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Crypto: What is Ethereum's Soulbound token?

A representations of cryptocurrency Ethereum is seen in front of a stock graph and U.S. dollar in this illustration taken, January 24, 2022. REUTERS/Dado Ruvic/Illustration
Ethereum has released a new crypto product called a Soulbound token. Illustration: Reuters/Dado Ruvic (Dado Ruvic / reuters)

Ethereum has launched a new blockchain-based asset, called a Soulbound Token, or SBT. Ethereum's founder Vitalik Buterin announced that a person's identity could soon be stored within Soulbound Tokens as they interact with the burgeoning web3 world.

What makes SBTs different from NFTs is that they are non-transferable and once they appear in your crypto-wallet they cannot be sent to another wallet address. They are non-financialised tokens designed to secure people's identities, their achievements and possibly even their past transgressions in the web3 space, which is evolving to become a decentralised version of present-day society.

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In May, Vitalik Buterin co-authored a whitepaper outlining his vision for a “decentralised society” (called DeSoc). The paper described the need for a new token that was not about trading financial assets, but one that "encodes social relationships of trust". In his plan people will work, spend, produce and create within a borderless online world and in doing so will accrue a permanent record of merits, transgressions and attributes that are stored in private blockchain wallets as non-tradable tokens that can never be exchanged with other wallets.

The authors of the paper refer to these achievement badges as “soulbound tokens” (SBTs) and they propose they will produce a "more transformative, pluralist future" for each individual who interacts with the web3 world.

The authors suggest an SBT could resemble a much more verifiable web3 version of Linkedin, stating they could create "a world where most participants have Souls, digital wallets, that store SBTs corresponding to a series of affiliations, memberships, and credentials,”

The paper added: “For example, a person might have a Soul that stores SBTs representing educational credentials, employment history, or hashes of their writings or works of art."

recruiter or employer holding cv having online virtual job interview meeting with candidate on video call.
An SBT could store your employment credentials. (insta_photos via Getty Images)

Speaking to Yahoo Finance about the possible impact of SBTs on the crypto-ecosystem and wider society, Elisha John Koh, the Chief Operating Officer of Web3Auth, said: "Think of SBTs like web3’s future reputation score, but in the form of an NFT.

"This could lead to better token distribution, reward, voting and governance processes."

The COO of Web3Auth added: "SBTs are still a relatively nascent part of blockchain technology, but could also see applications outside of the metaverse as well in areas such as proof of employment, and education certifications in the physical world."

Possible use cases for SBTs

At last week's Ethereum conference in Seoul (ETH-USD), Vitalik Buterin stated that SBTs should not be transferable and should "represent something about who you are and what you've personally done".

A university might issue SBTs to its alumni to verify that they have graduated from that school.

The paper co-authored by Buterin outlined the need for SBTs that could become "an extended resume" for each individual. However, the verification of these resume qualifications would be "issued, or attested by counter parties" that have a relationship with the owner of the SBT.

Read more: Ethereum supply to shrink after 'Merge' upgrade, says Vitalik Buterin

An SBT could also store a person's credit history, with Buterin and his co-authors stating that "SBTs that represent education credentials, work history, and rental contracts could serve as a persistent record of credit-relevant history".

In this fully automated future, when a loan is issued to a person the record of the loan would be stored within that individual's SBT, and when it is fully repaid it could be subsequently burned and replaced with proof of repayment token, and so build a positive credit rating.

People are corporating on a single network. Delegation of work and responsibilities. Decentralized networking. Teamwork cooperation. Functioning of departments and divisions of the company.
In 'the network society', internet-native groups will collectivise to form new decentralised communities and institutions that could develop to challenge existing institutions and even nation-states. (Andrii Yalanskyi via Getty Images)

What is a decentralised society, or DeSoc

Recently, there has been lots of talk about 'network states' or 'decentralised societies' amongst the most influential voices in the web3 space. A recent book by the former chief technology officer of Coinbase, Balaji S. Srinivasan, entitled 'The Network State', described the trend toward a decentralised society enabled by blockchain-based technologies.

In 'The Network Society', the author postulates that internet-native groups will collectivise to form new decentralised communities and institutions that could develop to challenge existing institutions and even nation-states.

Ownership of a particular cryptocurrency associated with these "network states" would offer economic incentives to the community, driving cooperation.

This kind of crypto-community incentivised action is already evident within fringe memecoin groups, such as Shiba Inu's 'Shib Army'.

Read more: Can ethereum merge make ether the next bitcoin?

At the Ethereum conference in Seoul, Buterin articulated how web3 communities would be important in verifying the identity of SBT tokens and returning them to the rightful owner, if they were somehow misplaced or the owner of a wallet lost their keys (passwords).

He said: "An SBT would be connected to some community and that community in some sense would be responsible for sort of policing this question of a legitimate transfer and if not, then to allow what the community determines to be the original owner some chance to get the SBT back."

Blockchain digital data transmission room. NFT non fungible token neon concept with crypto currencies Ethereum. New way to buy digital assets, collectibles and crypto art. High quality 3d illustration
SBTs will not be a replacement for NFTs. (FlashMovie via Getty Images)

Difference between an NFT and an SBT

In the paper, Buterin states that SBTs will not be a replacement for NFTs, or non-fungible tokens. NFTs will still operate as a way to monetise digital assets that cannot be exchanged equally for other assets, in the same way that commodities and currencies can be priced and exchanged. Instead, SBTs will act as a proof of character, rather than a proof of wealth for each individual that is the recipient of them. They will be stored in an individual's web3 wallet address alongside their cryptocurrencies and NFTs.

A surveillance camera is seen near a Chinese flag in Shanghai, China August 2, 2022. REUTERS/Aly Song
A surveillance camera in Shanghai, China. Photograph: Reuters/Aly Song (Aly Song / reuters)

China's social credits system and SBTs

Buterin is aware that an SBT database that automatically stores the personal details of every individual is gift to any surveillance regime, and suggested that an option could be programmed into the design allowing SBT owners the right to “burn” or hide their SBTs from the public.

In 2014, the Chinese State Council released its “Guidelines of Social Credit System Construction".

This was the Chinese politburo beginning in earnest to create a techno-authoritarian Chinese surveillance state.

The social credits system creates an online persona for each citizen in China, and each citizen is given a positive or negative social credit score depending on their actions, which can be automatically detected via China's vast web of surveillance devices, or in the more traditional way of neighbour watching and then informing on neighbour.

Parallels have been drawn between China's 'Orwellian' social credits system and Ethereum's Soulbound token system for tracking people's personal footprint in the online world.

China's Social Credits system gives full control to the communist politburo when dispensing a positive or negative social credit score to each citizen.

The SBT system relies on the decentralised 'smart contracts' deployed on the Ethereum blockchain to dispense associations, qualifications or achievements to each individual.

However, the same SBT system could allow the blockchain to store a person's transgressions, and these stains could then be stored on a person's online identity wallet forever.

In China's Social Credits system, when these transgressions are connected with 'programmable money', such as the digital yuan, a person could lose their right to freely function within society, via loss of purchasing freedoms.

Whether Ethereum's Soulbound tokens will create a free society or lead to a restrictive future, akin to China's social credits system, rests upon the extent of decentralisation and democratisation of the Ethereum blockchain.

And with Ethereum 'merging' to a proof of stake consensus mechanism, the future trajectory of its decentralisation and democratisation is being ferociously debated.

Watch: The Crypto Mile: Episode 6 – Ethereum insider reveals consequences of 'the merge'