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Ethereum has been hugely successful in becoming the first application-friendly blockchain platform. In fact, it has amassed a whopping $69 billion in terms of total value locked (TVL) spanning across 494 protocols. It has also given birth to a new dimension for the artistic world in the form of non-fungible tokens (NFTs) attracting a digital-first generation all around the world.
Given this context, the co-founder of Ethereum, Vitalik Buterin, has said that Soul Bound tokens (SBT) will be the future of Ethereum and Web 3.0. In todayâ€™s article, we will understand the basics of SBT and its significance in the crypto world.
The dependence on the old
Web 3.0 has grown by leaps and bounds yet, like any other burgeoning ecosystem, it has its flaws. For instance, a NFT artist has to verify NFT collections only with centralized platforms like OpenSea or Twitter. Decentralized autonomous organizations (DAOs) that often try to go beyond the coin-voting mechanism have to rely on Web 2.0 infrastructure such as social media profiles. Majority of the Web 3.0 users trust custodial wallets since decentralized key management is not yet user-friendly. As one can notice the trend, even though cryptography has resulted in a new era of expressing financial transactions, Web 3.0 has failed to represent the social identity of humans thereby relying on Web 2.0 infrastructure for the time being.
The key idea to solve this issue is to have accounts or wallets that hold publicly visible, non-transferable (but possibly revocable by the issuer) tokens. Those accounts are referred to as Souls and the tokens held by accounts as Soulbound tokens or SBTs. They are essentially a resume on a blockchain. Just like a gamer earns achievement badges after completing a task, a college student can get one SBT for finishing his degree. The only condition is that the college's Soul account has to issue a SBT (a degree) to the studentâ€™s Soul account.
SBTs can be used to represent commitments to projects, real world credentials, certificates and much more. With these concepts of Souls and SBTs, one can form a society centered around native Web 3.0 identities with rich composability. A paper co-authored by Vitalik Buterin â€śDecentralized society: Finding Web 3â€™s Soulâ€ť has envisioned a series of incremental advances in the use cases of SBTs. Letâ€™s look at some of them now.
- Establishing provenance: Souls can be used as a natural way for artists to stake their reputation on their works. When issuing an NFT, an artist can issue it from their Soul. By viewing the SBTs in an artistâ€™s Soul, buyers can confirm the Soul belongs to the artist, thereby confirming the NFTs legitimacy. Additionally, artists could issue an SBT in their Soul that attests to the NFTâ€™s membership to a collection & vouches for its scarcity.
- Undercollateralized Lending: In the tradFi world, undercollateralized lenders use credit scores to determine trustworthiness of a borrower. In Web 3.0 this isnâ€™t possible. There is no method for establishing reputation for Web 3.0 identities. SBTs that represent education credentials, work history and previous loans could serve as a persistent record of credit relevant history. It can become oneâ€™s on-chain identity. Loans and credit lines can be represented as non-transferable but revocable SBTs until they are repaid and subsequently burned, or replaced with proof of repayment SBTs.
- Compensating coordinated strategic behaviour: So far, Web 3.0 has largely relied on token sales or airdrops to gather new communities. These airdrops yield little accuracy or precision, and are easily susceptible to sybil attacks (security threat on an online system where one person tries to take over the network by creating multiple accounts). SBTs offer a radical improvement called â€śsouldropsâ€ť. Using SBTs, a DAO that wants to form a community within a specific layer 1 can souldrop to devs who hold tokens reflecting attendance like POAPs (proof-of-attendance protocols).
- It is somewhat clear why Vitalik thinks SBTs are â€śthe futureâ€ť of Ethereum. By making items in crypto Soulbound, they can represent more of who you are and not just what you can afford. The concept of SBTs are new and the ideas necessary to implement are yet to be discussed and designed.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.