Soulbound Tokens (SBTs) seem to be one of the newest topics in the cryptocurrency market. This new term that could soon become a buzzword in the crypto industry could definitely change many of the things that people and projects have been doing for several years now. There could be new applications, solutions and services offered based on these so-called Soulbound Tokens or SBTs.
In this guide, we will share with you all the things you should know about Soulbound Tokens. We will start by explaining what they are and how they work. We will continue by comparing Soulbound tokens with other popular token standards and assets that rely on blockchain technology. Finally, there will be a list of use cases for Soulbound tokens that would help us have a clear understanding of their capabilities.
What are Soulbound Tokens (SBTs)?
Soulbound tokens have been described by E. Glen Weyl, Puja Ohlhaver and Vitalik Buterin in a recently-released paper. The abstract of this paper discusses how Web3 today centres around transferable and financialized assets rather than encoding social relationships of trust. This is despite the fact that there are several services in this industry that are built on persistent and non-transferable relationships. Some of these services include uncollateralized lending or personal brands, among others.
This is why the authors of this paper came up with the idea of non-transferable tokens, which have been called “soulbound” or SBT tokens. These are representations of commitments, credentials and affiliations of “Souls” that could use trust networks to establish a reputation and also provenance. Some of the benefits described in the paper include community wallet recovery and Sybil-resistant governance.
But what exactly are souls and why do the authors of this paper use this term?
The paper reads as follows:
“Our key primitive is accounts, or wallets, that hold publicly visible, non-transferable (but possibly revocable-by-the-issuer) tokens. We refer to the accounts as “Souls” and tokens held by the account as “Soulbound Tokens” (SBTs).”
Therefore, we are seeing the development of a new type of token that could be added to the list of other token standards such as NFTs or ERC-20 tokens. The main difference is that these SBTs tokens are non-transferable. This is a very important concept that has now been added to the industry and that could revolutionize many sectors.
We are used to ERC-20 tokens or NFTs that can be transferred and that are used by a large number of users. It is possible to buy and sell them, create marketplaces and assign functionalities to these tokens. Instead, SBTs are linked to a user account or wallet. Hence, they are simply linked to a person, company or project.
When we use ERC-20 tokens or NFTs, we are using tokens that are smart contracts. Usually, these tokens are deployed on the Ethereum blockchain, but there are many other protocols that are allowing for similar assets to be released. Some other blockchain networks include Binance Smart Chain (BSC), Solana (SOL) and even layer-two networks.
Soulbound tokens would then change the way in which we think of tokens in the crypto ecosystem. These non-transferable tokens could be used as a decentralized database to identify different users and wallets. Therefore, this could change the way in which people engage with airdrops and other types of blockchain applications.
Soulbound Tokens vs Non-Fungible Tokens (SBTs vs NFTs)
Let’s now talk about the main differences between Soulbound Tokens (SBTs) and Non-Fungible tokens (NFTs). We have many times heard how NFTs work and how they allow holders of these tokens to own a unique asset that is stored on the blockchain. These NFTs could be a virtual representation of a physical object or they could also be considered as virtual ownership of anything stored on the blockchain.
Most of the time, we associate NFTs with images, memes, apes and punks. However, there are many other applications that could be given to NFTs. We have seen a large number of companies releasing their NFT collections and trying to attract a larger number of media attention with them.
NFT tokens can be transferred from one person to another. That means that users could swap NFTs, exchange, buy and also sell them if they want to do so. There are several marketplaces that make it easy for users and NFT holders to engage in different types of transactions.
Another thing to take into consideration about non-fungible tokens is that they also represent unique items in games, users’ accounts and many other virtual objects that you could imagine. This is why play-to-earn games became one of the hot topics in 2021 with the possibility they gave to users from all over the world to earn a living while playing their favourite NFT games.
Therefore, we see that there has been a strong impact of NFTs in the market. But NFTs were transferable and could be used in many different ways. So how do they compare with Soulbound tokens?
As we mentioned before, Soulbound tokens are non-transferable and they are linked to a specific user or wallet. Therefore, it would not be possible to send them and exchange them in the market as we can already do with NFTs or other types of tokens such as ERC-20.
One of the things that we should take into consideration is that Soulbound tokens are also considered to be non-fungible. They are unique tokens that are linked to a specific person or account. The main difference with traditional NFTs is that SBTs are non-transferable. The only way for SBTs to change their status is by people revoking them if they want.
Therefore, the keyword that we find here is that Soulbound tokens are non-transferable and that changes the nature of the token that users hold. SBTs vs NFTs differences include the transferability nature of the token. Nonetheless, these two types of assets can be considered to be NFTs with different degrees of functionalities.
Soulbound Tokens vs ERC-20 Tokens (SBTs vs ERC-20)
Now that we know the difference between Soulbound tokens and NFTs, we should get into the difference between SBTs and ERC-20. ERC-20 is perhaps the most popular token standard in the cryptocurrency market. It was popularized back in 2017 when Initial Coin Offerings (ICOs) and different crypto projects released their tokens to the market.
It was possible for anyone interested in launching a project to receive funding from the market just by selling a token that could have (or not) value. Investors believed that the token could then grow in price and sell at a profit. After five years, the market saw close to 99% of these ICO tokens disappear.
ERC-20 tokens are simply tokens that are based on blockchain technology, that run on the Ethereum blockchain and that have smart contract capabilities: they can be sold, transferred and purchased in many different exchanges. Examples of ERC-20 tokens include DAI, Shiba Inu (SHIB), The Sandbox (SAND) and Enjin Coin (ENJ), Tether (USDT), among others.
There are similar token standards to ERC-20 that rely on other blockchain platforms including Tron (TRC-20) or the Binance Smart Chain (BEP-20). BEP-20 and TRC-20 tokens are very similar to ERC-20 tokens with the only difference being that they run on top of other blockchain networks with different consensus rules and characteristics.
ERC-20 tokens can be used for a wide range of things. Compared to NFTs, these tokens are fungible. That means that it is the same for a user to have, for example, 1 ETH or 0.5 and 0.5 ETH. There are no differences between the tokens. They are all the same. Instead, NFTs have unique features and characteristics.
Therefore, we can already distinguish some differences between Soulbound tokens and ERC-20 tokens. In the previous section, we stated that SBTs are very similar to NFTs with the difference that SBTs are non-transferable. And again, this is the most important thing to take into consideration when making an ERC-20 vs SBT comparison.
SBTs would be non-transferable. Unless the user revokes that, there will be no way to transfer them. Additionally, they are non-fungible, which means that each SBT is unique and different from other SBTs. ERC-20 tokens such as Ether are all the same. There is no difference for a user to hold 1 ETH received from wallet A than receiving 1 ETH from wallet B. They have the same value and can be sold in the market for the same price.
Therefore, Solbound tokens would offer new features to the cryptocurrency market thanks to their non-fungible characteristics and their non-transferable nature.
Use Cases of Soulbound Tokens (SBTs)
But what’s the reason behind creating Soulbound Tokens? Is it strictly necessary to do so? The paper written by E. Glen Weyl, Puja Ohlhaver and Vitalik Buterin describes some possible use-cases of SBTs such as Art, Lending or Airdrops, among other things.
Art and Souls
The cryptocurrency market has seen the NFT industry grow thanks to artists selling their art as non-fungible assets. This allowed for new and incredible functionalities such as royalties implemented through smart contracts that were linked to a specific piece of art.
The paper describes the possibility of an artist creating an NFT from their Soul. Thanks to SBTs, it would be possible for market participants to recognize an NFT as legitimate.
The paper reads:
“The more SBTs the artist’s Soul carries, the easier it would be for buyers to identify the Soul as belonging to that artist, and thereby also confirm the NFT’s legitimacy.”
Hence, it could be a good way for the NFT industry to become more reliable over time. Let’s not forget that there have been many attempts by scammers to copy an image and sell it through different NFT marketplaces. SBTs could reduce these types of issues in the crypto space.
Lending has been a very useful thing in the cryptocurrency market over the last few years. With the expansion of decentralized finance (DeFi) solutions, we have seen a large number of projects releasing new functionalities and services for users that wanted to avoid using centralized platforms to have access to financial services.
ERC-20 tokens have been a key part of lending. But things could become even better with Soulbound tokens. As explained by the authors of the paper, one of the largest financial values built directly on reputation is uncollateralized lending.
The traditional financial systems rely on centralized scoring systems to provide uncollateralized loans to users. But things could change in the future in the crypto industry with SBTs. SBTs could create a new censorship-resistance alternative to social credit systems run by centralized financial institutions.
For example, SBTs could represent education credentials, work history and rental contracts. This could be one of the best ways to show possible credit worthiness.
“Loans and credit lines could be represented as non-transferable but revocable SBTs, so they are nested amongst a Soul’s other SBTs – a kind of non-seizable reputational collateral – until they are repaid and subsequently burned, or better yet, replaced with proof of repayment,” said the authors of the paper.
As Souls can represent individuals and reflect unique traits as they get SBTs, it is also possible to create new types of airdrops based on computations over SBTs. For example, it might be possible for projects to airdrop tokens to specific Souls that fulfil three out of five requisites represented through SBTs.
In some cases, it would be possible for SBTs given to Souls through airdrops to vest into transferable tokens later over time. The functionalities and possibilities offered by SBTs seem to be large, even for projects that want to engage with the community with airdrops.
Airdrops have been one of the most efficient ways for projects to release tokens to the market. Thanks to Soulbound tokens, it might be possible for airdrops to become more efficient over time.
The future according to @VitalikButerin revolves around soulbound tokens (SBTs).— Jason Levin (@iamjasonlevin) May 19, 2022
SBTs are NFTs that can't be transferred after they are received.
Once you receive an SBT, you hold it in a Soul wallet forever.
Pros and Cons of Soulbound Tokens
Let’s now get into the pros and cons of Soulbound tokens.
- Soulbound tokens offer new ways for users to become parts of the crypto ecosystem
- SBTs are enhanced NFTs linked to specific “Souls” or accounts
- These tokens could be used to offer better services to the crypto ecosystem
- SBTs could enhance lending, art expression and airdrops, among other things
- New solutions could be offered by developers and projects
- A new ecosystem could flourish thanks to SBTs
- They are non-transferable (this can also be considered a positive thing)
- It might be difficult for users to learn a new term in the crypto industry
- SBTs might not take off if they are not properly developed
- As every single type of token and programmable asset, they could be subject to bugs
Final Words About Soulbound Tokens (SBTs)
Soulbound tokens seem to be the next buzzword in the cryptocurrency industry. As we have shared with you in this guide, there are many use cases, especially in finance, that could bring new possibilities to investors and projects from all over the world.
Even if projects decide not to be very technical about SBTs, it could be a great way to offer new solutions to users in the cryptocurrency industry. Considering that the market continues to expand, SBTs and the concept of Souls could become a very useful thing to help cryptocurrencies expand even further and offer new and innovative solutions.