By creating an alternative financial system with exceptional flexibility and innovation in less than ten years, Web3 has stunned the world. Fundamental economic and cryptographic factors such as smart contracts and consensus mechanisms have helped create an open source system for conducting and authorizing financial transactions.

However, the Decentralized Finance (DeFi) platform cannot support direct contracts such as an apartment lease contract because it lacks a native Web3 identity. This article aims to show how even modest progress toward representing social identity using soul tokens can circumvent these limitations and redirect Web3 down an authentic and more transformative path.

What are Soul Tokens (SBT)?
Projects and use cases that focus on social identities and communities rather than just money are required for blockchain to be at the core of great, collaborative ecosystems. To address this issue, Ethereum co-founder Vitalik Buterin, along with Puja Ohlhaver, strategy advisor at FlashBots, and E. Glen Weyl, political economist and social technologist, introduced the concept of tokens in a paper titled “Decentralized Society: Researching the Soul of Web3” .

According to the authors, tokens provide the foundation soul for a decentralized society (DeSoc), a co-defined social community in which communities and souls come together from the bottom up as emerging features of each other to co-create multiple networked goods and bits of intelligence at different levels. A soul token is a publicly non-verifiable, non-transferable (NFT) token that represents an individual’s credentials, affiliations, and obligations. So, what is a non-transferable token?

Non-transferrable tokens refer to NFTs that can help track reputation and are added to addresses but cannot be sold. But what do the “souls” in soul NFTs refer to? Wallets or accounts to which SBTs or non-transferrable tokens are permanently linked are called Souls. For example, an ethos could represent an individual’s employment history, which could be self-certified similar to information on an individual’s resume.

But, when SBTs possessed by one soul can be issued – or witnessed – by other souls who are counterparties (for example, individuals or organizations) to these relationships, that is, when the true power of the mechanism is revealed. For example, the Ethereum Foundation might be a spirit giving out SBTs to those who attended an Ethereum conference. According to the paper, the concept of “pluralistic network clusters” refers to the interactions and connections within networks and are the most important drivers of economic growth.

How do soul tokens work?
Soulbound tokens may help Web3 networks use non-transferable tokens as indicators of reputation rather than relying on money-centric frameworks to achieve the same. For example, the lender currently checks the borrower’s bank account balances, credit scores, and payment history to provide a secured loan.

However, with SBTs representing one’s credentials, reputation will act as collateral for a secured loan. Now, if you remember the basic concept of NFTs, they represent property or assets with some monetary value. But, how do you check someone’s reputation in an untrusted blockchain-based system?

To understand this concept and the functioning of SBTs in the Web3 space, let’s take an example of a Decentralized Autonomous Organization (DAO) voting system. Most DAO governance models allocate voting power based on the number of tokens a member owns.

However, DAOs issuing SBTs can prioritize reputation over the tokens held by the member. Reputation can be verified through users’ interactions with the community. For example, awards obtained from Kusama’s governance bonus program for each chain’s referendum member’s vote can be used to represent its reputation.

However, the prizes serve as a visual representation of a member’s on-chain activity in Kusama and Polkadot DAOs, which may now be enough collateral for a secured loan. Additionally, a reputation-based voting system may defend DAOs against Sybil attacks.

A Sybil attack involves one or more bad actors taking control of the majority of governance codes to redirect the project in their favour. Soulbound tokens can be publicly verified, and that can protect DAOs from being trapped by bad actors. For example, souls holding respected SBTs may be assigned majority voting power to protect the integrity of decentralized autonomous organizations.

However, do soul tokens exist? There are some examples of how spirit tokens are used in the Web3 world, which are described in the section below. But. When will soulbound tokens be available? Binance Account Bound (BAB) will be the first SBT issued by Binance on the BNB chain. The BAB code will not have any monetary value and is not transferable.

It will serve as a digital verification solution

Source: CoinTelegraph