Soulbound Tokens: Paving the Path to a Decentralized Society in Web3

Introduction

Arguably one of the most desired and discussed concepts in Web3 developments is that of a decentralized ID system coming to the blockchain. Some argue that it is necessary to make proof-of-stake (POS) protocols and DAO’s more democratic, while others are more concerned with government developments regarding digital ID’s, and are looking for a way to hedge themselves against authoritarian surveillance systems, akin to China’s social credit scores, which they fear are coming. After having mentioned the need and importance of decentralized ID’s a couple of times in his blog posts over the last years, Vitalik Buterin, together with two others, has come up with a new concept regarding this issue. Together they published a paper about Soulbound tokens, also known as Soulbound NFTs, which represent a unique form of non-fungible tokens that diverge from the traditional transferable NFT model. This article aims to explore the multifaceted nature of Soulbound Tokens, explaining what they are, delving into the opportunities they present and the challenges they must overcome. We will examine the concept of a decentralized society, a vision put forth by the authors of the paper, where governance emerges organically through community interactions. Furthermore, we will explore the potential impact of Soulbound Tokens on the trajectory of Web3 and hope to gain a comprehensive understanding of the role they could play in shaping the future of a decentralized society.

What are SBTs?

Soulbound NFTs, also called Soulbound tokens (SBTs), are a special kind of non-fungible token (NFT). Whereas regular NFTs can be transferred between different users and can be traded on marketplaces, SBTs are linked to one specific wallet and are non-transferable, destined to belong to a single wallet for the entirety of its existence. SBTs were first described in a paper published by Vitalik Buterin, (Ethereums co-founder) Glen Weyl (economist, researcher at Microsoft) and Puja Ohlhaver (strategy counsel at Flashbots). The idea for the SBTs came from the videogame World of Warcraft, where most items can be bought or sold, with the exception of special items that are “soulbound”. The personification of the character in the game is denoted as the Soul. In the same manner, the wallets that would hold SBTs are referred to as Souls. The implementation of SBTs would allow the Web3 space to consist of NFTs with various utilizations, whereas now NFTs are mostly understood as jpeg’s that are typically traded in a tic-tac-boom fashion. Rather, SBTs have the potential to play a significant role if implemented correctly. By binding data to one specific wallet, the way is opened for concepts like digital ID, criminal records, academic credentials, medical data, memberships and attendance verifications to be tokenized on-chain in a decentralized manner.  Since applications of SBTs could be quite broad, it could be that individuals would own multiple “Souls”, one for a specific branch of data. Furthermore, SBTs could be made in a programmable way, such that the information that they foster can be updated when needed or to ensure that certain actions are taken under specified conditions. 

Some applications of SBTs that have already been implemented are tokenized diplomas issued by the National university of Mongolia and an SBT protocol created by Masa Finance that has launched on Ethereum. On this protocol, users can mint SBTs related to identity, unique domain names and Web3 credits. 

The concept of a decentralized society

The authors of the paper speculate that the introduction of SBTs could steer the development of Web3 into a direction which they call “decentralized society”. The idea is that society will be participated in horizontally, where governance emerges in a bottom-up way due to interactions between communities and individuals. This is denoted as stochastic social pluralism by the authors. According to them, current trajectories of DeFi is leading Web3 to become an over financialized space, compatible with anarcho-capitalistic philosophies. This means Web3 would turn into a stateless society where private enterprises govern the space in a highly libertarian manner. The current state of Web2 however, is that bureaucracies perform attestation in a top-down way, and is prone to authoritarian monitoring. While DeFi protocols are designed to circumvent the inherent centralization of Web2 and most components of traditional finance, they are still very much prone to implicit forms of centralization, most of the wealth and social power can easily become concentrated in the hands of a few. Meaning that the ongoing course of Web3’s development might lead to similar monopolistic features as currently present. But adding SBTs into the mix might change things, since they cannot be bought, they have to be earned, which inherently reduces the ongoing course of hyper-financialization mentioned before. Furthermore, this would lead to various interactions and communications between network members, which would enable an environment abundant with mechanisms that could be tailored through experimentation to function in ways that boost community engagement and decentralization of powers. This would not only transform the Web3 landscape into a more social network structure where multiple views are permitted and interoperable (pluralism), but foster economic growth as well. The latter stems from the authors believe that the above-described plural network groups are the primary driver of economic growth. 

Potential of SBTs

In this section we will explore the various benefits that SBTs bring with them, as well as the potential improvements that they could make to Web3’s infrastructure.

Securing ownership in digital networks

Since SBTs introduce the concept of identity to the blockchain, proving ownership of data emerges as a straightforward application. An issue with digital artists who enable blockchain networks is that their NFT art is sometimes sold under the name of a famous artist by individuals who hope to make an extra profit. But after implementing SBTs, artist could issue their NFTs from their Soul, hereby confirming the authenticity of their work via the various SBTs that are linked to their Soul. This obviously extends to many more forms of data outside of digital art, a prominent example to emphasize are media-based data like images or videos. With the rise of deep-fake technologies comes the problem of not being able to know what media is real and what is fake. The strong combination of the transparency of blockchain technology with an SBT based identification system build on top of it equips us with the tools to combat potential deep fake media attacks. 

Preventing fraud

SBTs open up the way for a person’s credentials to be completely verifiable. SBTs could take the form of things like criminal records and university degrees, but also as proof that you completed special courses, are holding a certain position or that you are eligible to perform a certain task. This data on the blockchain is immutable and publicly viewable for verification, making it significantly harder to commit various forms of fraud. This is in stark contrast to current digital credentials, whose authenticity is vastly more difficult to identify. In addition to preventing identity fraud, verifiable credentials are also likely to increase confidence among the public about each other’s positions and identity.

Bottom-up social credit systems

SBTs allow for the emergence of decentralized credit score systems, in contrast to the better-known centralized credit scores that are regulated in a top-down manner. This bottom-up variant comes with the advantage of circumventing biases and injustices that come into play often due to the opaqueness of centralized credit scores. What’s more, by allowing lenders to verify all the relevant credentials of borrowers, in the form of SBTs, the way is opened for uncollateralized lending systems to take place in a decentralized manner. Since borrowers cannot hide their obligations from lenders, reputation can be used instead of collateral to facilitate loans. Uncollateralized lending protocols can play a significant role of equipping people in need of a loan, but without the capital to collateralize it, with the means to obtain one. Furthermore, verifiable credentials would heavily incentivize individuals to pay off their obligations, else their reputation is surely damaged. 

Enabling participation rewards

Another possible application of SBTs is their usage as participation rewards. As a first they can be utilized to prove that someone participated in an event or course, or proof that someone attended certain meetings or conferences. In addition to this, SBTs can be used to incentivize network members to participate in a certain event. In close context to the current Web3, consider airdrops, an often-utilized way to start spreading a starting project’s new token. The airdrops would be orchestrated in accordance with certain SBTs that users can earn by partaking into events and activities related to the project. These so-called “Souldrops” could lead to an increase in useful engagement of upcoming projects. Additionally, SBTs could be used to regulate ICO’s or other tokens sales. 

Enhanced security

One of the most well-known security issues in Web3 today is the risk of a Sybil attack, an attack where a single user creates multiple “identities” to gain a large influence over the protocol. With the coming of SBTs however, this problem can be combated in a couple of ways. Souls can be verified to be unique by taking into account the different SBTs that a Soul holds. That way, it becomes easier to identify fake users and stop a Sybil attack from occurring. Furthermore, SBTs could assist in preventing vampire attacks from occurring. A vampire attack happens when the code of a Defi protocol, for example, is copied, followed by an attempt to lure participants of the protocol to the copied one by providing better rates. By setting up SBT-based rules for Souldrops in the DAO belonging to the protocol, it could be arranged that users are disincentivized from performing, or taking part in, vampire attacks.   

Bringing democratic values back to blockchain projects

Arguably one of the most significant benefits of SBTs is that it would allow for an increase in democratic values to Web3 projects. Most of their governance protocols in place today come with heavy discriminations against participants that are less wealthy. That is, most protocols work with a one token equals one vote system, which allows for voting power to be bought up by private enterprises or wealthy individuals. For example, numerous decentralized autonomous organizations (DAOs) currently deal with the vast majority of their voting power being concentrated in the hands of a minimal percentage of token holders. This is a consequence of the enormous emphasis on financialization that the cryptocurrency sector carries with it, but also due to security issues. As described in the previous section, these issues can be solved with the use of SBTs, allowing for governance rights to be based on various, non-financial factors, such as reputation, previous behavior or location. 

Driving network communications and interactions

As mentioned before, the concept of identity that is brought to the blockchain via SBTs can allow for a structure of networks that is ruled by interactions between individuals and communities. Since the blockchain is inherently transparent, the need for trusted third parties to verify an individual’s credentials and identity is reduced significantly. SBTs would make it possible for network participants to do the verification themselves, allowing the emergence of a more peer-to-peer based attestation system. Furthermore, the quality of online interactions can be enhanced drastically, since SBTs have the potential to eliminate the issues regarding bots and spam management on social media platforms. 

Drawbacks and challenges of SBTs

Aside from the many upsides that implementation of SBTs seem to have, there remains a large number of shortcomings that need to be overcome. The following section aims to provide an overview of some of the biggest drawbacks that SBTs bring with them together with numerous potential solutions to these problems.

Lack of available infrastructure

One of the hurdles that SBTs need to overcome is a lack of infrastructure. Current Web3 projects need to be compliant towards non-transferability of tokens in order for SBTs to be implemented. The high emphasis of financialization present means that protocols were developed with the idea in mind that nearly everything that is tokenized must also be transferable. Although not necessary for SBTs to function, as indicated by the authors of the paper, SBTs would shine brightest in a DeSoc environment, but a lot of innovation and critical thinking needs to happen in order for progress to be made in this field. In the meantime however, enterprises and investors will most likely have a hard time seeing how SBTs can benefit them directly. If SBTs are to ever become mainstream, this will most likely take some time to happen, as implementations and enhancements need to be made in a step-by-step manner. 

Privacy concerns

One of the big consequences of SBTs is that a lot of user information is verifiable to the public. Although this definitely deserves praise, this is quite an ambivalent feature since it comes at the cost of lesser privacy for users. There is not a straightforward solution that can be implemented here, since too little privacy may leave participants vulnerable but too much privacy can compromise the numerous advantages that SBTs offer. That is, users who hide their information well enough may undermine the beforementioned regulatory features that could make DeSoc work. In addition, with user data publicly visible, network participants are prone to experience numerous forms of discrimination. It is therefore of importance that the right amount of privacy for each application is reached. To this end, different privacy solutions need to be researched. The authors already provide some ideas that could be improved upon. As a start, it is suggested that SBT data is stored off-chain, and the hash on-chain, such that users can decide themselves who they share their data with. Besides that, privacy solutions utilizing zero-knowledge proofs (ZK proofs) could be explored as well.

Data recovery methods

Since the SBTs in a Soul are non-transferable, it becomes very important to have a recovery mechanism ready. Seeing that your Soul would carry all important data and identifiers, losing access to your wallet, due to losing private keys for example, would be a significant problem. One way to provide recovery of lost wallets is to implement community recovery. This is a process that works similar to social recovery options that are already being utilized in some protocols today, except that the recovery is now tied to multiple community memberships of the user. Members of a subset of communities chosen at random are queried over the identity of the user. To complete the recovery of the Soul would require that the majority of members agree on that the user’s wallet would be restored. This is an option presented by the authors, but experimentation is needed to determine the success rate of this process and to determine the exact details that could optimize the recovery.

Finding the right balance between transferability

SBTs are non-transferable by design, leading to lots of advantages that have been discussed so far. However, in some cases it would be convenient for users to transfer some of their SBTs. The most obvious reason would be wanting to transfer your tokens away from a wallet for security reasons. Besides that, it could happen that an SBT is issued to the wrong recipient. It would be troublesome if mistakes like this are completely irreversible. It is therefore suggested that not every SBT would necessarily be completely non-transferable. A proposed idea is to issue some SBTs as initially transferable, and let them grow into non-transferable tokens over time. These SBTs are referred to as proto-SBTs. Doing this adds the property of revocability to an SBT, and furthermore allows for SBTs and the recovery method discussed above to be implemented at the same time. A user would first obtain a proto-SBT and subsequent to that the community recovery would be instantiated. Once the recovery method is in place, the token would transform into a non-transferable SBT. Overall, it is important that the right amount of transferability is obtained, which is no easy task and requires more research. 

Conclusion

Soulbound Tokens have emerged as a groundbreaking concept in the realm of Web3, offering a fresh perspective on the space. As explored in this article, SBTs represent a unique form of non-fungible tokens that allows for the onboarding of digital identities, academic credentials, medical records, and various other forms of data to the blockchain, in a decentralized manner. These tokens hold the promise of enhancing security, preventing fraud, fostering bottom-up social credit systems, and incentivizing active participation within network communities. Furthermore, they present solutions to combat Sybil attacks and significantly increase democracy, contributing to a more robust and trustworthy Web3 ecosystem. The authors of the paper envision the implementation of SBTs steering Web3 towards a decentralized society, which would circumvent the authoritarian tendencies of Web2 and the anarcho-capitalism present in DeFi. This vision represents a stark departure from centralized financial systems and promotes an environment where power and decision-making are distributed horizontally. As with any transformative technology, SBTs also come with certain challenges that need to be addressed. The current lack of infrastructure and privacy concerns are among the key hurdles that must be carefully navigated to ensure the successful integration of SBTs into the Web3 landscape. Additionally, finding the right balance between transferability and non-transferability of SBTs presents a significant challenge, one that requires further research and experimentation.

While SBTs provide a possible pathway towards a decentralized ID system, it must be noted that there exist other projects that are trying to achieve similar goals. The advantages and limitations of all these options should be weighted against each other to see which alternative comes out on top. Generally, it is also important to keep in mind that while concepts like SBTs and DeSoc aim to solve a lot of problems and shortcomings, the new possibilities they offer might come with negative consequences and new problems of themselves that may be hard to foresee from our current situation. That said, the potential that SBTs offer are too great to ignore. While there is much work ahead, with continued collaboration and research, the potential of SBTs might one day be fully realized, birthing a version of Web3 that is akin to a more equitable and inclusive digital world.

Sources

1. Weyl, E., Ohlhaver, P., & Buterin, V. (2022, may). Decentralized Society: Finding Web3’s Soul