Crypto Basics: What are Soulbound Tokens? SBT explained

What Are Soulbound Tokens (SBT)?

In May 2022, Ethereum co-founder Vitalik Buterin, along with lawyer Puja Ohlhaver, and economist and social technologist Eric Glen, proposed a new crypto concept called soulbound tokens (SBT) to address some of the shortcomings of non-fungible tokens (NFTs) and similar structures.

It was seen by some as an attempt to move forward from the conventionally understood model of transferable and financialised digital assets, exploring the social relationships of trust that are seen as crucial aspects of the new Web3 ecosystem.

In this Learn Crypto article, we look at:

  • Applying the concept of “soul” in the technological fabric of crypto in the context of Web 3
  • How soulbound tokens might support the idea of decentralised society
  • How soulbound tokens would work and some emerging case studies

What is a soulbound token? Injecting soul into crypto

The concept of soul might at first appear at odds with the highly technological and financial spheres of modern society. If anything, its rare depiction in these sectors have often been from a creatively negative viewpoint – think of dystopian futuristic societies where mechanical efficiency tech has displaced human fallibility.

So if the ‘soulbound token’ sounds rather strange in a crypto context, well, it is.

But strip away the metaphysics and soul really doesn’t stray far from the uniqueness and non-interchangeability of non-fungible tokens (NFTs). Fad or new digital frontier, we already understand how NFTs are simply blockchain-based digital assets that enable their holders to prove ownership over items in digital art, collectibles, crypto gaming, and the music industry. Just like a soul, each NFT is unique, and cannot be interchanged or replicated.

The stark difference with NFTs, though, is that NFT ownership can be transferred to another person. A soul, on the other hand, is fundamentally linked to a particular being, person, thing, idea. It cannot – and, arguably should not – be transferred over without the new owner assuming the entirety of the soul.

So what if there was a way to design a digital token that could be permanently tied to an individual and, additionally, couldn’t be sold or purchased? A non-transferable NFT in the sense of identity.

Because Web3 lacks primitives to represent such social identity, it has become fundamentally dependent on the very centralized Web2 structures it aims to transcend, replicating their limitations.
 – Buterin, Ohlhaver and Glen, May 2022

This is what Buterin et al thought of when they introduced the soulbound token concept in a paper on decentralised society finding Web3. They claimed that, until now, Web3 (a new internet enabled with and by crypto) was merely centred around transferable and financialized digital assets rather than on building social relationships of trust.

On to the definition of soulbound tokens.

Soulbound tokens or SBTs can be described as a novel type of blockchain-based protocol representing non-transferable commitments, credentials, and affiliations of token holders. The new concept is about enabling Web3 users to better verify one another and establish a strong link of trust.

The main difference between SBTs and NFTs, both representing and being unique tokens, lies in the transferability option. Thus, SBTs cannot be purchased, sold, or traded like NFTs. They might be used in situations where the token holder has to verify that he or she completed a particular task. For example, you might use them as proof of a college degree, or to show medical records, or to demonstrate that you work at a particular company.

Think of SBTs as a representation of social identity or a digital identity that contains the traits, features, and achievements that make up an individual or an entity. According to the authors of the concept paper believe that soulbound tokens are foundational and primitive building blocks of an emerging Web3-based trend also known as the Decentralised Society (DeSoc).

What’s this got to do with Web3?

We’ll be writing more about Web3 and why it’s significant in coming articles, but it might help to look at a brief history of the web for the purpose of soulbound tokens.

The evolution of the web started in 1989 when Tim Berners Lee, a software engineer at CERN, published a paper on a universal system for sharing information. From the blueprint came out the framework for the first creation of the world wide web, described present-day as Web 1.0. The second version, namely Web2, came along with giant tech companies such as Google, Apple, Facebook, and others who quickly understood that data was the new oil. The web’s second version was centred around a growing number of users, collecting and monetising user data.

According to Vitalik Buterin and other authors of the soulbound concept, Web3 shook the world by creating a parallel system of finance in less than a decade. Web3 emerged as a way to bring back power to the hands of the users after having to give away a portion of personal data in exchange for an improved customer experience. The reverse in the power dynamics came up shortly after regulators worldwide understood that collecting, using, and monetising data should be subjected to strict regulations.

Innovations such as smart contracts, proof-of-work, proof-of-stake, and public key cryptography all led to the creation of a transparent and open ecosystem for financial transactions. Blockchain technology aided tremendously in moving information away from centralised authorities and into the hands of individual users. In terms of data, blockchain provided a secure manner of storing data without the interference or supervision of a central authority.

Read about the dangers of centralised information and how blockchain helps to reverse the current power dynamics in this Learn Crypto article: “How Blockchain Takes Info Away from Centralised Authority”.

However, the current iteration of Web3 is primarily concerned with digital assets and finances that are transferable in their nature. Herein lies the point of connection between Web3, soulbound tokens, and the decentralised society.

As explained briefly by the authors, with the focus being solely on a novel financial system of transferable digital assets, we have forgotten that many conventional economic theories depend on social relationships that are built on trust and are non-transferable in their essence.

Hence, the authors propose the introduction of non-transferable tokens possessed by ‘souls’ as accounts that serve as means in Web3 to improve the encoding of social relationship networks and as building blocks of the new concept of DeSoc. 

What is Decentralised Society (DeSoc) and why is it important?

Establishing that Web3 is pretty much centred on finance and ownership, Decentralised Society or DeSoc is expected to soften this current hyper-financialised status, nudging it toward a more pluralistic and impactful future.

If built properly, it has the potential to set the stage for novel governance mechanisms and property rights that lie on trust and cooperation. The authors of the concept refer to DeSoc as the co-determined society where communities and souls convene bottom-up, as emergent properties of each other to produce plural network goods across divergent scales. They highlight the significance of plural network goods as the main feature of DeSoc. Networks are the main driver of economic progress, yet likely to be captured by private actors, such as in the case of Web2 tech giants or powerful governments.

Even on the centralisation/decentralisation coin, there are other obscured sides. While Web3 is mainly focused on the concept of DeFi, Buterin and others think that without DeSoc, the financial concept needs to build up on a trustless premise, which requires trust networks encoded by DeSoc to underpin real economic concepts and generate plural network goods that are resilient to extraction or capture.

The connection between DeSoc and SBTs can be seen in the authors’ vision of how SBTs work, and the notion that these tokens are building blocks of the DeSoc.

How do soulbound tokens work?

At the time of writing and to our knowledge (as of December 2022), no soulbound token exists. There appear to be plenty of testnets and trials, but it is still very much an idea being worked on.

Nevertheless, some mechanics have already been outlined. The most interesting feature of SBTs is their non-transferability. In contrast to most popular token standards such as fungible currency tokens like Ether (ETH) and NFTs, an SBT is not designed to have a particular monetary value as it cannot be transferred from one person to another.

Apart from the fact that SBTs are related to a non-transferable identity, these tokens would operate similarly to NFTs. Even Buterin refers to them as non-transferable NFTs since each SBT is distinct and non-fungible, namely unique.

Within the context of DeSoc, these tokens would be issued and kept within accounts also known as ‘souls’. Souls would be wallets that hold SBTs with the purpose to establish provenance. Establishing provenance refers to the activity of establishing the real origin of something. That is why they are being referred to as DeSoc’s building blocks; they provide a type of address that establishes provenance. Hence, these souls can be associated with persons or entities. In relation to individual persons, however, they don’t encompass a 1:1 representation. In other words, one person can have multiple souls within DeSoc.

The mere nature of SBTs is representative and descriptive since their utility comes from the manner in which these tokens are held in a soul wallet and relate to the formation of soul’s communities founded on verified commitments, credentials, and affiliations. Using blockchain technology, it is possible to publicly verify the SBT, the issuer and the address of the soul wallet. In this manner, anyone gets the opportunity to rapidly discover a soul’s trust circles.

As stated by Buterin and others, a person might have a soul wallet that stores SBTs representing educational credentials, hashes of their artwork, medical records, or employment history. In its most simple form, SBTs could be self-certified, similar to sharing information in our CVs. The true power of the whole idea behind SBTs lies in the mechanism that enables SBTs theld by one soul to be issued or attested by other souls.

Use cases of soulbound tokens

Still in their infancy, SBTs theoretically have unlimited use case possibilities in the sense that virtually anything is conceptually possible to present as a soulbound token. However, official documentation and all types of credentials are more likely to become the first content related to SBTs, along with government-issued certifications or business-related documents. This is t least the when looking at SBT trials that have already begun.

Here are just some possible uses for SBTs in the close future.

1. Identity verification

While strikingly similar to NFTs, SBTs’s most obvious use case would be to verify identity. This could prove useful in one of NFT’s most popular uses in art collectibles. Similar to a verified check mark, SBTs could be related to NFT collections to help others know which collections genuinely belong to a particular artist. Establishing an identity check could aid in preventing scams and fraud within the NFT community.

The same has been discussed by Buterin and others in their paper as a combo of art and souls. They talked about the possibility of creating an NFT from a soul. Thereby, an NFT could be recognized as a legitimate one. Further, the more SBTs the creator’s soul carries, it would be easier for market participants to identify the soul as belonging to a specific creator. In the long run it would make the NFT industry become more reliable.

The banking industry, which requires intense identity verification measures, has certainly found the technology to be attractive to its needs, with Japan’s Sumitomo Bank already trialling SBT for its verification purposes.

2. Proof of attendance

The non-transferable nature of SBTs could also ensure that only real attendees can hold tokens that represent proof of attendance. This feature could relate to anything that needs unique certification so it could be largely used for educational, employment, and business-related purposes. Additionally, medical souls could hold a person’s medical records in a single location, making it easier for holders to switch practices or share information with divergent physicians.

This would certainly build on existing Proof of Attendance Protocol use cases we’ve written about – the same protocol that Learn Crypto DAO will be using to reward its users.

3. Social credit system

The authors pointed out many flaws in current collateralised and uncollateralised lending within the area of traditional finance and Web3. The main problem is linked to the difficulty of scoring and demonstrating creditworthiness for an average person. The emergence of SBTs could resolve this matter by creating a form of social credit system in which holding educational credentials, employment-related documents, contracts, and other types of documentation could present a credit-related history.

4. Account recovery

This method of use relates to the possibility of using SBTs as an alternative to social account recovery, taking into account that these tokens merely represent social credentials and memberships across many communities such as companies, off-chain, universities, or on-chain communities such as DAOs. 

5. A DAO voting alternative

SBTs have also been proposed as an alternative for decentralised autonomous organisation (DAO) voting. The current contemporary governance model is founded on the number of tokens a member holds.

The proposed alternative refers to issuing SBTs that assign voting power based on the user's interactions with the entire community. Such a model could prioritise voting power for the most dedicated users. Reputation-based voting for DAO governance models could also aid in avoiding a Sybil attack, one of the biggest threats faced by DAOs wherein an individual or group accumulates a critical mass of governance tokens to manipulate the procedure of voting.

What happens if you lose your soul?

The non-transferability feature does land a problematic issue – what happens if you lose your soul?

This takes into account that an SBT may be a one-time issued educational credential or medical record. With the crypto and NFT community particularly vulnerable to theft and scams, the loss of an SBT to theft, which basically translates to identity theft, is a serious risk.

Those behind the concept of SBT propose two solutions, namely social and community recovery.

Social recovery is a decent alternative to current methods of recovery within the DeSoc. It relies on an individual's trusted social relationship within the ecosystem. While it is a good starting point and, according to the authors, a better choice than most recovery methods within the DeFi environment, it encompasses particular security drawbacks. During the social recovery method, users can assign guardians, either individual or institutional. Guardians are enabled to change the keys of the soul wallet. A user can assign as many guardians as they want, but it is not recommended to have too many to avoid collusion. The social recovery method erases the single point of failure possibility, but a successful recovery still depends on trust.

A more robust solution is linked to a soul’s membership across communities, drawing a broad set of real-time relationships for the sake of security. In other words, SBTs essentially demonstrate membership to a broad set of communities such as educational institutions, companies, churches, and social clubs.

Using a community recovery method simply means that recovering a soul’s private keys would require a member from a qualified majority of the soul’s communities to consent. This concept stems from sociologist Georg Simmel’s social network theory, which examined the emergence of individuality from the intersection of social groups and vice versa.

From airdrops to souldrops

Another possible use case that deserves to be singled out, only because it might be the very first to use SBTs in practice: airdrops.

Airdrops have been one of the most effective ways for projects to release tokens to the market. Crypto projects create new communities by conducting token sales or starting airdrops. However, such a method has frequently turned out to be vulnerable to Sybil attacks, and as mentioned above, SBTs are able to solve these issues.

Taking into account that souls represent individuals and reflect genuine features, it may be possible to create a bunch of new types of airdrops based on computations over SBTs. Crypto projects could airdrop tokens to specific souls that fulfill multiple prerequisites represented through SBTs, for instance. A project focused on enhancing sustainability could also airdrop governance tokens to souls that have SBTs indicating prior participation in a number of sustainable actions.

Thus, there appears to be a wide range of possibilities and functionalities provided by soulbound tokens. In time, the ongoing trials and tests should provide early versions for us to use.

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