In May 2022, Vitalik Buterin published an article where he revealed the concept of Soul Bound Tokens (SBT), a new type of NFT token that will be released at the end of 2022 on the Ethereum network, which will provide a more personalized and social experience in the Ethereum ecosystem.

This has confused many about what SBT is, exactly how they will be implemented and used, and whether they will improve user interaction in the blockchain ecosystem. In this article, we will explain what SBT is, tell you how to use them, and consider the decentralized society (DeSoc) proposed by Buterin to better understand how this new technology will affect the blockchain ecosystem.

What does Soul mean? To understand this technology, you need to understand some terms. Souls is a term used to refer to the addresses of individual wallets that are uniquely involved in the ecosystem. There are no conditions that one Soul is attached to one person in real life, or that the Soul cannot be sold or transferred to another person. However, for simplicity of explanation, consider that the Soul is a person, and exceptions to this rule will be discussed in subsequent parts of the article.

What is SBT By definition, SBT is a publicly available non—transferable token that can be issued either independently or by a counterparty and can be revoked by such a counterparty. Until now, all forms of value in the blockchain ecosystem could be transferred.

NFT and tokens are constantly exchanged, and although they can be in the same wallet at any time, nothing obliges them to stay there. The main function of SBT and its main value proposition is to link SBT to this wallet. Since SBT cannot be transmitted, it serves as a social indicator of the actions of the Soul and indicates which type of actors this Soul belongs to.

To understand the context, read this comparison:

If there is ETH in the wallet, it is not known what ETH is needed for, or if the Soul received ETH with malicious intent (for the most part). The soul can exchange this ETH, use it for gas, buy NFT, etc.

However, if the wallet contains SBT, there is a clear indication of what the Soul has done to obtain SBT and what SBT means. SBT can mean an outstanding debt that needs to be paid, an apartment rent, a college degree; any type of data that is specific to this Soul and cannot be transferred to another Soul.

As mentioned earlier, the simplest form of SBT can be certified independently. It can take the form of a summary in which personal information is disclosed at the public level and verified as belonging to a certain Soul.

However, SBT certified by the counterparty is the place where the real value and functionality of SBT can be realized. Buterin's article uses an example of a loan, according to which the entity providing the loan issues SBT to the Soul receiving it in order to publicly indicate that the receiving Soul has a debt. Since this is a non-transferable token, the SBT will remain with the Soul until the loan is repaid, after which the entity that provided the loan can withdraw the original SBT and issue a new one, which indicates the creditworthiness of the Soul that was able to repay the loan.

With this example, it's easy to see how SBTs can demonstrate a personalized aspect of the blockchain ecosystem that doesn't exist yet. SBTs allow us to quantify social nobility in areas such as lending, DAO voting and events in the real world. In addition, SBTs can now guarantee shortages in sectors such as art and real-world tokenized assets; two use cases will be discussed later.

And what does DeSoc mean? DeSoc is an ecosystem in which every Soul has a culmination of SBTs that describe how they operate on the network. Based on SBT or a combination of them, Souls can interact with each other or protocols on a more personalized basis.

Personalized loan rates, voting rights in the DAO and quadratic financing are all possibilities if DeSoc exists. In fact, DeSoc will encourage good management of the blockchain ecosystem and discourage negative behavior (for example, loan evasion), as it will be publicly visible.

In addition, DeSoc will be able to create bridges between the real world and the blockchain space, since users can create a secure system using social confirmations in the blockchain about real events.

Areas of application of Soul Bound tokens To truly understand the value proposition of SBT, it is important to understand the various applications that they SBT may have in the blockchain ecosystem. This section will discuss many of the main applications published in Buterin's article on SBT, providing more context on how SBT will integrate into the current blockchain landscape.

Art Artists are now using overly centralized platforms like OpenSea to publish their NFTs to ensure scarcity and demonstrate the provenance of the collection. However, SBT will allow artists to independently produce NFT and verify that the work is in the collection and is associated with the artist.

Since SBTs cannot be transferred, one can be sure that the artist has produced NFTs, and the further sale of such NFTs may be related to the artist's SBT, showing that the work is actually original and comes from the original creator. Although this example uses art, in particular NFT, it is important to note that this ideology applies to all markets based on scarcity as a form of value.

Lending Throughout Buterin's article, lending may be the most discussed area of SBT application; especially unsecured lending. There is a good reason for this, since traditional financial markets were able to offer unsecured credit services based on social criteria, which was not the case in the blockchain space.

To put this in a more pleasant context, consider a credit card. You can spend money that you don't actually have, provided you pay it back later. This transaction can happen because lenders use credit scores to determine a customer's creditworthiness. If you have a very low credit score and a bad credit history (along with other financial factors such as income, etc.), you are likely to have a lower credit limit with a lender, if you have one at all. On the contrary, someone with an established credit rating and history will be able to take out much larger loans as they are more likely to repay them.

Now, how does SBT transfer this application to the blockchain? With SBT, you can register the credit history of the Soul by issuing SBT debt obligations, as well as SBT debt repayment, which will paint a picture of the credit history of the Soul. For example, suppose a Soul took out and repaid five separate loans in different cases, a decentralized lender is more likely to give the Soul an unsecured loan, since the Soul is more likely to repay the lender.

What to do if the Soul does not pay? Couldn't they just run away with all the money? Since SBTs are non-transferable, there are two safety nets in this regard. Firstly, SBT, meaning debt obligation, will remain tied to the Soul, and other decentralized creditors will no longer lend to this Soul.

As an extension, if the full DeSoc is indeed implemented, many other services in the blockchain ecosystem may refuse to service Soul with a bad SBT record. Secondly, loans will be given based on the SBT record, which means that one Soul cannot simply transfer money to another fresh Soul and hope for the same lending opportunities. The reputation of the new Soul as a reliable borrower must be established before a decentralized lender will consider providing an unsecured loan.

Although unsecured loans are the main subject of discussion above, the same logic can be applied to interest rate discounts, the amount of collateral needed and the tokens you can borrow; everything is based on the SBT record that Soul has. SBTs have deep application in the credit industry and will allow a decentralized blockchain ecosystem to provide outdated banking services that rely on trust and social nobility.

Souldrops Airdrops were an integral part of many protocol releases and allowed projects to easily distribute tokens to users. However, some of the disadvantages of airdrops are the ability for one user to create multiple wallets to combine tokens, as well as the lack of criteria necessary to obtain an airdrop. However, with the help of SoulDrops, tokens can be distributed among souls who possess certain SBTs, which means their participation in the project. In addition, it allows builders to make weighted drops depending on the number or type of SBT that each Soul owns; rewarding the most active community members.

Finally, SBTs will allow protocols to reset tokens as SBTs, which can later turn into transferable tokens after a certain time or after the user performs certain actions.

DAO of the Soul DAOs are known to be vulnerable to sybil attacks, when one participant will influence the DAO through various wallets in such a way that it benefits them. However, using SBT can solve this problem. Ultimately, DAOs want decisions to be made in the interests of all members of the DAO; therefore, it is in the interests of the DAO to have voices that represent the widest range of opinions within the organization.