Our topic today will be the Soulbound token, which was introduced by Ethereum co-founder Vitalik Buterin in January this year and recently published research on it by a team including Vitalik.
Soulbound token (‘SBT’) is a new generation token standard that is literally translated as ‘soul bound’, in other words, non-transferable, non-transferable or ‘essentially bound’. Before we get into what it is and how it works, let’s first recall the two types of tokens we are familiar with.
We see that the use of the word ‘token’ in its original form in English has become widespread in daily life. Besides, there is also the term coin, which is often confused with the token, so let’s start with the difference between the two.
The coin can be called the main coin of any blockchain. The two largest in the market capitalization are BTC, which is the coin of the Bitcoin blockchain, and ETH, the coin of the Ethereum blockchain. Tokens are code snippets that represent any digital asset issued by applications built on top of blockchains. Although there are different types, today we will talk about two basic token standards.
The first of these is Fungible tokens (changeable or identical tokens), which stand out as the basic features of money being interchangeable. In fact, almost every type of token traded in the crypto world falls under this category. It doesn’t matter which token you buy or sell, as long as it’s original. Each is the same as the other.
Non-fungible tokens, on the other hand, are the opposite of the category we mentioned above. A standard that ensures that each token is produced differently from the other. It is a system that serves to singularize all kinds of assets in the digital world, just like in the physical world. Although they enter our lives mostly with works of art, there is no doubt that they will be a tool to be used in all kinds of transactions that require ownership in the digital world, from title deeds to notary services.
Although there are many reasons why tokens are popular, one of the most important benefits for the user is that they can be easily exchanged in the digital world. A person who holds a token in his electronic wallet can transfer that token to a person living in another part of the world in seconds, or use it in financial transactions, whenever he wants, day and night, weekdays and weekends. In this way, an instrument that is much more liquid and has a higher turnover rate than classical assets enters our lives.
But what if in some cases there is no need to change the token? Even if this is not wanted? How Does? Let’s see.
SBT, a ‘non-transferable token‘, is intended to be introduced as a new standard in which people cannot transfer their tokens to anyone else.
But why do we need such a feature?
In the two token standards we mentioned above, the fact that tokens can be exchanged between anonymous people for money provides a significant added value to the tokens. In this way, we come across different and creative products that we would never have thought of before, especially in the field of DeFi (decentralized finance), which we can call the finance arm of Web3.
‘However, the economic value on which finance revolves is created through people and their relationships. The Web3 world in its current form lacks the basis of a ‘social identity’ that could lead to such relationships, due to its anonymous nature. This not only causes Web3 to still need the central authorities of the Web2 world but also prevents applications in the DeFi field, for example, from supporting the activities of the real economy.
Here, the non-transferable token is trying to create a new system that will allow people to establish trusting social relationships while protecting their privacy. You can think of this system as a kind of ‘advanced CV’ consisting of tokens that people will carry in their wallets and cannot transfer to anyone else. These tokens will be proof of one’s social capital, which cannot be bought with money saved in the past without revealing one’s ‘real’ identity. For example?
Many different fields, from the schools you have attended in the past, the training you have received, and the competencies you have acquired, to taking part in any activity or taking an early part in any formation, can come under the radar of these tokens. Documents were given to you by the counter-institutions to prove your competence without revealing your identity.
Although what we have explained above is similar to the concept of digital identity, there are a few basic differences. Digital identity is a concept that is given by central authorities and created based on our real-world identities. In a way, it is a concept that tries to put the digital world in the tight dress of the physical world.
In non-transferable tokens, individuals do not have to have a single identity. It doesn’t matter how many electronic wallets called Souls are used to store these tokens. The important thing here is that the person proves his competence. In addition, the institutions that issue these tokens will have the right to burn these tokens later.
The requirements of the digital world can be so different that they cannot be solved with digital identity. Because the use of non-transferable tokens is not limited to people proving their own competence. It is possible to imagine that these tokens can be useful in solving many problems faced by newly established digital organizations, from correctly evaluating the contributions of their members, to how the community is managed. However, let us give the first example in this area from the world of decentralized finance:
In decentralized finance, non-transferable tokens can have serious economic potential. Let’s take a look at an example:
Currently, lending platforms in the DeFi space are working with high collateral ratios to avoid counterparty risk. For example, if you want to borrow $100 from the MakerDAO protocol, you must put $150 in collateral in return. However, in the real world, financial institutions do not ask for such a high level of collateral from the people they lend to. This is mainly because institutions have access to information that has been held for years about their customers’ businesses, assets, or credit histories. (The issues such as transparency and reliability of information, and negative discrimination of certain groups due to lack of information have been discussed for years.)
Similarly, on Web3, transactions made through wallets can be viewed, and a similar credit summary can be extracted for the owner of the wallet from their past transactions. However, the fact that the assets in the wallet are independent of each other and can be easily transferred out creates doubts about how reliable these wallets are.
However, wallets containing the schools that the person has completed, the certificates he has obtained, the institutions he has worked for, and the non-transferable tokens obtained from the loans he has received and repaid before, can be accepted as collateral even if they do not contain enough ‘tangible assets’ as they reveal the ‘social capital (reputation)’ of the borrower. The non-transferable tokens that the lender puts in the wallet for the loan they give can be burned when the loan is repaid, replacing it with a token that indicates the loan has been paid, increasing the wallet’s reputation, or as a black mark when not repaid, destroying the entire creditworthiness of the wallet.
First of all, let me state this. Non-transferable tokens are still in the theory stage. It will take quite a while to develop. There are problems in front of the system that need to be solved. Practically what will happen if the keys to the wallet are lost? Will the privacy of individuals be adequately protected? How much can you trust institutions that print tokens, give them to people, and then burn them whenever they want? Although theoretical solutions have been brought to all these questions, it is not that difficult to foresee that there will be many changes and innovations at the point where it is desired to be applied to real life.
The non-transferable token may be the third important token type that will enter our lives after the fungible token and the non-fungible token (NFT). With this feature, it can occupy a considerable place next to the NFT market. It is already seen that it will have a wide usage area. For example, it can help solve one of the biggest obstacles to DeFi meeting real life. On the other hand, they can also have a vital function for emerging communities (DAOs – decentralized autonomous structures) in the digital world (we’ll talk about this in our next articles).
In practical application, especially if it can strike the delicate balance between privacy and functionality, it can make a name for itself in the next five years. As we always say, the future is exciting, and we will see it by living together.
Would you like to create your own NFT, SBT, or any other ETH smart contract project? Contact Enkronos team today.