What are Soulbound Tokens? How will SBTs Change Web3?

On January 26, 2022, Vitalik Buterin wrote the first paper on Soulbound Tokens.

I’d like to cover his thesis and then discuss how soulbound tokens will change our lives.

It’s actually that important.

One feature of World of Warcraft that is second nature to its players, but goes mostly undiscussed outside of gaming circles, is the concept of soulbound items. A soulbound item, once picked up, cannot be transferred or sold to another player.

Most very powerful items in the game are soulbound, and typically require completing a complicated quest or killing a very powerful monster, usually with the help of anywhere from four to thirty nine other players. Hence, in order to get your character anywhere close to having the best weapons and armor, you have no choice but to participate in killing some of these extremely difficult monsters yourself.

The purpose of the mechanic is fairly clear: it keeps the game challenging and interesting, by making sure that to get the best items you have to actually go and do the hard thing and figure out how to kill the dragon. You can’t just go kill boars ten hours a day for a year, get thousands of gold, and buy the epic magic armor from other players who killed the dragon for you.

Of course, the system is very imperfect: you could just pay a team of professionals to kill the dragon with you and let you collect the loot, or even outright buy a character on a secondary market, and do this all with out-of-game US dollars so you don’t even have to kill boars. But even still, it makes for a much better game than every item always having a price.

What if NFTs could be soulbound?

NFTs in their current form have many of the same properties as rare and epic items in a massively multiplayer online game. They have social signaling value: people who have them can show them off, and there’s more and more tools precisely to help users do that. Very recently, Twitter started rolling out an integration that allows users to show off their NFTs on their picture profile.

But what exactly are these NFTs signaling? Certainly, one part of the answer is some kind of skill in acquiring NFTs and knowing which NFTs to acquire. But because NFTs are tradeable items, another big part of the answer inevitably becomes that NFTs are about signaling wealth.

If someone shows you that they have an NFT that is obtainable by doing X, you can’t tell whether they did X themselves or whether they just paid someone else to do X. Some of the time this is not a problem: for an NFT supporting a charity, someone buying it off the secondary market is sacrificing their own funds for the cause and they are helping the charity by contributing to others’ incentive to buy the NFT, and so there is no reason to discriminate against them. And indeed, a lot of good can come from charity NFTs alone. But what if we want to create NFTs that are not just about who has the most money, and that actually try to signal something else?

Perhaps the best example of a project trying to do this is POAP, the “proof of attendance protocol”. POAP is a standard by which projects can send NFTs that represent the idea that the recipient personally participated in some event.

POAP has made the technical decision to not block transferability of the POAPs themselves. There are good reasons for this: users might have a good reason to want to migrate all their assets from one wallet to another (eg. for security), and the security of non-transferability implemented “naively” is not very strong anyway because users could just create a wrapper account that holds the NFT and then sell the ownership of that.

And indeed, there have been quite a few cases where POAPs have frequently been bought and sold when an economic rationale was there to do so. Adidas recently released a POAP for free to their fans that could give users priority access at a merchandise sale. What happened? Well, of course, many of the POAPs were quickly transferred to the highest bidder.

To solve this problem, the POAP team is suggesting that developers who care about non-transferability implement checks on their own: they could check on-chain if the current owner is the same address as the original owner, and they could add more sophisticated checks over time if deemed necessary. This is, for now, a more future-proof approach.

Perhaps the one NFT that is the most robustly non-transferable today is the proof-of-humanity attestation. Theoretically, anyone can create a proof-of-humanity profile with a smart contract account that has transferable ownership, and then sell that account. But the proof-of-humanity protocol has a revocation feature that allows the original owner to make a video asking for a profile to be removed, and a Kleros court decides whether or not the video was from the same person as the original creator. Once the profile is successfully removed, they can re-apply to make a new profile. Hence, if you buy someone else’s proof-of-humanity profile, your possession can be very quickly taken away from you, making transfers of ownership non-viable. Proof-of-humanity profiles are de-facto soulbound, and infrastructure built on top of them could allow for on-chain items in general to be soulbound to particular humans.

Can we limit transferability without going all the way and basing everything on proof of humanity? It becomes harder, but there are medium-strength approaches that are probably good enough for some use cases. Making an NFT bound to an ENS name is one simple option, if we assume that users care enough about their ENS names that they are not willing to transfer them. For now, what we’re likely to see is a spectrum of approaches to limit transferability, with different projects choosing different tradeoffs between security and convenience.

In essence, SBTs are non-transferable identity and reputation tokens. They allow individuals to verify all of their information — their education, work history, credit score, medical history, professional certifications, etc. — using blockchain technologies.

The idea is extremely divisive.

Some argue that SBTs are a more streamlined and trustworthy way of verifying information. Others compare it to China’s authoritarian social credit system. Which vision is more accurate? It’s not exactly easy to say. Here, we dive deep, covering everything you need to know about the tokens that could change your life.

What are Soulbound Tokens (SBTs)?

A non-fungible token (NFT) is a digital token of information (data) that lives on the blockchain. Every NFT has its own identification code and metadata, meaning that every NFT is unique and the data it contains cannot be falsified. Regular NFTs can be sold or given away for free. In other words, they aren’t tied to one specific person or organization.

Soulbound tokens are just permanent, non-transferable NFTs, meaning that they can’t be given away or taken from your private blockchain wallet.

The concept behind Soulbound Tokens seemingly comes from the game World of Warcraft (WoW) — which also inspired Buterin, who derived the name for his beloved Ethereum blockchain from the franchise. In WoW, “soulbound” is a property of an item that prevents it from being traded or mailed to another character. With this in mind, it’s easy to see where both the name and idea for SBTs come from.

Some SBTs may act like real-life achievement badges, similar to the badges you get in a video game when you complete a specific task or make it past a set milestone. However, instead of receiving a badge for defeating a foe or saving the princess (or prince!), you get an SBT for completing a degree, earning a professional certification, winning an award, and so on. Even if it’s for something as niche as being the world’s leading expert on kickball, your corresponding SBT would serve as a way of verifying that achievement to others.

But SBTs aren’t just about achievements. They can be tied to a myriad of other traits, features, and personal information. For example, an SBT could be used to verify your name, birthday, political affiliations, charitable giving, criminal record, medical history, nationality, religious upbringing, military history, and more. The possibilities are literally endless.

The thing to remember is this: Soulbound tokens are every bit of factual information about you broken down into individual NFTs and stored in your private blockchain wallet.

How do Soulbound Tokens work?

Yes, anyone can say they went to Harvard by marking it as their alma mater on Facebook. But with SBTs, Harvard’s “Soul” (aka their private wallet) would have to grant your “Soul” (aka your private wallet) an SBT of a diploma for you to be able to effectively make that claim. In this respect, SBTs can be distributed amongst members of a group or institution as proof of affiliation. This would make it next to impossible for people to claim false credentials.

Along these same lines, Buterin and his co-authors note that, since the tokens can’t be sold or transferred from one wallet to another, they could help “solve some of the problems ravaging decentralized finance, like scams and theft.” This is where they believe the true power of the mechanism lies, as NFT thefts are becoming increasingly commonplace.

Additionally, reputation plays a huge role in how much trust community members are willing to place in an NFT artist or project. We’ve seen this time and again, such as when the Azuki collection reached record-low floor prices after it was revealed that the creator had a history of abandoning projects. With SBTs, the Web3 community will be able to check for themselves if an individual can be trusted. Thus, people will be able to make more informed decisions regarding what projects deserve their support.

However, what happens when a person or organization sends your Soul an SBT that you don’t want? SBTs are permanent, so are you stuck with them forever?

Ideally, no. For the system to work effectively, the team stated that it must include features that let individuals hide an SBT from public view or destroy it. However, since the system doesn’t exist yet, the actual mechanics of this remains unclear.

What happens if you lose your Soul?

What happens if your Soul wallet is hacked? Or what if you lose the key to your Soul address? This is, unfortunately, a very valid concern.

As previously mentioned, thefts are rampant within the NFT community. So when it comes to SBTs, it’s vital to have proper safeguards or contingency plans in place to prevent bad actors from taking identity theft to a whole new level.

In answer to this problem, Buterin proposed a community-wide adoption of something known as the “social recovery model.” With social recovery, users can appoint a set of individuals or institutions as “guardians.” These guardians have the ability to access and change the private keys of a user’s wallet, should it get compromised. With this model, the authors note that recovering a Soul’s private keys would “require a member from a qualified majority of a (random subset of) Soul’s communities to consent.”

However, this doesn’t exactly solve the issues. For example, an individual would be hard-pressed to recover stolen SBTs if the people they appointed as guardians have passed away or if the relationships have broken down. What if a group of guardians decides to gang up on a person they had a falling out with? The results could be catastrophic.

Still, by granting a wider community the ability to assist in the recovery process, Buterin believes that SBTs will be at least a little more easily retrievable upon theft.

Soulbound token use cases

Currently, the potential applications for SBTs seem unlimited. While nearly anything could be conceptualized as an SBT (or as an NFT, for that matter), official documentation may very well be the first type of content turned Soulbound.

Proof education could quickly emerge as one of the most prominent use cases for SBTs. Businesses could take a peek into someone’s Soul Wallet to verify the graduating status of an applicant, or their various certifications. Perhaps even government-issued identification could live as an SBT. Imagine something like an immutable digital passport that officials can update as citizens travel and apply for visas.

Or maybe a secure virtual wallet containing your ID, credit score, and banking information that allows financial institutions to quickly transact with their customers. Even Binance, one of the most prominent Crypto Exchanges, announced plans to issue SBTs to users as forms of credentials going forward.

As previously mentioned, SBTs can be distributed amongst members of a group or institution as proof of affiliation. Of course, this likely won’t be a regular occurrence unless Buterin’s DeSoc comes to fruition. Similar to the reasons why Binance will use Know Your Customer (KYC) standards — designed to protect institutions against fraud, corruption, money laundering, etc. to issue SBTs — both companies and consumers may find it favorable to adopt SBTs for security purposes.

Yet, not all SBTs will carry financial or official connotations. SBTs might contain a holder’s medical history, information about their exclusive memberships, a log of their awards, and so on. But other tokens may not be so beneficial for holders, since even criminal history and negative credit score impactors could easily be applied to someone’s Soul Wallet through official channels.

Sure, use cases that concern identity can feel a bit dystopian. But in an age of deep fakes, social media reality distortion, and political distrust, the ability to easily and quickly verify the accuracy of information is becoming invaluable.

What are the drawbacks to SBTs?

In addition to the ability of SBTs to represent our personal info and make it difficult for scammers to impersonate us, these tokens have other utilities. They could be used for event ticketing, exclusive airdrops (also known as “Souldrops”), and other benefits aimed at members of a specific community.

In addition to representing our personal info and making it difficult for scammers to impersonate us, the tokens have other utilities. They could be used for event ticketing, exclusive airdrops (aka “Souldrops”), and for other benefits that are aimed at members of a specific community. For example, an organization could easily send reunion tickets to all alumni who graduated during a certain period.

Of course, the opposite is also true.

SBTs could be used by bad actors to identify, target, and harm members of specific communities. The potential when it comes to governing bodies is particularly alarming. For example, holders of a specific SBT could be denied entrance to facilities, denied medical care, refused travel permits, have their voting rights revoked, and more.

The authors acknowledge this dystopian potential in the paper, writing that a database of SBTs could provide a way to “automate red-lining of disfavored social groups or even target them for cyber or physical attack, enforce restrictive migration policies, or make predatory loans.”

This is one of the reasons why the authors note that users must have a way to discard or hide their SBTs if needed.

When will SBTs be available?

E. Glen Weyl, originally predicted that SBTs could become available by the end of 2022 in an interview with Jason Levin, a number of nascent projects using the technology have already popped up.

Of course, this is only for “early uses” – meaning there’s still a while before we see the DeSoc Buterin described in his paper. Getting there? It’s going to be a community-wide effort.