Crypto 101 A beginner’s guide to Soulbound tokens

Aside from non-fungible tokens (NFTs), there is such a thing as Soulbound tokens that are not transferable which is also known as a special kind of blockchain asset. NFTs can typically be bought and sold but cannot be duplicated.

NFTs are sometimes used for betting on casino games like slots and roulette games but they cannot be tied to a single person or group. Many NFT projects such as OpenSea and Bored Ape Yacht Club resell NFTs for thousands of dollars making the NFT trading market active and growing.

What if there’s a digital token that’s tied to a person but cannot be bought or sold? Soulbound tokens (SBT) were proposed in May 2022 by Ethereum co-founder Vitalik Buterin, economist Eric Glen Weyl, and lawyer Puja Ohlhaver. SBTs were introduced as a way to address the problems of NFTs and other decentralised systems. 

SBTs not only solve the issues in the NFT industry but also pave the way for new and innovative digital tokens. One of the most unique features of SBTs is that they can be tied to a person but cannot be sold or bought by anyone. 

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What are Soulbound tokens?

Since it is still relatively new, many are wondering, what are Soulbound tokens?. Unknown to many, SBTs are made to function the same as NFTs, but they are non-transferable. SBTs are stored in digital wallets called ‘souls’ that can be issued to one soul to one another. However, they have no intrinsic value because they cannot be traded for other goods and services. Tokens connected to a person's soul are the foundation of that person's digital identity. 

SBTs are coded verifiable data about a person that is kept in the blockchain. All sorts of info about a person, such as their work, education, medical history, and memberships make up their entire identity. 

This unique token is believed to have the potential to speed up the transition to a decentralised society. SBTs can improve economic and social interactions by providing a new and safe method of validating each other's identity, credentials, and reputation in the decentralised digital environment.

Can you buy it?

As mentioned, Soulbound tokens cannot be exchanged for cash or used to buy other tokens, meaning Soulbound tokens price are non-existent. Instead, SBTs can be issued by a person to symbolise an achievement. 

Tokens for early users are tied to a specific Telegram ID and were issued on the Binance Smart Chain. Idexo now includes SBTs in its software development kit, making it possible for the community to create their own SBTs and deploy them across different blockchain platforms.

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How it works

The inability to transmit Soulbound crypto is what sets them apart from other types of currencies. SBTs are not intended to have a market value and cannot be transferred to another wallet. This is in contrast to today's most popular token standards, which include fungible ERC-20 tokens like ETH and ERC-721 NFTs like Bored Ape Yacht Club.

To show credibility and trace an item's origin, SBTs can be stored in souls. Individuals, groups, and even companies can all have souls. For example, your high school can have a soul that awards diplomas in the form of SBTs to its graduates. This SBT will include your Girl Scout badge SBTs and National Honor Society SBTs in your credentials soul. However, your identification soul, which stores essential documents like your driver's licence and passport, is distinct from credentials soul.

Part of SBT’s feature is that those stored in souls can interact with one another. This is to establish emergent communities with trustworthy ties and credentials.

The difference between SBTs and NFTs

Blockchain tokens can either be SBTs or NFTs. The former can be moved from one wallet address to another on the blockchain but Soulbound NFT cannot be moved between. Consequently, NFTs are traded in a market with high value. Since SBTs can't be traded for cash, they have no real worth.

NFTs can be used to verify digital property ownership. They can prove ownership of anything that cannot be easily replicated by others, such as a digital work of art or a piece of real estate.

On the other hand, SBTs are the foundation of one's digital identity. Facts that can be independently confirmed about a person include their educational background, job experience, membership, attendance in a particular event, and other forms of identification that can all be stored in SBTs.

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How can you use SBTs

Research suggests that SBTs can reduce reliance on centralised structures in Web2 while helping advance the development of Web3. Furthermore, SBTs aim to shift token users away from the influence of greedy financial markets of crypto and discourage the usage of NFTs as status symbols.

Furthermore, SBTs can facilitate the trustless and mainly artificial nature of Web3 by establishing a reputation that can be independently verified by other users. Anyone can say they graduated from Harvard, but if they have an SBT from the university, that can be used as proof of education in Web3.

SBTs value reputation which is why its main goal is to provide one. Your or a group's reputation can have a heavy impact on how much trust the public has in them. If someone has an SBT showing their credentials and trustworthiness, processes, and applications will be a lot easier, safer and faster. SBT can also be used in the following: 

Job applications

With SBT, job candidates can use official SBTs provided by past employers and educational institutions to present their whole work history and professional certificates. The SBTs would serve as certificates of competency.

Health records

With medical records stored in an SBT, patients can quickly change doctors or healthcare providers. SBT can speed up the now time-consuming steps of filling out paperwork, checking your medical history, and corresponding with a human agent.

Education record

Upon graduating from college, students are awarded a diploma that verifies they have successfully completed all coursework. The SBT keeps your credentials as evidence that you have met the necessary criteria and is enrolled at the institution. 

Reputation building

Your digital reputation could be built out of Soulbound tokens. As an often-cited example, SBTs have the potential to serve as Web3's equivalent of a person's credit history. Such data could be used by decentralised lending protocols which builds a reputation for more accurately determining interest rates. Thus, minimising the lender's credit risk and, potentially, the borrower's interest payments.

Attendance record

SBTs are not only for your achievements but also for your participation in certain activities, whether they take place in the real world or online. With this, it is now easier to compile your own SBTs, which would serve as verifiable records of major events in their lives.

Benefits of SBTs

As a result of their potential to facilitate reputation verification in the emerging decentralised society, SBTs can also contribute to the resolution of trust concerns. SBT makes it impossible for people to lie about their standing and accomplishments in the crypto community, hence reducing the likelihood of scams and manipulation.

Supporters of SBT argue that if it solves trust problems, decentralised finance will become more effective. The credit history of a potential mortgage borrower is one factor that banks consider. This helps businesses mitigate their own credit risk while opening the door to a more competitive lending rate for the customer. 

Data like these can also prove invaluable to the development of decentralised banking protocols and speed up their widespread acceptance. By lowering reliance on centralised so-called ‘Web2’ social media and the development of SBT and soul technology can potentially contribute to the push toward a decentralised web. 

As an alternative to Facebook groups, a decentralised application built on the blockchain can be used to verify participation in an online community. This can be done smoothly by examining the user's supply of SBT.

Drawbacks of SBTs

There is a great deal of enthusiasm surrounding Soulbound tokens and the potential for a decentralised society that it could facilitate. However, the widespread use of SBTs has prompted concerns that privacy will be compromised. 

For example, SBTs could be used by corrupt people to track down their intended victims. People who hold certain SBTs that are associated with a certain political or religious affiliation can be subject to bias. 

The future of Soulbound tokens

In a transformative future where social interactions are crucial building blocks for your Web3 identity, souls and SBTs will serve as the foundation for a decentralised society. Trust can be restored in Web3 with the use of Soulbound tokens, which can be used to verify identities and build a solid reputation. 

They can't be given away, so there's less chance of people gaming the system by buying their way to the top of the social food chain or lying about their accomplishments. Since stealing someone's identity or passing yourself off as someone else is a more involved operation, this could also reduce the prevalence of Web3 scams.

As Soulbound tokens are becoming more popular, many people are excited to experience the benefits of using them. With SBTs, storing different personal data and information is made easier and more accessible. 

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Words by: Rica Miranda