoc). While Web3 focuses on financial and transferable assets, mainstream economics relies on non-transferrable social relationships built on trust. SBTs would encode these relationships by tracking the commitments, credentials, and affiliations of Souls.
For example, most decentralized autonomous organizations (DAOs) provide votes based on the number of tokens a member holds. Instead, next-generation DAOs could issue SBTs that assign voting power based on a user's involvement with the community. Or, SBTs could provide a way to defend against digital plagiarism or deep fakes.
How Do Soulbound Tokens Work?
The Soulbound Token is a novel concept without formal specifications, but the whitepaper outlines some mechanics. In particular, SBTs are non-transferable, meaning they cannot be sent to another wallet. As a result, they have no inherent value. These characteristics set them apart from cryptocurrencies, NFTs, and other crypto assets.
Soulbound Tokens are issued by and held within wallets known as Souls. Any person, business, or organization can create Souls and issue SBTs. For example, a university might have a Soul and give SBTs to graduates. Or, government agencies may have different Souls that give SBTs representing a driver's license or passport.
There are many use cases for SBTs:
- Medical Records – Medical Souls could hold a person's medical records in a single location, making it much easier to switch providers or share information with different practices. Health and wellness devices could also share information.
- Borrowing & Lending – Banks could use revocable SBTs to represent loans and credit lines. After repayment, the tokens could be burned or replaced with proof of repayment, demonstrating the creditworthiness of the borrower.
- Digital Resume – SBTs containing education or workplace credentials could help employees demonstrate their expertise and employers verify information without having to call references or universities.
- Artists – Artists can use SBTs to stake their reputations for their works, deepening provenance and preventing plagiarism and other problems in the NFT ecosystem.
Soulbound Token Pros & Cons
Soulbound Tokens could help Web3 fulfill its dual goals of decentralizing financial transactions and social networks. With verifiably identities and memberships, it's much easier for spontaneous communities to emerge built on trust. And even the few use cases above demonstrate its potential real-world utility for verification and other purposes.
On a broader level, SBTs are necessary to merge physical and virtual worlds (e.g., the metaverse). Without “primitives” (e.g., primitive data types) representing human souls and the relationships they support, it's impossible to represent communities, families, churches, teams, democracy, and other social constructs in today's society.
Despite these unique benefits, Soulbound Tokens have become highly divisive in the crypto community. The concept is often compared to China's authoritarian social credit system that tracks each person's social and financial interactions to support lending and other decisions. In the wrong hands, SBTs could enable redlining and other problems to fester.
Souls and SBTs could also be subject to many of the same risks as NFTs and other tokens. While it’s not possible to transfer SBTs out of a wallet, you might lose access to the wallet and provide thieves with everything they need for identity theft. The SBT whitepaper suggests a “social recovery model” to recover lost wallets, but there are still potential risks.
The Bottom Line
While Soulbound Tokens could be available by the end of this year, it could be some time before DeSoc becomes a reality. That said, Binance recently launched its SBT called Binance Account Bound (BAB), featuring similar properties to the tokens the whitepaper describes. The exchange hopes to use BABs to airdrop NFTs, prevent bots, and more.
Fortunately, SBTs would not be subject to capital gains taxes, like cryptocurrencies and NFTs, since they are non-transferable.
If you buy or sell crypto assets, ZenLedger can help you aggregate transactions across wallets and exchanges, compute your capital gain or loss, and complete your taxes each year. You can even find ways to minimize your tax liabilities through tax-loss harvesting while accessing what you need to defend yourself in an audit.