Soulbound Tokens: Social credit system or spark for global adoption?
Ethereum co-founder Vitalik Buterin’s Soulbound Token proposal for a robust identity and reputation system has stirred up the crypto community.
Soulbound Tokens or SBTs are non-transferable, non-financialized tokens tied to a unique profile proving verifiable achievements and commitments. Still at the concept stage, it’s suggested SBTs will be capable of tracking memberships, credentials and affiliations with educational establishments, decentralized lenders and other entities.
Supporters say that SBTs could be the use case for the next bull market. But others have likened the concept to China’s social credit system and say it’s an “expensive solution to a problem that’s already been solved.”
So, which is it? Let’s take a deeper dive.
Web3 should be more than financial assets
Last month, Vitalik Buterin and co-authors Glen Weyl and Puja Ohlhaver released a paper outlining their vision for Soulbound Tokens, which would enable individuals to accrue permanent non-tradeable records of merits and attributes and store them in a private blockchain wallet.
These would form an essential building block for a decentralized society, or DeSoc, which points away from the current hyper-financialized state of Web3 and depends on non-transferable social relationships of trust. The crypto world, the co-authors say, will move past simple transferable financialized assets.
#Soulbound might be the next biggest thing for #Blockchain applications. The concept of an #NFT that can identify unique individuals. Use cases are endless and can be the foundation of a decentralized society. The biggest next thing? Stay tuned!#Strader #STDR #Decentralized
— Straderlabs (@straderlabs) June 8, 2022
The non-transferable Soulbound Tokens represent credentials, commitments and affiliations and are linked to our “Souls.” To put it simply, they are tokenized representations of a whole host of possible traits, features and achievements that make up a person or entity. Souls can also issue and attest SBTs to other Souls. Students will receive an SBT, for example, from a college, which will also be represented by its own Soul.
Why we need Soulbound Tokens
Co-author Glen Weyl, an economist with RadicalxChange, provided the core ideas for the paper on Soulbound Tokens. When I get through to him on Zoom, he is just getting his board ready for a paddle around Lake Washington next to his house. As he saunters down to the waterfront, he explains why this new concept is vital.
“Right now, almost all the things that happen in the Web3 ecosystem are purely financial objects: They’re transferable and saleable wrappers, like wallets of transferable saleable assets, like tokens and currencies, there’s no actual such a thing as a person. All there is, is a financial holding account,” he says.
For Weyl, moving decentralization away from just financial objects is critical, “even for making the financial aspects of the space work well, as well as for allowing for much more interesting futures.”
Weyl believes that without social relationship development, financial relationships on Web3 will continue to be difficult. “It’s just like a feature of reality, that our social relationships are the fabric on top of which financial relationships are built. And a system that’s not able to represent that is going to be extremely limited, hyper financialized, anarcho-capitalist etc.”
In a sense, SBTs are a sort of universal aggregation system. Crucially, it’s not built in the top-down way China’s social credit system is imposed on the population, but is instead a bottom-up community system owned and governed by network users. You can also have multiple Souls.
“People would have like two or three [wallets] that represent different, very distinct aspects of your life. You might have one for your health profile, which would all be encrypted and would only have access to doctors or something. You might have one that represents a professional life, like your CV. You might have one that represents personal relationships — those might all be unlinked from each other.”
Weyl sees Soulbound Tokens as bringing the same values of decentralization to real human relationships and communities. “The key element is that the tokens can’t be transferred across people. Now what a person is, is actually really subtle when you build it within the Web3 space.”
Decentralized verifiable credentials already exist, so this isn’t some sort of Soulbound NFT versus off-chain identifiers debate. SBTs are likely to be a small subset of verifiable credentials that are imbued into an NFT on a blockchain.
Storing verifiable credentials in Web3
Evin McMullen is a co-founder and the CEO at Disco.xyz, which specializes in verifiable credentials and storage solutions in the metaverse. Appearing on the Bankless podcast recently, she said Soulbound Tokens will help bring new communities into the crypto space for the first time.
“It’s a really exciting moment in our ecosystem because we are looking at our own role in Web3 in a different way than we have before. And so, we as a community have the opportunity to go meet people where they are on their own journeys, which means that we can reach out to so many communities who haven’t yet engaged with Web3.”
I wrote a post on why “soulbound tokens” are a bad idea, and why we should use signed claims instead. https://t.co/zGVB6JS38t
— Kate Sills (@kate_sills) June 6, 2022
The tokens are intended to be anchored to the notion of what someone’s accurate social identity is. A true and indisputable list of achievements, credits and recommendations. McMullen said:
“Being able to describe the qualitative traits that we have, as individuals, as non-financial contributions to our communities, things like our achievements, our capabilities, our friendships, relationships, our memberships and secret societies, all of these traits describe us as humans, and deserve the ability to interact with our smart contracts.”
So, in essence, SBTs are designed to be building blocks to reshape how we interact with one another, build and manage communities. Weyl says thinking about simply recording a resume on a blockchain is too narrow a conception.
“It’s almost more like some combination of your resume and the set of Facebook groups that you’re part of. It represents affiliations that you have.”
Fuddy duddy FUD
Self-confessed fuddy duddy and Ethereum bear Knifefight isn’t buying the pitch, though. He runs the online publication Something Interesting and has been around the tech sector for 20 years.
“I think it is a kind of collision of things that have already existed for a long time and things that don’t need to exist and they’re sort of mixed together,” he tells Magazine. “The advantages of one are used to mask the disadvantages of others.”
“To me, what I see is a very expensive proposed solution to a problem that seems already solved.”
For Knifefight, a Soulbound Token is just a digitally signed message that somebody writes about an individual. This has been done before and can be done in other ways.
“I think it’s hard to make the case that we do need it because it’s hard to make the case you couldn’t have already built it for decades. The things that are new here are storage methods, not the things that allow you to issue or to assess.”
Knifefight says he struggles to understand the need for Soulbound Tokens, or as he puts it, “a collection of subjective opinions.” “The more that the subjective opinions you’re trying to aggregate are similar, the more your aggregation provides value, the more that you’re just trying to aggregate arbitrary information, the more you’re just like recreating the internet.”
He believes there won’t be any sudden surge of demand for Soulbound Tokens, not least of which because they’ll be “super expensive and unwieldy because they’ve been put on blockchain.”
Use cases and how they might work
But a sudden surge of demand is precisely what Ty Smith is banking on. Smith is the CEO of Coinbound, a Web3 marketing company with 20 employees. It’s one of the first companies to get on board with SBTs.
“Soulbound Tokens have many use cases straight away: verifying exclusive membership to an exclusive community where you need to be approved by a central authority is a big one. I think that’s going to be probably the biggest use of it.”
Smith tells me Coinbound has what it calls a “mastermind group” for entrepreneurs. “We are exploring using Soulbound Tokens to give members something that just proves that they are an approved person because we don’t want someone to be approved to be part of our community and then go and sell their membership essentially to someone else.”
Smith is excited about using SBTs as a way to demonstrate your credentials. “You can get a degree on a blockchain, but you can’t prove that you’re the person that earned the degree until Soulbound Tokens came along. So, this is an innovation that I think is necessary if we are to look towards a more Web3-enabled future where proof of attending a college and getting a degree or proof of working at a certain employer is needed.”
But for Knifefight, SBTs are a really expensive and unnecessary way to record a degree. He points out that employers won’t care if you kept multiple copies of a degree or who stored the degree. “All they care about is who issued that degree and who it was issued to. They don’t care about the provenance. There’s no double-spend problem,” he says.
The double-spend problem describes the difficulty of ensuring digital money is not easily duplicated and can’t be spent twice. Bitcoin solved the issue by allowing every member to verify every transaction.
“If you’re not double-spending, you don’t need a blockchain, and it’s not trivial to use block space, it’s expensive.” Knifefight says there’s no reason that a degree or other credential needs to be mediated through blockchain, “It could work the same way over email, or chat, like, there’s many different ways that people can pass cryptographically signed information back and forth between each other without it having to be stored on a blockchain.”
Decentralized loans and digital country clubs
Buterin told Bankless recently that blockchains are indeed useful in this situation. He said they provide account management and keep track of time, which confirms authenticity and patterns of reliability. Buterin added that Soulbound Tokens will also be able to prove you didn’t do something, just as well as it proves you did. For example, one possibility is that Soulbound Tokens will make it easier to obtain decentralized loans.
“If you want to take out a loan, then one thing you might want to be able to do is prove that you haven’t taken out any other loans or prove that you haven’t taken out more than a certain number of other loans.” In this case, you would take on “a reputation token that you can’t hide, even if you wanted to.”
Buterin said this would be to “prove the absence of those tokens or prove that you have less than a certain number of those tokens in order to show that you haven’t actually taken out many loans yet.”
Coinbound’s Smith also believes critics are missing the point. “I think people fail to see the need for SBTs because we haven’t yet seen what a true digital country club essentially looks like, a true membership-only. You have to be of a certain caliber to be part of this group community.” He says the unique aspect of SBTs that define them from NFTs is the non-tradeable part, which will help communities know that when they take on initially approved members, those members can’t then simply sell on their SBT, like is currently possible with NFTs.
Soulbound Tokens, a better technology?
Smith’s brother, Troy, is an engineer running his own Web3 business called Versify. Even before the white paper on Soulbound, he was already building a platform to enable companies to create and distribute NFTs easily. Troy Smith explains, “It’s very funny timing because what Versify is doing is kind of creating NFTs that are going to be used just like Soulbound Tokens are going to be used. But SBTs are actually a better technology for what I’m building.”
He says many of his clients have been using NFTs in a similar way to SBTs. The difference is that SBTs can’t be sold on. “Soulbound Tokens are a much better fit for this type of thing. Because why would you want to transfer an Employee of the Month badge to someone else, you shouldn’t be able to do that.”
Like his brother Ty, Troy is super bullish on the technology. He explains how he sees it working:
“If you had the most sales for your company, you’d get airdropped a Soulbound Token to your wallet, where you could go off and show it to whoever you want or take it with you to your next employer because your wallet obviously stays with you.”
He says the immutable nature of SBTs and how they fit into a wider decentralized society is what sets it apart.
Troy continues, “It’s just ideas and a white paper right now. So, once it is actually implemented, I’d love to help do that. I would like to be the first platform that is actually enabling businesses to issue Soulbound Tokens.”
Weyl says it’s the indisputable patterns that are identified in your Soulbound wallet that are going to be the most powerful, but he says the first problems they will combat are voting fraud, wallets with no accountability, and users making fake or multiple versions of NFTs that were supposed to be scarce.
”If you’re going to join a DAO, someone might be afraid that you’re a Sybil,” he says, referring to an attacker who attempts to subvert the service’s reputation system by creating a huge number of identities to gain large influence. “Unless you have enough SBTs that it’s plausible, they can figure you out, so you might have trouble joining certain opportunities if you haven’t got a sufficiently rich pattern of SBTs.”
Social recovery, the game-changer for security
According to Weyl, security will be the killer app for SBTs. Right now, “you have a choice between custodial wallets, which undermine the whole efforts of decentralization, and noncustodial wallets, which are subject to all the hacking problems.” The idea with Soulbound is based around community recovery where your account or “Soul” will be tied to a set of peers, referees and authority figures who can unlock your wallet.
Weyl explains, “For example, if you had your employer, your university, the DAO that you participated in, and a newspaper that you wrote for, the algorithm might choose three of those affiliations.”
Of course, privacy concerns abound, but mitigating against that, a lot of things in the Web3 ecosystem are already highly public. Weyl gives me the example of if I were an artist making NFTs, I’d likely issue press releases, describing the limited nature of the editions. Those statements of ownership at the moment are stored on Web2 sites like OpenSea or Twitter.
“If artists could instead have a wallet or a Soul that represents their public profile and contains the information that they’re asserting about the NFTs that they’re issuing, that’s just, like, a much better fit than either the current solutions.”
It’s all in the name, but does “Soul” work?
The name itself has attracted a lot of attention, given its relationship to divine and eternal concepts. The co-authors say it might just be a holding name to explore the concept, and Weyl admits it may not stick.
“Soulbound terminology, I think, is probably not an ideal basis for something that becomes a technical standard. On the other hand, I think it does help inspire people to think in a different way about things, and it inspires our artists and our imaginations.”
The inconvenient truth about “soulbound NFTs” is that the name is so perfectly designed to rile people up that the detractors will unwillingly spread the meme far wider than proponents ever could
— foobar (@0xfoobar) June 9, 2022
As Weyl picks up the pace on his paddle board across the lake, he tells me he expects Soulbound Tokens will really get going and will have taken on mass adoption by 2024, in the next upcycle.
After speaking with him, it’s hard not to get caught up with the enthusiasm for SBTs. But gazing into a crystal ball to know how the future will pan out is often a fruitless endeavor.
For his part, Knifefight is fairly confident SBTs are just a gimmick that won’t pan out.
“I don’t think normal people will issue or have Soulbound Tokens by 2024. I don’t think major businesses will rely on Soulbound Tokens to make business decisions. I don’t think you will be able to translate your Soulbound Token into any significant material value,” he says. However, he freely concedes that anyone who predicts the future with certainty could be made to look like a fool.
“So, I’m foolish for having made those predictions because they will certainly now be invalidated in some surprising way!”