Web3 has already changed the way that finance is approached over the last few years, through innovations like smart contracts, DeFi, crypto, and blockchain consensus mechanisms. However, one major component has been missing from all of this: identity. Unlike traditional means where reputation and personal history matter, most blockchain networks only recognize wallets and token balances.
This gap seems small, but it has actually limited what blockchain technology can achieve. To address this, Vitalik Buterin, Puja Ohlhaver, and E. Glen Weyl introduced the concept of soulbound tokens (SBTs). Think of SBTs as the next phase on the path to representing identity, achievements, and reputation in the decentralized world. Here’s what SoulBound tokens are, how they work, their real-world uses, benefits, and the risks they “might” carry.
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Table of Contents
What Are Soulbound Tokens (SBTs)?
Soulbound tokens are non-transferable NFTs (or non-fungible tokens). They are different, however, in that they represent aspects of a person’s identity. These tokens are permanently linked to a wallet known as a Soul and unlike regular NFTs, which can be bought, sold, and traded, SBTs are designed to stay with the owner forever. This is where their name comes from.
They can showcase everything from educational achievements, professional experience, certifications, memberships, or even a person’s reputation within a community. In their paper called Decentralized Society: Finding Web3’s Soul, Buterin and his co-authors argued that SBTs can help build a “decentralized society” (DeSoc). They painted a future where blockchain was a major part of relationships, reputations and social interactions: not just monetary transactions.
How Do Soulbound Tokens Work?
These tokens are typically issued by organizations or individuals as proof of an achievement or credential. For example, a university could issue an SBT representing a graduate’s diploma. A conference organizer might issue SBTs to attendees and thereby validate their participation. The major idea is that these tokens are publicly verifiable but non-transferable. They are permanently attached to a person’s “soul,” making them reliable indicators of identity (and therefore trustworthiness).
This system could replace the money-centric frameworks that are currently used in DeFi. Instead of assessing someone’s worth based on token holdings, decentralized platforms could judge users based on their reputation, as recorded through their SBTs. For example, someone seeking an undercollateralized loan could use their SBTs to showcase their credit history or community participation. This is a lot more efficient, instead of providing large sums of collateral.
Real-World Applications of Soulbound Tokens
The possible use cases for soulbound tokens stretch across many sectors, and here are the most promising applications:
1. NFT Provenance and Authenticity
Fake NFT collections have become a serious problem. Buyers can easily verify the authenticity of artwork, by linking NFTs to an artist’s Soul through SBTs. This not only protects artists, but also gives collectors better confidence in what they choose to spend money on.
2. Employment and Credentials
SBTs could also improve the hiring process. Instead of asking for resumes or even references, employers could verify anything. SBTs allow anyone to verify everything college degrees, professional certificates, past experience and work history directly on-chain. Since these tokens can’t be forged or sold, they are a much more reliable method of background checking.
3. Web3 Gaming
SBTs can also be used in gaming, where they are used to track a player’s achievements, regardless of platform or game. Avatars can level-up based on the player’s real-world or Web3 reputation, rather than in-game purchases. This adds a new way of looking at the meaning of progress, at least where gaming is concerned.
4. Creditworthiness Verification
Lenders could use SBTs to review a borrower’s financial history, instead of relying on mere credit scores. Once a debt is paid, the SBT could either be updated or removed. This makes sure that every borrower has a transparent credit record and can access loans more easily in the future.
5. Souldrops
Regular airdrops often end in tokens going to bystanders who don’t actually support a project. Souldrops on the other hand, are like airdrops (but based on SBTs). They allow developers to target users who have a record of engagement.
They therefore make sure that everyone is properly compensated for their work. For example, developers might airdrop tokens to those who attended a series of blockchain conferences and so on.
How Soulbound Tokens Build Online Communities
One of the most overlooked use cases for Soulbound Tokens is in how it can help to not only form online communities, but also govern them. Web3 today has many communities relying on token ownership as the only means of access or rewards.
However, this model tends to favor the wealthy, leaving participants with meaningful additions out. SBTs being awarded to users for active contribution, like moderating forums, creating valuable content, reporting bugs or helping onboard new users is a great way to reward members based on merit. This reinforces a culture of authenticity and keeps everyone involved for the long-term.
For example, a DAO could issue reputation-based SBTs that determine voting weight. Instead of whales taking advantage of a protocol with their large token holdings, active members would have more of a say. Similarly, creators and artists could use SBTs to build verifiable followings and receive recognition, without having to rely only on follower counts or social media metrics. This model is great for building healthier platforms where contributions are more important than capital.
The First Real-World Example, Binance Account Bound (BAB)
Binance is leading the way in this revolution with its Binance Account Bound (BAB) token. This token stands out as the first soulbound token issued on the BNB Chain and are both non-transferable and hold no monetary value. They simply prove that a Binance user has completed Know Your Customer (KYC) verification.
Third-party platforms can use BAB for decentralized voting, credential checking, verification, and targeted airdrops. Overall, this shows how SBTs could quickly become a major part of more Web3 platforms.
Advantages of Soulbound Tokens
Soulbound tokens also offer several important benefits like Tamper-Proof Credentials, where achievements and memberships recorded via SBTs are permanently stored on the blockchain. This makes them very difficult to forge. Another is Trust Building, where SBTs encourage genuine participation because they cannot be purchased or transferred. Lenders can also evaluate a borrower’s financial behavior directly through SBTs.
DAOs can use them to prioritize governance rights based on reputation, rather than just token ownership. This does much to prevent Sybil attacks, where one actor controls multiple identities.
Risks of Soulbound Tokens
While the benefits are great, there are some risks to consider. For example, if someone loses access to their Soul wallet, they could also lose their SBTs. One possible solution involves “social recovery,” where trusted communities can help recover a lost Soul. However, this solution has not yet been implemented yet.
Another one is issues with privacy, because SBTs are public, personal information could be exposed. This could lead to a range of problems including harassment or discrimination if people are judged by their SBTs. In extreme cases, SBTs could also enable social credit systems that are similar to those seen in authoritarian regimes. In these scenarios, people’s freedoms could end up being tied to their blockchain reputation.
The Future of Soulbound Tokens
Soulbound tokens are a whole new paradigm shift for Web3 development. However, they are far from replacing NFTs. They offer a different way of thinking, that focuses on building reputation, community and authentic digital identities. As more projects adopt SBTs, we might see DAOs becoming safer and more powerful. Lending will also become more reputation-based and even hiring practices will become more efficient in the blockchain space.
However, how widespread its adoption becomes, will depend on how many challenges it can solve around recovery and privacy, as well as bypassing possible misuse. If SBTs succeed, they could become the foundation of a truly decentralized society. They could create a world where identity and collaboration carry just as much weight as financial transactions.
