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.
References:
- CoinMetro (2024): The emergence of soulbound tokens in Web3. Available at: https://coinmetro.com/learning-lab/the-emergence-of-soulbound-tokens-in-web3 (Accessed: 17 September 2024).
- Cointelegraph (2024) Singapore court authorizes freeze order attached to wallets as soulbound NFT. Available at: https://cointelegraph.com/news/singapore-court-authorizes-freeze-order-attached-wallets-soulbound-nft (Accessed: 17 September 2024).
- nftnow (2024) Soulbound tokens: meet the tokens that may change your life. Available at: https://nftnow.com/guides/soulbound-tokens-sbts-meet-the-tokens-that-may-change-your-life (Accessed: 17 September 2024).
- Penningtons Law (2024) The emergence of soulbound tokens and their use in fraud prevention. Available at: https://www.penningtonslaw.com/news-publications/latest-news/2024/are-fraudsters-soul-bound-to-fail-an-overview-of-soulbound-tokens-and-their-use-in-fighting-fraud (Accessed: 17 September 2024).
- Pontem Network (2024) An overview of Binance Account Bound (BAB) token. Available at: https://pontem.network/posts/an-overview-of-binance-account-bound-bab (Accessed: 17 September 2024).
