What are Soulbound Tokens and How do They Differ from NFTs?

Soulbound token (SBT), also called a non-transferable token, is a type of NFT asset that can only be sent to one blockchain address.

You can’t move or send the SBT token to another blockchain address. A token that can’t be moved is only given out once, and only the person who owns the address can use it.

The direction of Web3 technology is toward non-transferable tokens, which are a link between users, blockchain services, and DAO.

Even though there aren’t many real-world examples of SBT use yet, it could become a popular way to check the identity or other information of its owner.

Soulbound Token (SBT) Explained

Soulbound is an NFT token that can only be used at one address. It can’t be moved to another address or sold. A token like this that can’t be given to someone else gives the owner special rights and chances. The token can also prove that certain conditions have been met, that the user is a member of the community, and that the user is unique.

Vitalik Buterin, who created Ethereum, came up with the idea for SBT. He wrote about it for the first time on his blog in January 2022. Buterin brought up the fact that players in the online game World of Warcraft sometimes give away rare items that can only belong to one player. He suggested that this rule be used for non-fungible tokens (NFT): NFT can only be made for a specific address in the blockchain and must always be tied to that address.

To get such a token, you might have to meet certain requirements or do certain things. In exchange, SBT may give its owner special features or advantages. For example, a soulbound token can be used as proof of a diploma or a course completion certificate, or as a “entry ticket” to a community or club.

Buterin developed the idea of SBT in a new paper called “Decentralized Society: Finding Web3’s Soul,” which came out in May 2022 and was written with economist Glen Weil, social technologist Pooja Olhaven, and lawyer Pooja Olhaven.

The paper talks about a model for a new decentralized digital society that would be similar to China’s “social rating” and “digital karma.” It would be based on Web3 technologies, blockchain, and tokens that can’t be traded.

Example of Soulbound Tokens (SBT)

Buterin used the POAP project, which gives exclusive NFTs to people who attend themed events, as an example of SBT in the same article. Adidas held one of these giveaways and gave away a set of POAP tokens in November 2021.

The company then used these tokens to get into the NFT collection made by the Bored Ape Yacht Club (BAYC), GMoney, and PunksComic projects in collaboration. Buterin pointed out that POAP were not perfect because they could be sold again.

Where soulbound tokens can be used (SBT)

The crypto industry does not yet use SBT technology very often. Buterin, Weil, and Olhaver’s work, which was mentioned above, shows how it could be used.

Social scores and loans

In the future, your social rating and reputation will affect your ability to get a cash loan or other type of loan. It can be stored as a number in SBT, which gives the borrower a way to prove their credit history that can’t be destroyed. In the future, SBT-based specialized products may also be used in DeFi.

The DAO and groups

SBT can be used as a part of a way to run a decentralized organization’s government (DAOs). Optimism, a second-level solution based on Ethereum, is already planning to use SBT tokens for one of these use cases. The proposal says that non-transferable tokens could be used to get into different “chambers” of the Optimism DAO. Each “chamber” would have its own functions and rules.

Airdrops and Business

Soulbound tokens make it possible to tweak airdrops, which are a popular way for the crypto industry to encourage and engage the community by giving out cryptocurrency. SBT can also be used for other marketing purposes. Adidas has already shown how this can be done by using soulbound tokens as “VIP tickets.”

Ownership

SBTs can be made by people who make digital art or content as a proof of authorship for collectors and regular buyers. This method isn’t just useful in the art world. It can be used in any situation where the holder’s identity needs to be confirmed, like on an education diploma or a certificate of ownership of real estate.

ID confirmation

Using soulbound tokens can make it easier to buy things from the DeFi market and use Web3 services. A user can only prove who they are once in one app, get an SBT as proof, and then use it in other apps.