In a January 26, 2022 blog post, Vitalik introduced the idea of soulbound tokens. He lifted the name from a World of Warcraft feature, wherein certain items in the game, once picked up, could not be transferred or sold to another player. These soulbound items were usually very powerful and were only available after a player had completed a difficult quest or killed a powerful monster. Most notably, though, these actions could only be completed with the help of other players – it’s very unlikely that you could, on your own, complete a task large enough to receive a soulbound item.

Effectively, he defines the prerequisites of the soulbound philosophy: difficulty (or expertise), collaboration, and non-transferability.

In a nutshell, soulbound tokens (SBTs) are non-transferable tokens – usually visualized as a soulbound NFT – that cannot be sold.

The idea here is to reduce the focus of wealth in ownership and reputation. Research published in Blockchain Economics evaluated the 8 major cryptocurrencies at the time suggest wealth inequality in cryptocurrency to be consistent with wealth inequality in the world using traditional currencies. That is, 0.01% of Bitcoin addresses contain over 58.21% of all Bitcoin in circulation. The top 100 Ethereum addresses control over 35.13% of all Ethereum in circulation. Due to this wealth distribution, it’s incredibly easy for a few individuals or organizations to gain control over multiple functions as they can always buy majority ownership and membership in projects of interest.

Soulbound tokens are intended to subvert this inequality by placing power in the hands of those who have gained expertise and demonstrated collaboration and making the asset non-transferable, thereby removing the secondary market for these. In an ideal world, these tokens would equalize the landscape, revolutionizing the idea of social identity and capital in the space.

Let’s Talk Utility

Governance

Vitalik makes the case that non-transferable governance power could eradicate the idea of “buying power.” One would not be able to amass governance power by buying out smaller interests, and if one assumes that the competent receive governance power because of their competency, then transferability is moot.

SBTs would effectively be trying to prevent a web3 oligarchy for DAOs, where the same people hold significant voting power across multiple organizations, simply by buying a large amount of available supply of tokens. Within market conditions, such a large purchase would also conceivable increase the price of the token, further constructing barriers to entry.

A project currently working on SBT governance in DAOs is Otterspace. Most notably, they’re working with Bankless DAO to implement the non-transferable token (NTT) strategy for membership roles and designations. They also allow expiry dates for these badges, which is notable as a common critique of SBTs for governance is the prospect of assessing longevity and validity.

Membership

Because the core of soulbound tokens are social participation, a foreseeable use case for them is memberships. Participating in DAOs, joining clubs or platforms, and verifying affiliation to an organization would all be cases where an SBT would fulfill the intended purpose: representative of the owner’s participation, and unable to be traded on a secondary market, therefore invaluable. This would also contribute to the “exclusivity” of a membership, as the new requirements for entry go beyond monetary power.

To illustrate this better, let's assume SheFi decides to offer SBTs to all members. This differs from a membership NFT because that SBT cannot be sold on a secondary market: only the original recipients will be able to access the resources that come with the membership. Thus, the SBT represents not only one's affiliation with the organization but also the fact that they were vetted and accepted to the organization, thereby contributing to the recipients' reputation.

Reputation

If one could receive diplomas, certifications, and job verifications in the form of SBTs, it would be hard to contest their validity or experience. Hosting one’s reputation on-chain through tokens issued by (keyword) verified and trustworthy issuers would make any form of resumes or portfolios moot due to the permanence of the blockchain.

Proof of Humanity (PoH) is one such example of reputational verifiability and personhood that Vitalik regularly brings up. PoH is a social identity verification by Kleros that uses video + an ETH address + a social vouch to verify your personhood on-chain.

101 is another example of a platform that issues non-transferable ERC-721 badges for completing courses. 101 is a learning platform - a "metaversity" - that issues crypto rewards for completing its courses like "Intro to Tokenomics" and "Wallet Safety Essentials."

So, Why Haven’t They Taken Off Yet?

SBTs are at a fairly nascent stage right now — there are many hurdles and restrictions to their implementation. The very first visible hurdle is establishing who can send SBTs — because of their non-transferability, it would be exceedingly dangerous for SBTs to be the subject of airdrops, where assets can be transferred to your wallet without your consent. If you are an active NFT collector, you’ve probably hidden many such airdrops on your OpenSea page, transferred them to a dummy wallet, or simply burned them. The implications of spam SBTs that you can’t get rid of would make the space very annoying at best, extremely untrustworthy at worst.

This means, for SBTs to truly kick off, there need to be two established mechanisms:

1. A way to verify the reputation of the sender

2. A measure of permission for receiving SBTs from the sender in question

Creating a checks-and-balances system for the issuance of SBTs and their reputational validity is a large consideration for their success. Having a central organization to assign reputational value to an issuer defeats the purpose of decentralized interaction, however, the opposite can lead to false information being cemented on-chain. A proof-first system that requires the issuer to prove that the issued token is being received consensually could solve the permission-problem, provided there is also a protocol for the receiver to confirm that they consider the data in the token valid, and the issuer reliable. The EIP-712 Proposal from 2017 attempts to solve this by requiring the receiver’s signature for the airdrop.

For governance, the idea of non-transferability without restriction or expiry can be catastrophic. Governance tokens require the scope of mutability because governance is constantly evolving with people leaving or joining DAOs, wanting to increase or decrease responsibility, and effective governance cannot evolve in a static space. For non-transferability to apply to governance tokens, it would require an expiry or renewal function. As mentioned early, Otterspace is already working on expiry.

Additionally, a major concern in the decentralized world is privacy. While, there are ways to preserve privacy even within a non-transferable structure – Vitalik recommends a combination of a mixer (like the now sanctioned Tornado Cash), a Merkle branch, and a zK-SNARK – we’re still in the process of developing scalable zK solutions and so most soulbound tokens would not be able to preserve privacy. So, only a select few people would have access to the privacy mechanisms to not disclose their identity. Until we have more sustainable mechanisms to preserve privacy, especially considering the preference for a pseudonymous or anonymous presence in web3, SBTs could end up revealing more about a person than they’d like.

Looking Forward

There currently exist off-chain interactive solutions that have the potential to replace the functionality of SBTs. Decentralized Identifiers and Verifiable Credentials are a W3C recommended proposition for a globally unique identifier. They also offer the option of not revealing all identifying information sent to an identifier, which can be critical in terms of social profiling. This reputational system is currently being built (cc: Disco) as a presentable and consent-forward alternative to SBTs that is cross-functional across chains. For a deeper comparison between the two, this Bankless debate is a great place to start.

However, there is still something to be said about having a reputational system like this operate completely on-chain. Vitalik mentions that the reason he believes in SBTs is because it allows one to prove negatives - you’re proving the absence of something rather than the presence of something else. He believes it allows people to begin at base zero — instead of focusing on what is proved on-chain, this system starts from scratch with what demonstrably does not exist.

While there’s a lot to still build for the SBT ecosystem, I think this functionality is something worth keeping an eye on as it contributes to the landscape of decentralized identity.