What are soulbound tokens and how are they different from NFTs
The Soulbound Token (SBT) or also known as “non-transferable” is a type of NFT asset that is issued in a single copy and is forever linked to a single blockchain address.
Soulbound tokens cannot be transferred or sent to another network address . They are transmitted only once and only the owner of the address can access them.
Said coins are part of the Web3 technology direction and are a connecting element between users, blockchain services and DAO.
Although real-life examples of SBT use are still few, in theory it could become a popular means of verifying the identity or other data of its user.
Another definition of soulbound tokens
Soulbound is an NFT token created for one address only without the ability to move it to another or sell it. Such a non-transferable token gives the owner unique rights and capabilities. It can also confirm compliance with certain conditions, act as proof of community membership, and authenticate a user’s unique status.
The idea of SBT belongs to the genius founder of Ethereum, Vitalik Buterin, who first shared it on his blog in January 2022. Buterin drew attention to the practice of releasing rare artifacts in the popular online game World of Warcraft, which can only belong to to one player. He suggested applying this principle to non-fungible tokens: They can only be issued to a specific address on the blockchain and must be permanently linked to it.
In order to obtain such token, we may need to fulfill certain conditions or tasks. In return, it can grant its possessor unique characteristics or advantages. For example, it can be used as confirmation of an education diploma or course completion certificate, or as an ‘entrance ticket’ to a club or community.
The founder expanded on the idea of soulbound in a new paper titled Decentralized Society: Finding the Soul of Web3, published in May 2022 with economist and social technologist Glenn Weil and attorney Pooja Ohlhaver.
The paper describes a model of a new decentralized virtual society with the creation of an analogue of China ‘s “social rating” and “digital karma” – all based on Web3 technologies, block chains and non-transferable tokens.
As examples of soulbound tokens in the same post, Buterin cited the POAP project, which releases exclusive NFTs for participants in themed events. One such AirDrop was hosted by Adidas, which launched a basket of POAP tokens in November 2021.
The company subsequently used these coins to access the NFT collection created in collaboration with the Bored Ape Yacht Club (BAYC), GMoney and PunksComic projects. However, the genius noted the imperfection of the tokens due to the possibility of their resale.
In September 2022, the first non-transferable token on the BNB Chain network was launched by the crypto exchange Binance, it is called Binance Account Bound (BAB). Any user who has passed identity verification (KYC) on the platform can create a BAB. The SBT is then associated with the address and acts as a verification certificate that third-party applications can accept. If desired, the owner of the token can destroy it and reissue it after 72 hours.
Areas of application
Soulbound technology is not yet widely used in the crypto industry. However, possible applications are indicated in the work of Buterin, Weil and Ohlhaver mentioned above.
Social rating and lending
In the future, it will be possible to receive a cash or other type of loan based on our social rating and reputation. It can be digitally recorded in the non-transferable token, which will serve as an indestructible way for the borrower to prove their credit history. Dedicated SBT-based products may also appear in DeFi applications in the future.
The DAO and other communities
The Soulbound token can be used as part of a governance mechanism in Decentralized Organizations (DAOs). One such application case is now proposed to be implemented in a second tier solution based on Ethereum – Optimism. According to the proposal, non-transferable tokens could serve as a way to access individual Optimism DAO “chambers”, each with their own features and limitations.
Airdrops and Marketing
Thanks to SBT, it becomes possible to fine-tune airdrops, a popular mechanism in the crypto industry to promote and activate the community through the distribution of cryptocurrencies. In addition, tokens may be useful for other marketing activities, an example of which was already demonstrated by Adidas presenting them as a “VIP ticket”.
Digital art and content creators can construct soulbound tokens as a certificate of authorship and 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 confirmation of the identity of the holder is required, for example in an educational diploma or a certificate of ownership of real estate.
The use of non-transferable tokens can facilitate access to DeFi market products and Web3 services. A user can verify their identity only once in one application, issue an SBT as proof, and use it in all other applications that recognize this verification method.
The use of cryptocurrencies and blockchain applications is associated with a myriad of risks, including hacks, identity theft, protocol errors, and common carelessness on the part of individuals.
One of the possible dangers could be the deliberate hacking of the address to which the SBT is connected in order to use the user’s personal data.
Uncertain and emerging risks include attacks on user privacy, abuse of social rating systems, communities, and DAOs using non-transferable tokens.