What are soulbound tokens, and how do they work

Soulbound tokens

In spirituality, the soul is often considered immortal. In blockchain and crypto, the soul is the central concept around identity. Soulbound Tokens (SBTs) are one way of maintaining digital identity in a decentralized world. This blog post explains the idea of SBTs and their importance.

Understanding soulbound tokens (SBTs)

The concept of SBTs has its genesis in a research paper authored by Ethereum co-founder Vitalik Buterin, Puja Ohlhaver, and E. Glen Weyl in May 2022. In their whitepaper, the authors focused on the need for establishing credentials as part of Web3 elements. The paper discusses credentials such as names, traits, features, and even achievements that can be loaded into a wallet. However, you cannot trade or transfer SBTs.

How do soulbound tokens work?

SBTs are akin to nonfungible tokens (NFTs), which is a rage among blockchain users. The only difference is that SBTs are non-transferable and non-tradable, while you can trade NFTs.

The SBT network includes an issuer and individuals. For instance, a large educational institution could issue non-transferable certificates to its students over a blockchain network in the form of Souls, which credits individuals with details of a course completed, marks gained, or any other educational details. These credits could be digitally stored as part of the Soul, which is stored within a wallet. Besides educational institutions, firms can issue souls to employees. Since Souls are digital identities, one could have multiple government records, hospital and medical records, financial details, and even a driving license organized as Soul.

How can soulbound tokens be used?

According to the official paper, the major use for SBTs is to ensure the validation of credentials. To individual users, the Soul can be proof of origin, while to issuing authorities, this could be akin to proof of certification. A verifiable identity could be a part of the affiliation, credentials, employment history, or even personal creations.

NFT ownership

The most significant advantage of SBTs is in the area of NFTs, where owners have to depend on centralized systems to prove ownership of their digital assets. Downtime in the NFT marketplace can result in the disappearance of the NFT profile pictures. SoulBound NFTs can resolve this problem, enabling creators to assign their credentials to digital assets directly from their blockchain account or wallet. The more tokens an account accumulates, the easier it will be to verify the NFT’s legitimacy, thereby helping creators and artists.

Job vacancies

SBTs can be used to create a unique digital resume for professionals, making the hiring process faster and more efficient. Validating a candidate’s experience or academic credentials can be challenging, but non-transferable NFTs can provide a publicly verifiable digital record. This enables employers to make more informed hiring decisions based on a candidate’s SBT history from previous employers or academic institutions.

Gaming

In the gaming industry, digital badges or trophies earned are a mark of honor. However, many users may unethically sell such digital badges. With an SBT, such honors can stay with the gamer permanently, facilitating rewards and perks in the future. SBTs also eliminate the “pay-to-win” dynamic, motivating players to improve their skills. With blockchain technology and Web3 principles, SBTs can disrupt the gaming industry and revolutionize reputation, achievements, and skill verification. Developers are already building SBT products for potential use by the end of the year.

Verification of borrowers’ credit history

To any bank, creditor, or lender, the credit history of an applicant is crucial during the lending and loan verification process. SBTs can offer lenders details of a potential borrower’s lending activity, history, and creditworthiness. It also reveals the connections of such borrowers with trusted entities. This can lead to quality disbursal of loans and better management of loan accounts and provide transparency. Thus, SBTs can eliminate the significant risk of nonpayment of dues in lending.

Souldrops

Souldrop finds mention in Vitalik Buterin’s whitepaper. It proposes conducting airdrops based on computations from SBTs or other tokens within a Soul. This approach can help crypto projects attract the right communities by airdropping tokens to users based on their interests and activities.

Benefits of soulbound tokens

SBTs bring benefits such as reducing reliance on centralized organizations, guaranteeing document authenticity, and increasing trust in Web3 space. They are non-tradable and non-transferable and can enhance trust among members of the decentralized community. They will require effort to obtain and will serve important purposes beyond just making money.

Risks associated with soulbound tokens

SBTs show great promise and potential for managing personal information. However, despite significant advantages, implementing an SBT itself is complex, and the chances of loss of data can harm reputation. Moreover, issues such as Sybil attacks, infrastructure woes, and network threats on the blockchain could pose a risk to SBTs.

Conclusion

Soulbound NFTs have unique features that could be valuable to the future of Web3, but it may take time for them to be widely adopted. Despite this, the concept behind the project is promising and can set the standard for creating a decentralized society with verified credentials. Non-transferable NFTs can transform the basics of NFTs, and Soulbound is just the start.

FAQs

How do soulbound tokens work?

SBTs are like unique NFTs that represent an individual’s credentials, affiliations, and commitments but cannot be transferred or sold. Souls refer to the wallets or accounts permanently bound to SBTs, representing an individual’s employment history or other self-certified information, similar to a resume. Non-transferable tokens help track reputation and are added to addresses but cannot be sold.

What is a soulbound token?

SBTs are a new type of digital asset that provides a stronger level of security and control over your digital assets. An SBT is a token that can only be owned and transferred by a specific address. In other words, once an SBT is created and assigned to an address, it cannot be transferred or owned by any other address. This provides a high level of security and control to the token’s owner and anyone who might be holding the token.

How do you make a soulbound token?

While the concept is still in its infancy, some networks allow their users to build unique and non-transferrable SBTs.

Can you buy soulbound tokens?

SBTs are very similar to NFTs, but you cannot purchase, sell, trade, or donate them. They are linked to a unique blockchain identification code and are secure, given there is no element of falsification or replication. In some cases, however, an NFT can be created to pass on ownership details to a different wallet, which involves the transfer of some tokens. The general idea of SBTs is not to prove ownership but rather to empower users with a non-transferrable unique identity.

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered investment/financial advice from CoinSwitch. Any action taken upon the information shall be at the user’s risk.

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