What are soulbound tokens and how do they differ from NFTs?

Main

• Soulbound token (SBT), or a non-transferable token, is a type of NFT asset that is issued in a single copy and is forever tied to one blockchain address.
• The SBT token cannot be transferred or sent to another blockchain address. A non-transferable token is issued only once, and only the owner of the address has access to it.
• The non-transferable token is part of the Web3 technology direction and is a connecting element between users, blockchain services and DAO.
• Although real examples of the use of SBT are still few, in theory it could become a popular means of verifying the identity or any other data of its owner.

What is a soulbound token (SBT) in simple terms

Soulbound is a non-fungible token created for only one address without the ability to move it to another or sell it. Such an NFT gives the owner unique rights and opportunities. The token can also confirm compliance with certain conditions, act as proof of membership in the community, as well as to certify the unique status of the user.

The idea of ​​SBT belongs to the founder of Ethereum Vitalik Buterin, who first outlined it on my blog in January 2022. Buterin drew attention to the practice of releasing rare artifacts in the World of Warcraft online game that can only belong to one player. He proposed to apply this principle to non-fungible tokens: NFT can only be issued for a specific address in the blockchain and must be permanently tied to it.

To obtain such a token, you may need to fulfill certain conditions or tasks. In return, SBT may provide its owner with unique features or benefits. For example, a soulbound token can be used as a confirmation of a diploma of education or a certificate of course completion, or as an “entry ticket” to a club or community.

Buterin developed the idea of ​​SBT in a new article entitled “Decentralized society: in search of the soul of Web3” (“Decentralized Society: Finding Web3’s Soul”), published in May 2022 with economist and social technologist Glen Weil, lawyer Pooja Olhaiver.

The paper describes a model of a new decentralized digital society with the creation of an analogue of “social rating” in China and “digital karma” – all based on Web3 technologies, blockchain and non-transferable tokens.

Examples of soulbound tokens (SBT)

As an example of SBT, in the same publication, Buterin cited the POAP project, which releases exclusive NFTs for participants in thematic events. One of these distributions was held by Adidas, which released a collection of POAP tokens. in November 2021.

Subsequently, the company used these tokens to access the NFT collection created in collaboration with the Bored Ape Yacht Club (BAYC), GMoney and PunksComic projects. However, Buterin noted the imperfection of POAP due to the possibility of their resale.

In September 2022, the first non-transferable token on the BNB Chain network released by the Binance exchange, it is called Binance Account Bound (BAB). Any user who has passed identity verification (KYC) on the platform can create a BAB. After that, SBT is bound to the address and acts as a confirmation certificate that third-party applications can accept. If desired, the owner of the token can destroy it and reissue it after 72 hours.

Application areas of soulbound tokens (SBT)

SBT technology is not yet widely used in the crypto industry. However, possible applications are indicated in the work of Buterin, Weil and Olhaver, mentioned above.

Social rating and lending

In the future, it will be possible to get a cash loan or other type of loan based on social rating and reputation. It can be numerically recorded in SBT, which will serve as an indestructible way for the borrower to prove their credit history. In the future, specialized products based on SBT may also appear in DeFi applications.

DAO and communities

SBT can be used as part of a governance mechanism in decentralized organizations (DAOs). One such use case, using SBT tokens, is already propose to implement in a second-level solution based on Ethereum – Optimism. According to the proposal, non-transferable tokens could serve as a way to access separate “chambers” of the Optimism DAO, each with its own functions and limitations.

Airdrops and Marketing

Thanks to soulbound tokens, it becomes possible to fine-tune airdrops, a popular mechanism in the crypto industry to encourage and activate the community by distributing cryptocurrency. In addition, SBT can be used for other marketing activities, an example of which has already been demonstrated by Adidas using soulbound tokens as a “VIP ticket”.

Ownership

Digital art and content creators can create SBTs as a certificate of authorship for an item for collectors and general buyers. This method of application is not limited to the art industry and can be used in any situation where it is required to confirm the identity of the holder, for example, in a diploma of education or a certificate of ownership of real estate.

ID confirmation

The use of soulbound tokens can facilitate access to DeFi market products and Web3 services. The user can verify his identity just once in one application, issue SBT as proof and use it in any other applications that recognize this method of verification.

Risks of Using Non-Transferable Tokens (SBT)

The use of cryptocurrencies and blockchain applications comes with a huge number of risks, including hacks, identity theft, protocol errors, and common user carelessness.

In addition to the possible benefits, the use of soulbound tokens can bring certain risks, the extent of which remains to be seen. One of the possible risks could be the intentional hacking of the address to which the SBT is linked, in order to use its properties under the identity of the owner.

Uncertain and emerging risks include attack vectors on user privacy, abuse of social rating systems, communities, and DAOs built on or using non-transferable tokens.