Soulbound Tokens: The Next Big Ethereum Token Standard?
Earlier this year, Ethereum founder Vitalik Buterin wrote a blog post about Soulbound tokens. Though this sounds like a confusing and complicated term, the idea itself is quite simple and has a wide variety of use cases that could help propel blockchain and crypto to mainstream adoption.
NFTs are currently used for all sorts of different applications, with their main use being speculating on and trading digital artwork. This is facilitated by platforms like OpenSea and UniqueHash, where users can buy, sell, and exchange their NFTs for cryptocurrencies. However, the use cases of NFTs expand far beyond speculation into some revolutionary ideas and protocols.
Proof of Attendance Protocol, or POAP, is a project that uses NFTs as badges and collectible items to represent a significant event. Their slogan, “bookmarks for your life,” captures their goal of using NFTs as a way for users to signify their attendance or recollection of a certain event. For example, POAPs are given away at most blockchain conferences, and some cryptocurrency projects give them to token holders when a significant milestone is reached.
These POAPS, like any NFT today, get some sort of monetary value associated with them and thus are sold on markets like OpenSea. However, this somewhat negates their use case as a collectible item exclusive for people who were at a certain event. If anyone can buy a POAP stating that they went to Devcon in 2016, then what is the point of giving out the exclusive item in the first place? This question extends to several different use cases of NFTs, such as decentralized identity solutions and blockchain-based game items. The transferability of NFTs, while great for efficiency and free-market economics, can significantly hinder their use case.
In his article, Vitalik proposes the idea of soulbound tokens. These tokens would behave similar to NFTs or Ethereum-based tokens available today, but would be non-transferable and “soulbound” to the wallet of the person who first received them. This opens up a wide variety of opportunities and possibilities for NFTs and makes it much more possible for them to be used as a tool in our everyday lives.
For example, let’s say there is a country that uses a blockchain-based voting system, and each citizen has an identity card represented by an NFT. If these NFTs were transferable, citizens could effectively sell their vote to the highest bidder by selling their NFT. However, with soulbound tokens, nobody but themselves can vote or access their identity card, making it truly unique to them and nobody else.
Naturally, whenever a new technology emerges in the cryptocurrency space, the first thought on most investors’ minds is how they can invest in its success. In the case of soulbound tokens, the idea is so new that there are not many public projects working exclusively in that area. The best way to invest in the idea of Soulbound tokens is to invest in tokens and projects that facilitate the creation and use of NFTs, such as Enjin Coin, Chiliz, and Flow. These projects are focused specifically on the NFT space and if the idea of soulbound tokens takes off in a significant way, it is likely that these tokens will adopt the technology and allow users to implement it into their NFTs in some way.
Another project that has an interesting role in the proliferation of Soulbound tokens is Kleros, a decentralized arbitration service that was created to solve Web3 disputes in a decentralized manner. Holders of the PNK token can stake their tokens and become a judge on different Web3 disputes, such as whether or not a decentralized insurance protocol should payout, or if a DAO employee lived up to the terms of their contract. With Soulbound tokens, it is likely that there will have to be some way to transfer them from address to address in case someone loses access to their Ethereum wallet. In these cases, it is likely that Kleros will be needed in order to prove that an individual is the true owner of the address and that they are allowed to transfer their soulbound token to a new address.
Even though soulbound tokens have yet to take off in a major way in the blockchain industry, it is likely that they will be more widely adopted in the near future. Allowing all NFTs to be transferable is a recipe for disaster when NFTs start being used for identity solutions and other sensitive items, and soulbound tokens offer an elegant solution that could make NFTs mainstream.
By Lincoln Murr