What Is A Soulbound Token (SBT)? The Future of Ethereum5 min read

Amidst the ongoing tragedy of the crypto market, Ethereum’s co-founder, Vitalik Buterin, seemingly has no worries. On May 11th, a black day in the crypto world, Buterin co-published a paper detailing his plans for Ethereum. The research paper introduced a relatively new concept that goes by the name Soulbound Token or SBT.

Buterin has a past of establishing innovative concepts in what’s now called the web3, as he was the first to implement smart contracts and dApps in blockchain technology. Rather than having only the financial aspect decentralized, the crypto community took a different path than intended by accessing a world of “decentralization.”

Nevertheless, it became clear that the decentralization web3 once promised is beginning to slowly fade. Most dApps, NFT marketplaces, and crypto exchanges based on Ethereum are now depending on the very same infrastructure that built web2, which defeats its purpose.

Therefore, the introduction of Souldbound tokens is a step forward in what Buterin calls “Decentralized Society” or DeSoc. It may not fully solve the current centralization issue found in blockchains. However, it aims to regenerate a level of trust and transparency that’s missing from the crypto community.

What Is A Soulbound Token (SBT)?

A Soulbound token (SBT), similar to an NFT, represents a unique digital asset. Although, unlike NFTs, they cannot be traded or sold. So, what is its purpose then? An SBT can be a form of commitment, credentials, or affiliations that encode a level of trust between two parties. The current DeFi system lacks such representation of the real economy and doesn’t support activities such as uncollateralized lending or simple contracts. With Soulbound tokens, that could all change.

We begin by explaining the primitives of DeSoc, centered around accounts (or wallets) holding non-transferable (initially public) “soulbound” tokens (SBTs) representing commitments, credentials, and affiliations. Such tokens would be like an extended resume, issued by other wallets that attest to these social relations.

“Decentralized Society: Finding Web3’s Soul” Buterin, Weyl, and Ohlhaver, p.1

An SBT will “forever” be stored in a publically visible wallet that Buterin calls a “Soul.” A Soul can be an organization or entity that vouches for the issue of SBTs to the intended parties. In return, this combines a level of social relationships that are built on reputations in the real economy with blockchain technology. With Soul wallets, users can attest that the credentials provided are accounted for and, therefore, can be trusted.

What Are The Use Cases of Soulbound Tokens?

As I mentioned previously, a Soulbound token aims to legitimize users’ reputations and bring back trust within the crypto community. It also provides an incentive to substitute the standard form of receiving credentials. As such, there are many use cases for Soulbound tokens that not only benefit the current blockchain ecosystem but will also enhance its infrastructure.

USE CASE 1: Receiving & Providing Credentials

Soulbound token

Since an SBT is nontransferable, it can be issued as a form of verification that implies the achievement of something. In particular, an SBT can be a scholar degree granted to graduates, a club membership, or a badge to a private conference.

In these scenarios, the organizations are the “Souls” issuing SBTs. However, an SBT can also be self-issued by individuals. For instance, it can be a person’s CV or an artist’s portfolio.

USE CASE 2: Bringing Back NFT Legitimacy

Soulbound token

The main issue that requires improvement in the crypto world is NFT platforms. Currently, the so-called “decentralized” NFT marketplaces rely on the same underpinnings as web2. As a result, platforms like OpenSea, tend to store user data on servers run by third-party organizations, dismissing the concept of decentralization.

To bring back NFT legitimacy, Buterin suggests artists build their reputations using SBTs. For example, an artist can issue an NFT from their Soul account. The more SBTs an artist carries in his Soul, the more buyers will recognize that Soul belongs to that artist. In return, buyers can fully confirm the NFT’s owner, which increases the legitimacy of NFT transactions.

USE CASE 3: Uncollateralized Loans

Soulbound token

In the real economy, uncollateralized loans depend on an individual’s creditworthiness. At times, judging whether a person deserves a loan based on their credit score may be discriminating. In most situations, uncollateralized loans are denied due to a person’s background or history. Therefore, Buterin hopes that SBTs will eliminate the vagueness and unfairness of the credit score infrastructure.

In the Decentralized Society, lenders can trust a person’s reputation by viewing their Soul, which will include their education credentials, work experience, and rental contracts. This alone can enable people to secure a loan based on a meaningful representation of them. A Soul will present a secured loan as an SBT, thereby acting as reputational collateral. It can then be revoked or replaced with proof of payment once the loan is repaid.

Final Thoughts

The concept of Decentralized Society (DeSoc) intends to take decentralization to the next level. This also means that Buterin’s vision for the future relies on blockchain technology to a great extent. However, at this point, I assume that people are aware of the consequences that follow the crypto community.

Nevertheless, the introduction of SBTs could be the next big thing. Additionally, it’s predicted that the concept will be launched by the end of 2022 and adopted for maximum use by 2024.