What are Soulbound Tokens, and How Do They Work?

Muhammad Naeem

Blogger

NFTs have stormed the internet in the past few years, and from top brands to celebrities, everyone is getting involved in the NFT space. NFTs are one-of-a-kind authentic digital assets with non-interchangeable properties like unique codes and metadata that separate one NFT from another. NFTs are non-fungible which means that they cannot be mutually exchanged on a one-to-one basis as other fungible assets can be. However, since NFTs are still transferable, their utility to prove ownership is limited, as they often fall short in representing earned attributes such as abilities, experiences, or knowledge. Soulbound tokens, on the other hand, are designed to be non-transferable and permanently bound to a specific individual or entity.

What are Soulbound tokens?

In 2022, the idea of Soulbound tokens was introduced by Vitalik Buterin, the co-founder of Ethereum, along with Puja Ohlhaver, strategy counsel at FlashBots, and E. Glen Weyl, a political economist and social technologist, in their whitepaper titled 'Decentralized Society: Finding Web3’s Soul. Built on blockchain technology, Soulbound tokens are digital identity tokens that are non-transferable and represent social identity. These tokens are held by private wallets known as souls.

Individuals may own different wallets (or Souls), each of which represents a distinct aspect of their lives. For example, Credentials Soul, a Soulbound token representing work life, may emphasize professional skills, accomplishments, and career-related attributes. Social Soul, the token representing personal life, may highlight relationships, personal growth, and hobbies. Medical soul, the token for health, may focus on physical well-being, exercise routines, and health-related achievements.

How do Soulbound tokens work?

Although Soulbound token specifications are not yet official, it is possible to outline SBT's basic functionality from Vitalik Buterin's whitepaper. Soulbond tokens can only be issued by the creators and when they are attached to a wallet address or soul address, they stick to it permanently.

They function exactly like NFTs except for their non-transferable character, which is why Vitalik Buterin referred to them as non-transferable NFTs. Like other NFTs, Soulbound tokens cannot be traded on secondary marketplaces such as Opensea. On the blockchain, the SBT, its issuer, and Soul’s address are all publicly verifiable and can be seen by anyone.

Potential uses of Soulbound tokens

There are several potential uses for Soulbound tokens in different areas of life. Some of them include:

I. Educational History

Soulbound tokens can also be used to demonstrate the educational history of students. Just as obtaining a degree acts as evidence that you completed your education, soulbound tokens can also be used to show students' educational achievements and verify their membership in an institution.

II. Applicants for jobs

Soulbound tokens can also be used as a digital resume. Soulbound tokens can store all educational accomplishments, certificates and other relevant skills digitally. When applying for jobs, candidates can just show their Soulbound token to their potential employers as comprehensive proof of their educational accomplishments. Companies, too, can issue Soulbound tokens to their employees as certificates of working experience that they can later use in interviews or when applying for a different job.

III. Health Records

Soulbound tokens have a lot of benefits and possibilities in the medical field, too. In traditional healthcare systems, tracking the medical history of patients and validating certificates and prescriptions takes time. Soulbound tokens can store all the data on the blockchain, which is easily accessible. Moreover, aggregated data from Soulbound tokens can further be used for various population health analyses and for research purposes.

IV. Public voting

Soulbound tokens have the potential to transform the traditional voting system, too, by introducing a transparent, secure and accessible voting system. Each voter can be assigned a soulbound token which is stored on the blockchain, making it tamper-proof and resistant to manipulations. A soulbound token-based voting system is more accessible than the traditional voting system as it allows people to cast their votes remotely, eliminating the need for physical presence.

V. Tickets

The non-transferable feature of the soulbound token ensures that the purchaser is attending an event personally and eliminates ticketing frauds like counterfeit tickets, black selling, and ticket scalping.

What happens if we lose SBTs?

What happens if you lose private keys to your non-fungible tokens? You lose your assets forever, as all the transactions on the blockchain are irreversible and its decentralized nature makes it difficult to locate the perpetrators. However, in the case of soulbound tokens, you don’t have to worry, as Vitalik Buterin has already proposed a social recovery model which you can execute if you lose your soulbound token.

In the social recovery model, you appoint a wallet address as a “guardian” who has full access to your account. These guardians could be anyone such as close friends, family members, or trusted institutions. When things go south, these guardians' wallets can change your security keys with the consent of qualified community members.

Can you buy soulbound tokens?

Soulbound tokens are non-transferable assets and they cannot be traded on secondary NFT marketplaces as they don’t have any market value. These tokens are issued only by creators and then permanently attached to a single wallet address.

Drawbacks of soulbound tokens

Along with all these advantages, soulbound tokens have their limitations, too.

I. Interoperability

Soulbound tokens are often built on a specific blockchain which limits their interoperability across different blockchains. As soulbound tokens are non-transferable, they cannot become interoperable on another blockchain.

II. Scalability

Blockchain networks, especially those which are used for soulbound tokens, have scalability challenges. Users may face low speeds and higher transaction fees during the token’s interaction time.

III. Environmental impact

Many blockchain networks including Ethereum work on a proof of work (POW) mechanism which requires high computational power leading to different environmental concerns.

IV. Security concerns

Although blockchain is considered to be inherently secure, issues like hacking, phishing attacks, and vulnerabilities in smart contracts might put the security of your soulbound tokens at risk.

Conclusion

It is impossible to predict the future of soulbound tokens or any technology. However, the future of soulbound tokens looks promising and they might gain widespread adoption in the future as more companies and institutions realize their true potential.