NFTs 2.0: Soulbound Tokens: Digital Identity on Blockchains?

18

September

2024

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In May 2022, a white paper was written by Vitalik Buterin (founder of Ethereum), Eric Glen Weyl, and Puja Ohlhaver that introduced the concept of Soulbound Tokens (SBTs). This concept was made to transform digital identity management in Web3, moving blockchain applications from being focused on finance to extending their activities to personal and organizational credentialing (nftnow, 2024).

What are SBTs?

While they do have some semblance to the traditional NFTs (Non-fungible tokens), there are some key differences. SBTs are permanent and non-transferable, meaning they are designed more to represent ways of identification of an individual on the blockchain. The concept and the term „Soulbound“ originated from a popular MMORPG game, World of Warcraft, where some items could not be traded or sold and were bound to one account.

Why are SBTs revolutionary?

Soulbound Tokens are revolutionizing the way digital identity operates by offering a tamper-proof, secure, and decentralized system of verifying key aspects of an individual’s life. Management of traditional identities rely on centralized authorities that are easier to hack into, but these tokens allow individuals to control their personal data without relying on intermediaries.

SBTs reduce the risk of being impersonated by showcasing your credentials, achievements, and records that are linked to individual blockchain wallets and represent records and credentials that are not transferable or sellable.  These tokens can take the form of various aspects of life, such as Legal, Medical Records, Achievements, etc.  For example, instead of receiving paper diplomas from universities, a SBT could be issued.

Source: https://nftnow.com/guides/soulbound-tokens-sbts-meet-the-tokens-that-may-change-your-life/

Real-world examples

In 2023, the High Court of Singapore authorized the use of SBTs to pose as a freezing order on cryptocurrency wallets that were involved in fraudulent activities. Attaching SBT to wallets that were involved in illegal activities is a permanent marker that warns other parties and exchanges of their previous records (CoinMetro, 2024; Penningtons Law, 2024). This illustrates how they can be used to reduce fraud, establishing a new precedent for legal enforcement in blockchain.

Another example is Binance, which introduced Binance Account Bound (BAB) tokens. It is a type of SBT that is given to verified users who have passed Know Your Customer (KYC) procedures. The token serves as a non-transferable credential that ensures that only verified people can access some decentralized finance (DeFi) services (Pontem Network, 2024).

Privacy Concerns and Challenges

Despite their revolutionary potential, SBTs raise some serious questions about possible privacy issues. Since blockchain records are permanently engraved into the blockchain and accessible by everyone, there is a risk that sensitive information could be exposed to unwanted parties. The nature of SBT is so immutable, which means individuals cannot remove nor alter them once issued, potentially violating laws like GDPR. There is also a risk of potential de-anonymization on the blockchain, as linking to real-world identities is possible (Coinmetro, 2024).

My opinion

The rise of SBTs represents a significant shift in potential uses of blockchain technology By introducing secure and verifiable digital identities, SBTs could potentially streamline processes in various industries. However, the permanent nature of SBTs and privacy concerns must be addressed and somehow regulated first before widespread adoption occurs. If these obstacles are overcome, SBTs could become a cornerstone to mainstream blockchain adoption.

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2 thoughts on “NFTs 2.0: Soulbound Tokens: Digital Identity on Blockchains?”

  1. Hi David,

    SBTs are revolutionizing the way identities are checked. This could help cryptocurrencies to become a widespreadly accepted currency, possibly enabling people to actually pay with them. However, two questions arose in my mind while reading your article. On the one hand, I do not completely understand the privacy concerns. I understand that in every case in which personal data is included, data privacy is an important topic. But whether solely your personal data is stored and you have to verify yourself with an ID, or your personal data and a specific unique unremovable token is stored additionally, should not really make a difference, isn’t it. Moreover, even if this would cause concerns because of their non-removability, the privat data behind these tokens is removable anyways, isn’t it? On the other hand, introducing cryptocurrencies was – amongst others – based on the idea that there is an online payment method not being monitorable bei intermediaries, am I wrong? You already mention the case, in which (thanks to SBTs) crypto wallets being involved in fraudulent activities have been frozen. Why would somebody want to introduce a token, making all the transactions traceable?

    1. Hi, thanks for the lenghty comment.
      Concerning privacy issues with SBTs: SBTs are different from other instances in that they are permanent, even though both entail retaining personal data. Because the token is linked to your identity and cannot be deleted, even if the underlying personal data is changed or deleted, the SBT and its connection to your identity remain visible on the blockchain forever. This can be concerning since over time, information based on your SBT activity may be used to put together personal information even in the absence of direct personal data.

      Regarding your second concern regarding traceability and cryptocurrencies: You’re correct; one of the main concepts behind cryptocurrencies was to provide a private, decentralized means of conducting business without the need for middlemen. The argument is on the traceability layer that SBTs actually introduce. Although this may appear to go against the initial intent of privacy, the purpose of SBTs is to improve crypto’s regulatory compliance and acceptability for wider use cases, such as financial systems, where fraud prevention and identity verification are essential. There is a trade-off between preserving complete privacy and facilitating broader adoption by enhancing security and accountability.

      I hope this clarifies it!

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