The innovation in the Ethereum Ecosystem is reaching new heights. Recently in one of the Ethereum Community Events, Vitalik Buterin, the co-founder of Ethereum proposed a new token standard — The Soulbound token. Digital identity is one such concept in Web3 space, which has not seen enough growth and there are still some limitations. Hence, Soulbound tokens could be an important building block for DeSoc or the Decentralised Society.
What are Soulbound Tokens?
Soulbound Tokens are the new token standard in the Ethereum Ecosystem, which is quite similar to the Non Fungible tokens but nontransferable. This means that, Unlike NFTs, the Soulbound TOkens cannot be traded or sold to anyone else. In the real world, there are many documents like degree, certificates, and land registry which is still stored in a simple database. Soulbound tokens can represent those documents and further, they can be stored on a blockchain.
Any person or the wallet address which owns the Soulbound Token is called “Soul”
How do soulbound cryptocurrency Tokens Work?
Soulbound tokens can act as a digital representation of a resume or any other document. Any Developer can make the soulbound token by following its standard. Every Soulbound token standard will have an owner who can issue soulbound tokens to specific addresses. Once the token is transferred to a specific address it can not be retrieved back or sent to anyone else.
SBT vs NFTs
But Why do we need Soulbound Tokens?
Currently, in the web3 ecosystem, most of the elements are purely based on financial concepts. Tokens like ERC721 and ERC20 are saleable wrappers and transferable assets. And such tokens are not always owned by a single person. Hence, when it is not possible to represent any social identity or certificates, or accomplishments using such token standards.
Some of the primary reasons why we need soulbound tokens are the following
- Prevents Sybil Attack
The use cases of the soulbound tokens are not limited to financial protocols but also DAOs. At most the DAOs, there is a risk of having a Sybil attack where the large shareholders can come together and try to manipulate the DAO through its majority of Votes.
Soulbound tokens prevent this and solve the challenge as they are non-transferable tokens. Hence all the voting rights can be given to users who own specific types of soulbound tokens such as endorsement points or educational credentials.
- Key Management
In various decentralized applications, the key management is not user-friendly or has a good user experience. Most of the Defi applications specifically store the digital assets on centralized Applications such as Binance or coinbase. With the use of soulbound tokens, it would become quite easy to replicate such a mechanism in web3 space and build a DeSoc.
Various NFT curators currently use social media platforms like Twitter or Opensea to prove their ownership of their collection.
Soulbound tokens would be the small subset among various verifiable credentials solutions available in the web2 space. Some of the proposed areas where Soulbound tokens could be game-changing are the following.
- NFT art
Various NFT artists can use soulbound tokens as a digital Identity that can be linked with their collection of artwork. This would help to eliminate the fake artists and bad players who try to sell fake artwork in name of popular artists. Also, Artists can go one step ahead by attesting their Soulbound token To the NFT collection that can vouch for the scarcity limits. Any buyer can easily verify the Artist’s authenticity by checking the soulbound token Metadata.
- Defi Lending
Currently, most of the lending protocols like Yearn Finance and Aave do only offer collateralized loans to the users. With the help of Soulbound nft tokens, the uncollateralized loan can easily be provided just like how it works in the traditional markets where the credit score of a user is checked before giving any loan.
Soulbound tokens can also be used to identify the on-chain reputation of the users by collecting the data from various Defi application user uses for any financial activity.
- Digital Accomplishments and Degrees.
Most of the recruitment process often faces delays when it comes to credential verification of the person they want to hire. Here, Soulbound Tokens can play a major role as they can be useful to represent the CVs and degrees of the candidate. And this could be easily Verifiable on the Blockchain NEtwork at which it was issued.
Anyone can build their digital portfolio using the Social Bound tokens and gain some reputation points in DAOs. This would help the user to enhance its integration and fasten the process of the trust establishment, and legitimacy of their account at various DAOs.
- Proof of Presence or POP.
Soulbound tokens can act like a digital Identity card or the membership card for various special occasions such as events, conferences, seminars, and much more. Any event organizer can issue an SBT to the people who purchase the ticket. This would help in crowd management for any event.
Different Advantages and Disadvantages of Soulbound Tokens.
- Soulbound tokens are a promising solution, that can enhance various elements like airdrops, lending, artwork representations, and much more.
- Could be a base for many innovative projects and developers.
- A new ecosystem based on reputation can be built with the Help of Soulbound Tokens.
- Soulbound tokens enhance the concept of NFT tokens owned by a specific Wallet.
Soulbound tokens offer a variety of use cases, as we discussed earlier but there are some limitations to them.
- Most of the soulbound tokens are non-transferable. This means that if any owner of the soulbound token loses access to the wallet, then it would be quite difficult to recover the token back.
- SBTs are just pieces of code that could lead to some bugs.
- Educating people about Soulbound tokens could be quite difficult as it is a quite new term.
- SBTs need to be carefully designed else it would be difficult to use them.
Soulbound tokens are a new buzzword in the crypto and web3 ecosystem. With the help of this article, we have covered every bit about soulbound tokens and their various use cases. Soulbound tokens open up a new whole set of opportunities for investors and various developers from all over the world.
Also, it could be a new and innovative way to enhance the existing solutions in the cryptocurrency market. As the market will be kept on progressing, the Soulbound cryptocurrency tokens can play a major role in developing the next set of solutions.
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