Soulbound Tokens are digital tokens that represent someone’s identity and are a different form of NFT because they tokenise and verify credentials.
If you’re still in the process of coming to grips with Web3, cryptocurrencies or even NFTs, then you’re likely to be amazed or possibly overwhelmed when you learn about one of the newest NFTs. Some say that Soulbound Tokens are just a natural extension of NFTs. But it’s worth first explaining some of the technology powering this type of NFT before going on to discuss what exactly Soulbound Tokens are and why they’re seen as a unique digital asset.
So, firstly to demystify NFTs if you’re not familiar with them. Non-fungible tokens, or NFTs for short, are unique digital items such as artwork, music, videos, or collectors items that are one of a kind or a very limited number. They have identifying codes which confirm their scarcity and are intended to protect their value.
Some NFT artworks and collectors items are selling for silly amount of money because that’s capitalism for you. Scarcity creates demand which equates to value and therefore prices — for those in the world of NFTs. For those of us IRL, perhaps not so much.
Adding to the NFT toolbox with Soulbound Tokens
The way the uniqueness, and thus the value, of NFTs can be confirmed is through blockchain technology. It’s the same kind of technology that powers cryptocurrencies such as Bitcoin and Ethereum. Blockchain is like a digital accounting ledger where everything is recorded and verified, providing a shared, immutable list of all the transactions. Blockchain is slowly changing the way transactions of all types, not just cryptocurrencies, will be carried out in the future. It will be used for contracts, databases, payments and all sorts of other transactions. But a full explanation of blockchain is for another post. Now back to NFTs and Soulbound Tokens in particular.
The concept of Soulbound Tokens was mooted nearly 2022 by Ethereum crypto cofounder Vitalik Buterin, together with lawyer Puja Ohlhaver and technologist E. Glen Weyl. In a paper entitled Decentralized Society: Finding Web3’s Soul, they articulated the idea of people using elements of their unique identity as non-transferable tokens.
As NFT and cryptocurrency thefts start to shatter the idea that these digital technologies are bullet-proof, this kind of personalised token system has been proposed to help protect against some of the problems. Soulbound tokens can’t be bought or sold and are deemed not to have any intrinsic monetary or market value because they belong to individuals and are intended to represent their particular identities. It’s worth noting here that NFT creation platform Idexo has said it first launched a Soulbound Token in 2021 and has now the ability to create Soulbound Tokens to its toolbox.
What could Soulbound Tokens be used for?
It’s been said Soulbound Tokens will help advance the move towards Web3 by weakening the dependence on centralised structures that dominate Web2 and control digital transactions and the digital economy. One of the ways this can happen is by changing the nature of digital wallets that are integral to cryptocurrencies and other blockchain-based digital items like NFTs.
At the moment, cryptocurrencies are held in digital wallets, where the crypto wallet may belong to the crypto exchange such as Coinbase (known as custodial wallet), or be held by an individual (known as non-custodial wallet) and are usually browser-based.
Those behind Soulbound Tokens say that it will enable exchanges more directly, whether that’s economic transactions or other digital or social interactions because it promotes trust because it’s based on safely validating the identity, credentials or reputational factors because they’re linked to an individual. There are still plenty of questions and proof points to be settled, but it’s certainly a significant step in the inevitable move to a more decentralised, digital-based economy and interactions.
It’s not just people who will be able to have soul tokens as digital credentials or identity factors. Government, businesses and other organisations will need to created their own Soulbound Tokens in order for this kind of exchange system to work effectively as widely as possible.
Soulbound Tokens & potential of Web3 digital wallets
So just what could Soulbound Tokens be used for? It’s been suggested that they may be applied to medical records, digital ID cards, achievements such as education or job history, attendance at certain events, a kind of credit rating and even certain types of voting. It’s equal parts exciting and alarming the notion of so much of our lives and identities being transferred into digital credentials.
What if something goes wrong? The authors of the paper have outlined a recovery model for this Web3 which involves individuals or institutions acting as guardians to have access to a user’s wallet if there’s an issue. Obviously no system is without its flaws and limitations, just like the ones we’re dealing in now, with scams, hacks, digital failures and the like being reported every day.
One of the things Web3 is doing is redefining the very notion of a digital wallet. There are projects and innovations already in the works that will revolutionise how we carry out most of our life transactions. There’s more to say in another post on these, but digital wallets will one day soon profoundly alter how we store and share our personal information, how we transact and even redefine how we mange our digital lives. In my book, that’s a lot more revolutionary, and exciting, than an expensive Nike NFT.