Thematic Analysis #2
This is the second article in our Thematic Analysis series. In this series, we talk about broader trends and emerging concepts in the crypto space, looking towards the future and analysing how Web3 is evolving in real-time. Let’s dive in!
Theme: Soulbound Tokens
As we’ve covered in our earlier post, NFTs are nothing but digital files (MP3, MP4, JPEGs, etc.) that live on a blockchain and are unique in nature. And being on a blockchain, they inherit all the benefits of smart contracts such as programmability, provenance, security, etc.
However, what all NFTs are, is transferable. That means, there is no restriction on your ability to send / receive an NFT to / from someone else. While this is a feature, the antithesis of the feature – the inability to transfer / receive – comes with its own set of advantages. Enter Soulbounds.
What are Soulbounds? 👻
World of Warcraft is a massively multiplayer online role-playing game (MMORPG) released in 2004, and since then has become nothing short of a global phenomenon. In the video game, players create their avatars, and get to explore an open world, complete quests, interact with other players, fight monsters, and more.
Relevant to us is the players’ ability to pick up items during their explorations, which provide in-game benefits like strength, stamina, etc. These items come in various types, but one such type is the Soulbound – a category of powerful items that once picked up, cannot be transferred to any other player. To access such items, usually a player must complete the toughest challenges the game has to offer; effectively incentivising actual gameplay as such items cannot simply be bought.
Similarly, in the Web3 context, a Soulbound token (SBT) is nothing but an NFT that, once received, cannot be transferred to anyone else. As described by the authors of Decentralized Society: Finding Web3’s Soul, SBTs can be understood as NFTs that are non-transferable, publicly visible or private, but possibly revocable by the issuer. The issuer can be an individual or an organisation. For example, a university could issue a diploma in the form of a SBT to graduates. Or a sports club could issue a SBT to a long-time fan (based on how many times they have watched the team play live). In essence, SBTs can be thought of as a mechanism to identify and reward unique users, using filters beyond those that are financial.
Before going any forward, it would be prudent to highlight the fact that, as of now, Soulbounds exist purely in theory. Given how difficult it is to natively implement on-chain non-transferability (due to all current blockchain standards designed for maximum autonomy), there are no tangible implementations made thus far, or any public proof of concepts made live. Thus, most of our discussions today will remain in between the philosophical and theoretical realms; we will focus on what the technology can do, as opposed to what it has done and is doing.
With that out of the way, let’s get into why Soulbounds are needed and how it can possibly usher along a new wave of Web3 innovation.
The Broader Context: A Need for Web3 Native Identity 🆔
In its current state, there are a multitude of use cases that Web3 has yet not delivered on effectively – uncollateralised lending, effective governance, and so on. The reason why this is so, is clear. For such use cases to exist, we will need a robust mechanism for on-chain identity and reputation.
To emphasize this point, think about the dependency on Web2 at various layers of the Web3 stack. More specifically, due to the lack of a Web3 native social identity mechanism, several stakeholders resort to Web2 solutions like an artist relying on OpenSea and Twitter to establish provenance, DAOs relying on tools like Discord to carry out their governance processes, and even us users relying on custodial wallets.
While there are multiple teams working to solve the issue of Web3 identity (like Proof of Attendance Protocol, Proof of Humanity, etc.), it is yet one of the most nascent verticals in the already nascent Web3 industry. However, solving for this is what is going to unlock serious value, thus making SBTs a worthy experiment to conduct.
SBTs in Practice 📜
Soulbounds are a step in the direction of figuring out a robust on-chain identity system.
Well, let’s go over a few use cases SBTs would be ideal for.
Academic Credentials – The educational institute issues an SBT as a proof of curriculum / course completion.
Work Credentials – The employer issues an SBT as a proof of employment and career progression.
Community Affiliation / Milestones – If you are part of a community, the collective can issue SBTs based on factors of their choosing. This can act as a proof of your contribution, and signal that you are indeed part of said community. Thus enabling you to be associated with the values of the group.
Uncollateralised Lending – Once you have a method of assessing one’s values and past activity history, lenders can use the SBTs as collateral to grant loans.
Airdrops – Using SBTs to filter down who should be eligible for an airdrop eliminates the possibility of someone buying their way into an airdrop. This is as the only way to get the SBT would be to carry out whatever action triggers SBT issuance.
Governance – With SBTs you can avoid the one-token-one-vote model and can implement a more contextual voting system. This is so as SBTs can tell us what the values and biases are of the voter. Thus, we can potentially add weights and arrive at a more neutral outcome.
While these all sound very promising, like with everything, there are pros and cons to be weighed.
Soulbound tokens mean that social reputation can’t just be sold to the highest bidder. Creating on-chain reputation systems using items like NFTs and wallet holdings that are tradable and purchasable is less secure than using tokens that signify that you yourself ‘completed work’ (i.e., attended an event, completed tasks for your organisation, contributed to a community initiative, etc.). Since SBTs are only received on the basis of one's actions, it provides sybil resistance to a certain degree since ‘work’ has to be done in order to attain an SBT, which (theoretically) should not be able to be ‘gamed’ by multiple wallets. However, this is not necessarily true because, as we’ll discuss below, bots can be used to ‘farm’ SBTs, which needs to be guarded against.
Moreover, being on-chain, SBTs provide provenance and the ability to signal values / personality characteristics in a non-exclusionary manner. Vitalik explains this point best here.
Finally, a unique characteristic of SBTs is that they can allow for contextual on-chain governance. What does this mean? Essentially, in a community, each member’s SBTs are transparent and on-chain, and therefore publicly visible for all to see. It therefore becomes easier to see the diversity (or lack of it) in terms of the ‘ideological preferences’ that a group of voters have. If, for example, a diverse group of voters with a range of ideological preferences votes for Option A, and a group of more homogenous voters votes for Option B, then more weight can be given to Option A since it represents a wider sect of the voting population. This can potentially help in alleviating echo chambers and avoiding herd mentality and groupthink. However, this is only one side of the story – there are cons to being able to weight voters, as we’ll see below.
Firstly, privacy is a major consideration when opting in for an SBT. To begin with, on-chain privacy is a tough problem to solve as a publicly accessible ledger is a core tenet of Web3. You likely wouldn’t mind making publicly visible an SBT you received from your favourite clothing brand or artist, but you would for an SBT of, say, your medical history.
Secondly, while SBTs make this tough, ‘SBT farming’ will most likely still happen as people try to game the system. People can create bots, for example, that complete tasks which grant SBTs – on-chain reputation can potentially be fudged, making it less trustworthy. SBT systems will need to be designed to mitigate this issue from the very beginning.
Another consideration to be made would be that of cross-chain and off-chain interoperability. If SBTs only exist on one blockchain, it will silo the use of these identifiers to that one system. What about people using another L1? Or people not using blockchains yet? While still valuable, it will limit its utility in the “real world”.
Moreso, the nomenclature of SBTs is very uninviting for the average user. This is a problem with Web3 in general – we need to be a lot less complex with our terminology and make it more intuitive and obvious for people to understand what they are signing up to. To get into the mainstream as something other than ‘another product created by the crypto bros’, the marketing needs to improve and move on from being esoteric and difficult to grasp from the get-go.
Lastly, coming back to the point of weighting votes based on ‘ideological preferences’ – this may be a pretty dangerous idea. You can end up ignoring the perspectives of one group just because they’re similar, and then the question becomes ‘who is making the decision that the perspectives of a similar-thinking group of people should be less impactful than those of a group with more diverse perspectives?’ In the hands of autocrats, this fine-tuned targeting could be severely misused, especially if people aren’t given the option to accept or reject an ‘SBT-drop’.
Privacy, the Choice to Accept, and Verifiable Credentials ✅
The very last point we touched upon above is critical enough to deserve a section of its own. People should be given the option to accept or reject the issuance of a token to their wallets, i.e., their identities. If they aren’t given this option, and all data is forever publicly visible, then there is a severe lack of privacy in the identity system.
An alternative could be Verifiable Credentials (VCs), which can be thought of as digital versions of credit scores, defaults, criminal records, identity cards, membership cards, etc. VCs are closely linked to ‘Decentralised Identifiers’ (DIDs), which, as described by disco.xyz, are ‘aliases for our existing addresses (Ethereum address, email address, website, Bitcoin address, etc.) that make it easy to prove ownership and control over other identifiers’. A VC is cryptographically signed by a DID about another DID. As an example, take a graduation certificate, which is a VC. The certificate is signed by the DID belonging to my university and is attributed to my DID (wallet address). The important differences between VCs and soulbound tokens is that VCs are issued off-chain and the data is stored off-chain. The credential that I receive is encrypted, and only I can choose when and for what purpose to decrypt it and display it publicly.
The VC method has trade-offs – the primary one being that reputation systems are not as perfectly tailored due to all information not being public. However, privacy is a considerable benefit, as is the ability to accept or reject the issuance of VCs.
A great example of a project built on the primitives of DIDs and VCs is disco.xyz, as mentioned above.
Closing Thoughts ⌛
Web3 today most definitely enables a higher order of economic value creation (primarily via tokenisation). But, in the physical world, a lot of value creation is based on human relationships. Today, all the data I have to make a judgment about an on-chain user is their history of financial transactions – what they bought, transferred, airdropped, exploited, and so on. There is no method to describe qualitative traits of individuals.
Thus, in essence, not only are SBTs solving for the decentralized identity problem, but also are an opportunity to de-financialise the entire crypto sector (which has got a bad reputation for being ‘money-oriented’). What this eventually does is usher in a new era, termed Decentralised Society (by E Glen Weyl, Vitalik Buterin, and Puja Ohlhaver in their paper) – a Cambrian explosion of political, social, and economic applications, underpinned by Soulbounds.
With the core goal being to decentralise every layer of society, blockchains are already, to a certain extent, underway at decentralising the financial substrate of society. However, the social, societal substrate has not been affected, yet. We are still to see how this will look in practice. In our opinion it is not going to be a hole-in-one; it is most likely going to be an iterative process to achieve a ‘Decentralised Society’.
While these may sound like utopian claims, remember, you don't need a perfect system, you just need one better than the current. Never let perfect be the enemy of good.
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