Blockchains are designed to track ownership and transfers of tokens.  Bitcoin, the original blockchain, created the Bitcoin cryptocurrency to enable a decentralized financial system hosted on the blockchain.

Since the development of Bitcoin, new types of tokens have been defined and created on various blockchain platforms.  One of the more recent developments is the soulbound token.

What is a Soulbound Token?

Soulbound tokens are a new form of token that was first proposed by Vitalik Buterin, the creator of the Ethereum smart contract platform, E. Glen Weyl, and Puja Ohlhaver.  These tokens are a special type of NFT that are intended to be one of the core building blocks of Web3’s decentralized society.

What is an NFT?

Before diving into the details of what soulbound tokens are and how they work, it’s important to understand NFTs.  NFTs are non-fungible tokens, which means that each token has a unique, inherent value.  In contrast, fungible tokens, such as Bitcoin and Ether, have no unique value.  Any two Bitcoin can be exchanged 1:1 just like two dollar bills or other fiat currencies.

One of the main applications of NFTs is to track ownership on the blockchain.  If ownership information is encoded in an NFT, that ownership can be transferred on-chain by sending the token to the new owner just like Bitcoin or Ether can be sent on-chain.

Today, the primary application of NFTs is tracking ownership of digital art such as the Bored Ape Yacht Club (BAYC).  However, NFTs can be used to track anything whose ownership can be recorded on the blockchain.

From NFTs to Soulbound Tokens

Soulbound tokens are a particular type of NFT, but they differ in one major way: they are designed never to be transferred.  A soulbound token is linked to a particular Soul, a special type of blockchain address.

Soulbound tokens’ non-transferability enables them to track information that is unique to a person or entity and cannot be effectively tracked via NFTs.  For example, a user credential encoded within a soulbound token should be linked to a particular user, not transferable to any account on the blockchain.

What are Soulbound Tokens good for?

Soulbound tokens are intended to serve as a major building block of Digital Society.  One of the fundamental features of many blockchain platforms is that they provide a level of pseudonymity.  Anyone can create an account on the blockchain, and this blockchain account is difficult to link back to a user’s real-world identity.

While this is good for anonymity and privacy, it creates issues for use cases where strong identity verification would be useful.  Soulbound tokens are designed to fill this gap by providing attestations that a particular entity has certain attributes.  

Some examples of information that may be encoded within soulbound tokens include:

  • Identity Documents: Many countries and other jurisdictions are increasingly supporting the use of digital versions of common identity documents such as driver’s licenses and passports.  A soulbound token could hold this identifying information, validating the identity of a particular entity.
  • Credentials: A soulbound token may replace passwords and similar mechanisms for validating a user’s identity and providing access to certain systems or resources.  If a soulbound token is locked to a particular address, then a user controlling that address should be the legitimate owner of those credentials.
  • Certifications: A soulbound token can encode certifications and credentials such as a diploma, professional certification, and other records of an individual’s achievements.  A soulbound token owned by the accrediting body (college, professional organization, etc.) can create an attestation that the owner of a particular Soul has earned that certification.
  • Records: Currently, transferring medical records and similar data between providers is complex due to an array of standalone systems.  If medical records were securely encoded within soulbound tokens, the owner could both validate their identity and provide necessary records to a new provider as needed.

With the wide variety of data that can be encoded in soulbound tokens, it makes sense that a user may have multiple Souls intended for various purposes.  For example, one Soul may contain professional information (credentials, certifications, etc.), while another may be used for medical records, and a third for storing identity documents.

Additionally, ownership of Souls is not restricted to humans.  Organizations, software, computers, and other entities may have their own Souls and the ability to use soulbound tokens to track and validate certain information.

The Future of Soulbound Tokens

Soulbound tokens were first formalized in a paper published in May 2022 after a January 2022 post by Buterin.  Since the concept is relatively new, protocols have not yet been defined to describe how these tokens would work in practice.

However, as the concept is more developed and formalized, it has the potential to lay the groundwork for a decentralized society.  With the ability to strongly validate users’ identities and have certain attributes tied to that identity, it is possible to track reputation, implement access control, and perform other core functions on the blockchain.

Soulbound tokens also have a significant impact on blockchain security.  On the one hand, the ability to authenticate users and prove humanity is useful for implementing trust and protecting against Sybil attacks.  

On the other hand, the Soul accounts used to hold soulbound tokens will be high-value targets for cybercriminals and can have profound impacts if compromised by an attacker or if the associated private keys are lost by their owners.

What Are Soulbound Tokens (SBTs)?
Rob Behnke
07.11.2022