Essentially, a Soulbound Token represents commitments, credentials, and affiliations. For example, say you attend an informative conference like VeeCon—considering such an event is a learning experience, you should be accredited for your newly perceived knowledge hence you receive a Soulbound Token.
You can think of SBTs as assets that act as an extended resume and are issued by wallets that attest to these social relations. These reputable issuing wallets are known as Souls (more on this later).
Ultimately, a Soulbound token doesn’t just represent an achievement or participation in an event, rather, it can represent an array of information. From personal information such as medical records and college degrees to being a longtime sports fan, SBTs aim to be accredited social tokens.
It’s important to note that SBTs would make little sense if they don’t originate from an accredited source, aka the Soul.
Souls can be used by artists and creators alike to stake their reputations on their creations. As a creator, you can issue a tradeable NFT from your Soul. This way, the more SBTs a creator holds, the easier it would be for buyers to verify the legitimacy of a Soul in association with the creator, thereby confirming the NFT’s authenticity.
Additionally, Buterin and his co-authors note that “artists could go a step further to issue a linked SBT stored in their Soul that attests to the NFT’s membership to a “collection” and vouches for whatever scarcity limits the artist wishes to set. Souls would thus create a variable, on-chain way to stake and build reputation on the provenance and scarcity of an object.”
Considering all assets in web3 are easily transferable—therefore strictly collateral—there aren’t many options for offering people uncollateralized loans. Outside of web3, our current financial system utilizes centralized credit scores to determine how trustworthy a borrower might be.
With that, current scores have many flaws that aren’t taken into account and are generally biased towards minorities and the less fortunate. What if instead the willingness to lend someone something was based off other factors such as work history and rental contracts?
Thus, allowing Souls to stake meaningful reputation to avoid traditional collateral requirements and secure a loan. Vitalik and his co-authors elaborated on this very matter in their whitepaper saying these loans could be represented by SBTs.
“Loans and credit lines could be represented as non-transferable but revocable SBTs, so they are nested amongst a Soul’s other SBTs—a kind of non-seizable reputational collateral—until they are repaid and subsequently burned, or better yet, replaced with proof of repayment.”
Vitalik and his team also stated that SBTs offer useful security properties to prevent borrowers from escaping such loans.
“SBTs offer useful security properties: non-transferability prevents transferring or hiding outstanding loans, while a rich ecosystem of SBTs ensures that borrowers who try to escape their loans (perhaps by spinning up a fresh Soul) will lack SBTs to meaningfully stake their reputation.”
By incorporating these types of loans, new correlations between SBTs and repayment risk would emerge, leading to better lending algorithms that could predict creditworthiness and reduce the role of centralized credit-scoring entities.
Furthermore, SBTs could provide an opportunity for borrowers to partake in “community lending”, where members of a social network agree to take on each other’s liabilities.
“Because a Soul’s constellation of SBTs represents memberships across social groups, participants could easily discover other Souls who would be valuable co-participants in a group lending project,” said Buterin.