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Soulbound tokens make ownership possible through a predetermined process that cannot be compromised after the fact. This article explores how soulbound tokens work.
What is Soulbound Token?
Inspired by the massively popular multiplayer game World of Warcraft, Ethereum founder Vitalik Buterin came up with a concept called “soulbound tokens.” The idea is a shift from giving out the ownership of NFTs to the highest bidder or the monetization of non-fungible tokens. Soulbound tokens restore the true value of NFTs—the work or activity carried out to earn these tokens.
In an ideal situation, soulbound tokens are non-transferable NFTs held in a special type of wallet that is only accessible by the user who created it. A cryptographic technique known as “zero-knowledge proofs” ensures that no one else can see the wallet’s contents or access the tokens.
It is, in fact, correct to imagine soulbound tokens as an innovative way to safeguard and secure ownership of other important data. With soulbounds a token is locked to a single wallet representing a soul or a unique individual. The content of such NFTs will include the effort and requirements fulfilled to acquire certain verification that cannot be purchased randomly in the open market.
How It Works
There are two possible implementations of soulbound tokens, according to the original proposal written by Vitalik Buterin. The first is to design a system that works like the proof-of-humanity protocol, allowing anyone to create a non-transferable NFT. Even in cases where individuals try to transfer the NFTs, the original owner can request that the system deletes the transferred profile and components of the NFT.
Another approach to soulbound tokens would involve bounding NFTs to asset participants in the system will be less likely to transfer. A good example of such an asset would be their ENS name. Or other forms of identity that users will be less willing to tradeoff for anything else. Such a system is possible if it remains convenient and secure for holders to hold the token.
Consequently, if any of the aforementioned setups was adopted, one way to ensure privacy would be to store the user information, which could be personal, in an address which is the hash digest of an index or owners, the recipient address, and the content of the soulbound token.
Equally, a different approach could involve publishing the ownership data of a bunch of items and distributing an encrypted copy of these data to their owners. The owner can prove that they own the data using a cryptographic method such as zero-knowledge proof that protects the user’s personal information from unauthorized access.
The following are some of the most important use cases for soulbound tokens.
Use Cases of Soulbound Token
Education and Licenses
Drivers’ licenses, birth certificates, university diplomas, national IDs, and passports will be worthless if anyone with enough cash can pay to get these important credentials from those who have them. The essence of the process, which takes many years in the case of an academic degree, is also defeated to a great extent. Non-transferable NFTs like soulbounds tokens will tackle such problems and ensure a more reliable and verifiable system across the globe.
Again, soulbound tokens will also be essential for building future governance in ideal physical states and decentralized communities. The power-hungry are often the least suited for power. Nevertheless, election in most societies is often a decision between wide distribution, popularity, and competence.
In a widely distributed governance criteria scenario, the power-hungry can reach their end by whatever means. In other words, they can pay those who own the votes to multiply their numbers and emerge as the majority.
Identically, the incompetent but resolute can also buy power in a system where competence is a core criterion. Soulbound token is again a lasting solution in both scenarios as it will ensure that only those who are qualified or represent the fair majority get access to power. They achieve this through unalterable criteria recorded in the soulbound or token of the candidates.
Soulbound tokens allow NFTs to represent who people are (their souls) than what they hold. Information such as job history, current salary, and credit status can be stored in a soulbound to determine eligibility for future credit. Using reliable data available through soulbound tokens, DeFi lending protocols can also issue collateral-free loans to deserving users of their platforms.
Benefits of Soulbound
The non-transferability of soulbound tokens creates room for many possibilities in the physical and virtual worlds. As the line between both worlds continues to blur soulbound tokens will form the basis for reputation and collective decision-making.
Furthermore, the most evident implications of soulbound tokens are governance rights. Using soulbound tokens as proof of participation, only eligible DeFi community participants can vote on decisions pertinent to their community.
Soulbound tokens are also being used to give exclusive membership to DeFi users who meet predetermined and fair criteria. Being an exclusive member of DeFi community events can also strengthen the user’s reputation and increase opportunities for the user in the community.
Again, in an era where bounty hunters are abusing airdrop tasks and criteria with bots and multiple wallets, soulbound tokens can help prevent spam and restore sanity and fairness. Protocols can distribute airdrop to eligible users while other users will be motivated to meet the requirements set by the platform.
All in all, the importance of soulbound tokens is far-reaching. Within protocols, holders of non-transferable soulbound tokens who have met the requirements will build a healthier ecosystem by making the best decisions free from manipulation and centralized biases.
Also, the money-oriented nature of DeFi, which has made almost every NFT a price tag, will be contained. Without transferability, the criteria for acquiring NFTs of any kind especially gaming NFTs, will be fulfilled. Participants will also derive more fun and become more committed to decentralized projects and communities.
Despite the constraints such as privacy and the difficulty of finding a perfect setup, soulbound tokens will come at two critical compromises. First, the NFTs or objects could be attached to a system like proof-of-humanity, making transferability impossible, or to an item such as a domain name that is so important to users.
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These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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