Published
July 29, 2022

Soulbound Tokens: The Future of Identification in Web3?

Intro

Written in collaboration with E. Glen Weyl and Puja Ohlhaver, Vitalik Buterin recently released a white paper detailing the future of decentralized society through the use of Soulbound tokens, or SBTs. The paper outlines the problems with Web2 centralization, the dependance of Web3 on Web2 infrastructure, and the complexities associated with achieving a balance between Web3 identification whilst maintaining privacy.  It is worth noting now that Web3 is generally accepted as a blanket term often used to describe digital and cryptographic innovations enabled by blockchain technology.  The Web3 movement is centered around ideas of decentralization and data ownership. Web2, on the other hand, is commonly used within the industry to describe the internet in its current state. The authors go on to explain how SBTs function, and how they could resolve the issues that hamper Web3 from becoming a true driving force behind a decentralized society. This article will provide a brief overview of the ideas mentioned by Vitalik, as well as the defining the idea of SBTs, and their use cases. 

What are SBTs?

SBTs are a type of non-transferrable token that strive to represent social identity through different memberships and intersections with other “Souls.” SBTs can represent commitments, affiliations, credentials, memberships, or even beliefs, all of which combine to form an accurate representation of an individual's identity in Web3. A Soul’s personal beliefs and social circle should be discernible from the tokens it holds in its wallet, or SBTs. These SBTs can be issued or attested by other Souls, adding credibility to a Souls wallet from the number of attestors, or the credentials of the issuers of their SBTs. A key aspect behind SBTs is that there can only be one Soul per human, to ensure that the system is not manipulated through people issuing themselves SBTs, or through other methods. The goal of implementing the Soul and SBT system is to move towards a “Decentralized Society,” reducing dependency on the centralized systems of Web2.

Why do we need SBTs?

Web2 is too centralized

In explaining the necessity for SBTs, Vitalik highlights several problems with our existing systems, and how SBTs would help resolve them. Vitalik is critical of Web2, and emphasizes society’s reliance on the system which is moving towards authoritarianism, describing Web2 as an “architecture for opaque surveillance and social control.” This criticism stems from the extreme power a small handful of large centralized entities like Google and Facebook have in Web2, and the over-reliance on these firms to establish any form of online identity. In Web2, data ownership is king. It is the main source of strength and profit extraction for firms. Therefore, the centralized mediums for creating an identity are the ones who own the data produced by your identity. The whole system is based around monetizing and owning users’ data to do with what they will, subject to their terms and conditions and the law. This minimizes long term value creation, as it creates a bottleneck where only certain large players have access to and can profit from data. SBTs offer a solution to this problem by making all data either owned privately by the individual, or displayed for everyone to see.

Web3 relies on Web2, and has governance issues

Web3 was initially developed as a “decentralized online ecosystem,” which aimed to solve the centralization and private data collection issues that plagued Web2. Unfortunately, Web3 has relied heavily on Web2 infrastructure, and has experienced new struggles that limit its effectiveness, all of which SBTs could solve. The reliance on Web2 infrastructure originates from the inability to represent social identity in Web2. Therefore, any DAO that wants to move away from the inherently flawed coin voting system has to fall back onto Web2 architecture, which leads back to the previously mentioned issues. This is because the only way to remain on-chain for DAOs, at least currently, is to use token voting. SBTs provide a Web3 alternative. 

Token voting systems are inherently flawed for one crucial reason; it introduced centralization into a purportedly decentralized system by putting the majority of voting power in the hands of the wealthy. Token voting has also allowed for one individual to take control of a voting process simply because their spending power is higher, meaning many DAOs are dominated by whales (large token-holders). Thus these whales can ensure that the DAO, and all of the other stakeholders, serve their own self-interests simply because they hold the most influence. The problem is not with those who act in self-interest, but that the existing system allows them to dominate an entire organization and subvert any kind of democracy.

Web3 can’t yet keep up with the real-world financial system

Web3 has been criticized for being a breeding ground for speculation and short term profit, rather than long term value creation, leading to “hyper-financialization.” This is a natural consequence of the emphasis placed on the transferability of Web3 assets, something SBTs will combat naturally through holding value despite being non-transferable. SBTs are an opportunity to develop a new side of Web3: a more social and non-financial side that allows Web3 to integrate within society more effectively and meaningfully.

There are financial transactions that rely on reputation staking to occur, such as lower-collateral loans, or rent, but are impossible to execute on the blockchain because of Web3’s lack of identity confirmation. Web3s inability to provide many reputation-based services maintains the necessity for centralized Web2 organizations like banks, which allow you to stake your credit. SBTs combat these problems by enabling decentralized on-chain identity. DAOs can reward those who don’t shift liquidity during vampire attacks, tracking this through SBTs. Lastly, SBTs enable Web3 users to stake their reputation, exactly how credit does, for uncollateralized loans and peer to peer contracts.

Existing solutions for Web3’s identity problems aren’t enough.

How do SBTs solve these problems?

SBTs have the potential to innovate Web3 in a number of ways: 

Inclusive voting systems & better governance

This installation of SBTs could bring a variety of long term improvements to both Web3, and if largely embraced, will improve societal structures as a whole.

The most vital use case of SBTs is that they provide an instant solution to the token voting system which many Web3 entities and DAOs currently rely on. SBTs give every single individual member of a community governance rights, and can highlight how involved they are in a community. By issuing SBTs for participation, attendance, regular voting, more involved individuals are given higher weighted votes. This eliminates the problems of vote manipulation by whales, whose financial status does not give them instant power. It also reduces the effectiveness of bot attacks, as fake accounts will not be able to earn contribution or participation SBTs. 

Another usage of SBTs with regards to voting stems from their ability to map out social relationships, communities, and joint biases. The ability to track biases before votes will enable the discounting of certain votes or groups, to ensure that minority groups are always represented. This can be done initially in Web3 organizations such as DAOs, so that “whales” do not dominate, and can later be integrated into real world voting systems.

Breaking down Web2 data monopolies 

SBTs can offer a comprehensive solution to the data centralization problem of Web2. They offer a way to program economic incentives for collecting data, while giving individuals rights over their own data. Data being accessible to the general public removes the bottleneck created by the oligopoly of data owners in Web2. This is because dependence on Web2 by Web3 platforms is completely eliminated. Although there are some privacy concerns with making data public, these can be addressed, as will be explained later. This allows for far greater value creation, as data with SBTs becomes more of a public good.

Enabling a reputation-based financial system in Web3

The ability of SBTs to build Web3 reputations gives them a variety of financial uses which were not possible before. The permanent attachment of non-transferrable tokens means that a “credit” style history is created for a Soul, allowing for lower-collateral or non-collateralized loans on Web3. This is not the only way that SBTs can advance the financial capabilities on Web3. In Web3, property rights are often inseparable, unlike in the real world. Therefore, real world contracts, such as a rent contract, cannot occur. A rent contract allows for usage of a property, but not for its destruction or profiting (subletting). A rent contract separates property rights, which is impossible in Web3. The introduction of non-transferable and revocable tokens will amend this limitation of Web3, and therefore help bring the blockchain into the mainstream.

Solving issues with accuracy in prediction markets

SBTs will also allow for the innovation of our market prediction models from the existing two options of AI or prediction markets by individuals. They would do this through allowing large-scale quadratic polling. Quadratic polling measures the direction and degree of people’s beliefs about future events. With SBTs, every contributor’s expertise and experience can be judged and measured by model makers, allowing for them to weigh votes accordingly. Therefore, when analysts predict what happens in a market, model makers would be able to make a far more accurate prediction, using all of their individual predictions, than what was possible before. This would maximize the chances of getting the right direction of the event, therefore allowing for a greater success rate of predicting market movement.

Benefits of non-transferable assets in gaming

The non-transferable nature of SBTs provides opportunities to solve issues associated with the transferability of all cryptoasses. For example, many issues surrounding the crypto gaming industry are based on high value in-game assets being transferable, enabling wealthy speculators to buy into the game at a high level and begin to profit immediately. This idea that the top level of a game can be bought into creates an unsustainable P2E economy. Through turning the highest value/best in game assets into soulbound items, there would be some assurance that people who play the game will earn the most. This would prevent “whales” with capital coming in and running the economic loops faster than anyone else can.

Questions surrounding SBTs

Privacy is a key issue that does not have a clear answer when it comes to SBTs. There needs to be a balance between exposing enough information to make reputation staking and mapping social circles possible, without compromising an individual’s privacy. If too much information is exposed, people will feel insecure with the SBT system, and will be vulnerable to malicious actors. One solution is to designate certain SBTs as public, such as negative ones that may prevent the individual receiving a loan. Another solution to preserve privacy is to use zero-knowledge proofs in addition to SBTs. The final key debate surrounding privacy and SBTs is the debate on how to store off-chain data. Data can be either the responsibility of the Soul’s holder and be stored on hardware, or can rely on more centralized Web2 infrastructure such as the cloud.

Conclusion

SBTs offer a wide range of applications to enhance how Web3 is currently used. Web3 was designed to create large-scale decentralization, a significant challenge which is yet to truly be achieved. The changes that can be implemented to Web3 governance because of SBTs without falling back into Web2 architecture will prevent whale dominance and drastically limit sybil attacks. Moreover, engaged members of communities will be able to prove their interest and will be rewarded accordingly. SBTs can also significantly advance prediction markets, crypto gaming, and the financial capabilities of Web3 DeFi organizations through creating less of an emphasis on transferability, and building reputations. They solve the identity problems that limit Web3, paving a way for Web3 to become more useful to our everyday lives than ever before.

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