Best Way to Explain What Are Soulbound Tokens (SBT)?
What Is the Meaning of Soulbound Tokens (SBT)? Soulbound tokens are digital identity tokens that represent a person’s or entity’s traits, features, achievements, and attributes on the blockchain. Souls, which represent blockchain accounts or wallets, issue these tokens.
Soulbound tokens are technically non-transferable NFTs, which are unique and publicly verifiable tokens. Buterin sees them “encoding social relationships of trust” and easing the transition to a decentralized society. Such tokens could, for example, serve as tokenized representations of a CV or represent affiliations, credentials, achievements, and memberships.
SBTs are not exact replicas of humans. They are instead linked to an individual, an organization, or an entity. They are specifically tied to a wallet for the duration of its life. SBTs, for example, can show a person’s past, such as employment history. However, the same person (or entity) may have more than one SBT representing their non-professional associations. As a result, it is conceivable to have multiple “Souls.”
Soulbound Tokens appear to be inspired by the game World of Warcraft, which prompted Vitalik Buterin to name his beloved Ethereum network after the title.
Similar to the concept of a token, soulbound is a quality of an object that prevents it from being transferred or sent to another character. With this in mind, it’s simple to understand how the name and concept were inspired by World of Warcraft.
Buterin, Weyl, and Ohlhaver suggest that because SBTs cannot be sold between individuals, they might be used to build a decentralized society. (DeSoc). Soulbound tokens, which function as IDs and are kept in a blockchain, would be the norm for daily transactions in a DeSoc world wild.
How Do SoulBound Tokens Function?
SBTs are a new type of digital currency that allows users to lend and borrow money anonymously. One of the most pressing concerns confronting the Web 3.0 sector is trust. How can you ever trust someone’s reputation when the entire system was meant to be distrustful and there is no central authority?
Consider lending money as an example of how SBTs work. A user transfers ETH into his wallet and initiates the creation of a loan contract. He then forwards the loan agreement to another user. The loan details, including interest rates and repayment deadlines, are agreed upon by both parties. When the loan is paid off, the lender receives his funds plus any interest that has accrued.
A user’s reputation is determined by a variety of variables, including previous transactions, loan history, and other pertinent data points. These variables are used to compute a user’s risk score. Users with high-risk profiles are eligible for reduced interest rates and shorter repayment terms.
SBTs are provided in predetermined quantities to protect against Sybil attacks. Each token represents one-hundredth of a vote. A user will continue to receive votes as long as he maintains a specific level of participation on the network. If a person ceases communicating with the network, his votes expire and he loses access to his SBT balance.
SoulBound tokens are a new type of cryptocurrency that allows users to lend or borrow money in a secure setting. By allowing users to earn money, The mechanism incentivizes users to join in the network by rewarding them for lending out their SBTs.
The Advantages of Soulbound Tokens
Soulbound tokens provide various advantages. First and foremost, they have the potential to boost confidence in the Web3 domain. Web3 continues to rely on Web2 tools to tackle representation and trust issues. For example, to fully utilize NFTs, you’ll need Twitter or Instagram (to display them as profile pictures) and OpenSea. (to trade them). DAOs that rely on Discord voting to prevent Sybil assaults are another example, as are DeFi credit markets that rely on over-collateralization to ensure counterparty trust.
SBTs, on the other hand, allow you to endorse an individual or corporation after doing business with them. Similarly, they would link a loan to a verified entity, so unlocking a social aspect of credit and allowing for undercollateralized loans.
As a result, soulbound tokens enable a more accurate portrayal of integrity, trust, and affinities.
They would steer Web3 away from monetary frameworks and toward reputation-based, cooperative frameworks. In essence, they enable desoc by adhering to the same principles: composability, cooperation, trust, and reputation management that network members own and regulate.
What Are Some Case Studies of SBTs in Action?
Future applications for soulbound tokens include:
- Evidence of NFT provenance
- DAO balloting
- DeFi undercollateralized lending
- Attendance documentation
- Digital labor records
- Certifications, paperwork, badges, and other items can all be verified digitally.
- Digital medical records
- Soul-bound airdrops
What Are the Consequences of SBTs?
One of the primary criticisms is that SBTs could lead to a dystopian future with increased surveillance. By connecting an individual’s work or health record to a token, those with access to such information would gain significant leverage over the business to which the record belongs. Despite the fact that SBTs are not designed to be linked to the government, their functionality could be exploited.
Second, while recording and standardizing off-chain data seems good, connecting to an on-chain record is going to be problematic. Furthermore, the lack of a unified standard for SBTs would unavoidably result in each blockchain releasing its own soulbound tokens, similar to how comparable NFT collections appear on different chains. Identifying the “true” Soul would be difficult.
SBTs vs. NFTs
The use of NFTs in cryptogaming, collectibles, DeFi, and the metaverse is quickly expanding. However, some possible disadvantages of NFTs may prevent their broad use in actual contexts. For example, NFTs are transferable, which means they may be used with any wallet and abused if their private keys fall into the wrong hands.
SBTs, on the other hand, are inextricably linked to the recipient’s “Soul” or wallet address. This implies they can’t be traded or sold for another set. There are numerous similarities between SBTs and NFTs. Although SBTs do not have the liquidity of NFTs, they do have some advantages, such as the opportunity for the issuer to terminate the SBT. Because they are attached to a certain cipher, SBTs also block the transfer of credentials The location of your wallet.
An SBT’s issuer and recipient are in direct contact with one another. When NFTs are sold in an NFT marketplace, however, many middlemen are typically engaged.
Furthermore, SBTs provide many of the same benefits as NFTs but cannot be traded since they are more difficult to reallocate than NFTs. Furthermore, SBTs promote accountability and openness across the Web3 ecosystem, which has the potential to have far-reaching social consequences.
Closing Thoughts
Soulbound tokens were inspired by the computer game “World of Warcraft,” in which some objects are soulbound. Their on-chain implementation could aid in the resolution of various pressing Web3 trust and representation issues. As a result, they may compete with the metaverse as the trendy topic that sparks the next cryptocurrency bull run.let us know what you think about the soulbound tokens.
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