SBTs (Soulbound Tokens): The Next Phase of Decentralized Identity

Web3 has already changed the way that finance is approached over the last few years, through innovations like smart contracts, DeFi, crypto, and blockchain consensus mechanisms. However, one major component has been missing from all of this: identity.

Unlike traditional means where reputation and personal history matter, most blockchain networks only recognize wallets and token balances. This gap seems small, but it has actually limited what blockchain technology can achieve.

To address this, Vitalik Buterin, Puja Ohlhaver, and E. Glen Weyl introduced the concept of soulbound tokens (SBTs). SBTs are the next phase on the path to representing identity, achievements, and reputation in the decentralized world.

Here’s what SoulBound tokens are, how they work, their real-world uses, benefits, and the risks they “might” carry.

Estimated reading time: 7 minutes

Table of Contents

What Are Soulbound Tokens (SBTs)?

Soulbound tokens are non-transferable NFTs (or non-fungible tokens). They are different, however, in that they represent aspects of a person’s identity. These tokens are permanently linked to a wallet known as a Soul and unlike regular NFTs, which can be bought, sold, and traded, SBTs are designed to stay with the owner forever. This is where their name comes from.

They can showcase everything from educational achievements, professional experience, certifications, memberships, or even a person’s reputation within a community. In their paper called Decentralized Society: Finding Web3’s Soul, Buterin and his co-authors argued that SBTs can help build a “decentralized society” (DeSoc). They painted a future where blockchain was a major part of relationships, reputations and social interactions: not just monetary transactions.

How Do Soulbound Tokens Work?

These tokens are typically issued by organizations or individuals as proof of an achievement or credential. For example, a university could issue an SBT representing a graduate’s diploma. A conference organizer might issue SBTs to attendees and thereby validate their participation. The major idea is that these tokens are publicly verifiable but non-transferable. They are permanently attached to a person’s “soul,” making them reliable indicators of identity (and therefore trustworthiness).

This system could replace the money-centric frameworks that are currently used in DeFi. Instead of assessing someone’s worth based on token holdings, decentralized platforms could judge users based on their reputation, as recorded through their SBTs.

For example, someone seeking an undercollateralized loan could use their SBTs to showcase their credit history or community participation. This is a lot more efficient, instead of providing large sums of collateral.

Real-World Applications of Soulbound Tokens

The possible use cases for soulbound tokens stretch across many sectors, and here are the most promising applications:

1. NFT Provenance and Authenticity

Fake NFT collections have become a serious problem. Buyers can easily verify the authenticity of artwork, by linking NFTs to an artist’s Soul through SBTs. This not only protects artists, but also gives collectors better confidence in what they choose to spend money on.

2. Employment and Credentials

SBTs could also improve the hiring process. Instead of asking for resumes or even references, employers could verify anything. SBTs allow anyone to verify everything college degrees, professional certificates, past experience and work history directly on-chain. Since these tokens can’t be forged or sold, they are a much more reliable method of background checking.

3. Web3 Gaming

SBTs can also be used in gaming, where they are used to track a player’s achievements, regardless of platform or game. Avatars can level-up based on the player’s real-world or Web3 reputation, rather than in-game purchases. This adds a new way of looking at the meaning of progress, at least where gaming is concerned.

4. Creditworthiness Verification

Lenders could use SBTs to review a borrower’s financial history, instead of relying on mere credit scores. Once a debt is paid, the SBT could either be updated or removed. This makes sure that every borrower has a transparent credit record and can access loans more easily in the future.

5. Souldrops

Regular airdrops often end in tokens going to bystanders who don’t actually support a project. Souldrops on the other hand, are like airdrops (but based on SBTs). They allow developers to target users who have a record of engagement.

They therefore make sure that everyone is properly compensated for their work. For example, developers might airdrop tokens to those who attended a series of blockchain conferences and so on.

How Soulbound Tokens Build Online Communities

One of the most overlooked use cases for Soulbound Tokens is in how it can help to not only form online communities, but also govern them.

Web3 today has many communities relying on token ownership as the only means of access