Starting from Galxe's Passport event, let's explore four trends in the development of soulbound tokens

Author: wesely, The Path of Defi

When a Web3 project starts to launch services that require KYC, the outcome is predictable.

The well-known Web3 credential data network project Galxe faced a backlash after launching its own Passport, as it required users' identity and facial information. Despite repeatedly emphasizing its encrypted storage and security, this regressive approach still failed to win over Web3 users. Meanwhile, it once again brought the soulbound token (SBT) into the spotlight.

The first time I heard the term "soulbound," I thought it sounded too mystical and seemed unreliable, like a name given by a fortune teller. After reading the paper "Decentralized Society: Finding Web3's Soul," co-authored by Vitalik Buterin, E. Glen Weyl, and Puja Ohlhaver, along with numerous related articles, some thoughts began to emerge—both positive and negative. Ultimately, I completed the following content with a sense of ambiguity.

This article mainly outlines a few trends I believe will shape the future development of soulbound tokens and the potential issues they may face during this process. This is merely my personal opinion, and I welcome discussions and learning.

How to Understand Soulbound Tokens?

I see it as a proof of affiliation or, more simply, a label—an irremovable label once attached. This label can represent a certain identity, a certificate, an event, or even some on-chain behavior. For example, Nansen assigns labels like "Rare NFT Collector" and "Elite DEX Trader" to different wallets. If these labels are SBT-ified, they essentially represent a type of soulbound token, signifying a particular characteristic of the wallet owner. Through these SBT labels, a native digital identity profile can be constructed, which can be associated with the real world or not. However, in the digital world, the collection of various SBTs can shape an independent on-chain digital identity profile.

In fact, this perspective starts from the on-chain angle; the records of on-chain activities are already a manifestation of SBTs. SBTs merely make these on-chain activities explicit. If we consider it from an off-chain perspective, SBTs will be strongly correlated with the issuer. The industry and application positioning of the issuer determine the utility and influence of the SBT. For instance, the BAB issued by Binance represents a real user who has undergone KYC, so the BAB SBT essentially serves as an on-chain ID card, proving that the wallet holding this SBT belongs to an independent and unique user. This naturally explains why SBT-based airdrops might be a trend in the future, as they can easily achieve token distribution while largely avoiding witch attacks.

When discussing the use cases for soulbound tokens, they can be roughly categorized into the following types:

• Digital ID or membership qualification

• Proof of achievements, such as work experience, education, event attendance verification, reputation, etc.

• Unsecured lending

• Social recovery wallets

• Soul airdrops

• DAO governance defense

Four Development Trends of SBTs

If we understand the statement "the collection of various SBTs can shape an independent on-chain digital identity profile," interpreting the above application scenarios and development trends becomes straightforward, as they all revolve around the keyword "identity."

1. DID and On-chain Identity

If we want to build a digital society similar to the real world, what would be the first element?

Of course, it’s people; without people, there can be no society. So how do we define an on-chain digital person? Through on-chain data? That’s possible, but it’s time-consuming and labor-intensive. Currently, the development of on-chain DIDs like BrightID and Proof of Humanity has been struggling in the mire, with high costs and slow growth preventing DIDs from having the desired impact. Even if we use SBTs to label, we still need to gather enough labels to create a complete profile. The simplest way is to bridge the KYC from the real world, like Binance's BAB, which is straightforward and direct. Therefore, the combination of SBTs and on-chain DIDs will be a trend in the future, especially for companies in traditional industries that possess a wealth of real KYC data, giving them a natural advantage in this area.

DID is a vast field with rich development potential and application scenarios. Some Web3 companies hope to seize the first-mover advantage, whether it’s Gitcoin's Passport that bundles traditional social accounts or Galxe's KYC-required Passport, both aiming to create their own DID systems, as this data is more valuable than on-chain data.

2. On-chain Credit and On-chain Data Analysis

Unsecured lending seems to be an ideal for all crypto enthusiasts, and the premise for unsecured lending is a well-established identity and credit system. Identity refers to a complete on-chain digital person, encompassing various information such as digital personality and behavioral habits. Building credit requires establishing an on-chain credit system through on-chain behavior, allowing for credit ratings of different subjects. For example, in the future, there may be an on-chain credit rating agency that analyzes on-chain behavior and the SBTs held, presenting credit ratings for relevant wallet holders in the form of SBTs. Of course, this requires sufficient information to accurately display real credit ratings, which leads to the subsequent discussion of cross-chain associations of SBTs, a process that cannot be completed overnight.

Such rating agencies will need strong processing capabilities for on-chain data. Therefore, projects based on on-chain data analysis, such as Nansen, Token Terminal, Dune Analytics, and Skew, may demonstrate greater value and influence.

3. Dynamic SBT + Cross-chain

Real users are multi-chain users, so supporting cross-chain associations for SBTs will definitely be a future development direction. In a single-chain model, constructing user profiles through SBTs will have many limitations and be relatively one-sided. If we can connect all SBTs across different public chains and categorize and summarize various on-chain data and SBT types, we can more quickly and comprehensively aggregate the true characteristics of users while maximizing the utility of different SBTs.

Moreover, since SBTs are essentially non-transferable NFTs, the dynamic nature of NFTs is a trend toward making NFTs smarter. For instance, the "Proof of Merge" NFT created by ConsenSys to celebrate the Ethereum merge is essentially a dynamic SBT. Dynamic SBTs will reflect the on-chain activities of digital individuals in a more flexible and intelligent manner, showcasing more fun in areas like gaming and social interactions.

The current crypto industry is an over-financialized sector where all applications are tied to finance, whether in social interactions or DAO governance. However, over-financialization is not the entirety of an industry; speculation should not become the core of crypto. There are larger markets and imaginations to explore—connecting the existing physical world and integrating traditional businesses onto the chain in a more reasonable way. The dynamic SBT + cross-chain approach will make it easier to connect the physical society and create more potential application scenarios.

4. SBT: A New Perspective for Web2 Enterprises Entering Crypto

From the global perspective of traditional Web2 enterprises, the crypto industry still appears to be a product in a legally ambiguous zone. Due to risk considerations, Web2 enterprises often participate with a cautious attitude. If they want to delve deeper into this industry, tokens and NFTs can pose potential hazards, while the non-tradable nature of SBTs provides them with a new perspective.

Whether it’s SBTs under a membership system or integrating offline KYC into the chain via SBTs, the risks are lower. Additionally, creating multi-dimensional SBTs through Web2 methods can accelerate the construction and improvement of on-chain identities in a decentralized society (DeSoc). Perhaps in the future, there will be entities whose primary business revolves around this. In fact, Starbucks' recent NFT initiative could be a good attempt if combined with SBTs. In the future, the issuer of SBTs may become more important than the SBTs themselves.

However, approaching from this angle will be limited by the business scope and attributes of Web2 enterprises, making it less versatile than the all-purpose strategy of NFTs. Additionally, the removal of the financial attributes of SBTs may reduce the motivation for some profit-driven projects to participate, leading to a slower construction of SBT infrastructure and other application scenarios.

Main Issues Faced by SBTs

Having introduced the advantages of SBTs, let’s now discuss their drawbacks.

First, there’s the issue of privacy and security.

On one hand, there are privacy concerns regarding SBTs—what SBTs can be made public, which should remain private, and whether it’s possible to customize the scope and conditions of disclosure. These issues still need resolution, and technologies like zero-knowledge proofs may need to be introduced to balance privacy and transparency. This is particularly important for SBTs linked to real-world KYC, where security becomes even more critical.

Furthermore, the security of addresses associated with SBTs will become increasingly prominent. If a private key is lost, the consequences could be severe. For example, if an address holds SBTs for educational certificates and identity verification, hackers could easily exploit unsecured lending mechanisms for risk-free arbitrage.

In the future, as different types of SBTs are introduced, the credibility of issuers will be a core consideration. Therefore, the ability to verify issuers will be crucial. SBTs rely on their issuers, and any fraud or malfeasance by the issuer cannot be measured or judged, making the centralization of issuers a limiting factor in the development of SBTs.

On-chain Discrimination of SBTs

When someone sends malicious SBTs, it can negatively impact the identity of the address, especially regarding discrimination against different SBTs. Implementing Web2-style operations such as price discrimination, service restrictions, and entry barriers will become easier. Additionally, "account farming" may become an industry, particularly when combined with the special characteristics of on-chain identities, creating a high-quality on-chain identity that can engage in financial activities in the on-chain financial society at lower or even no cost, while the true morals and identities of the digital individuals behind it are false. This could become a financial landmine ready to explode at any moment.

Such on-chain discrimination could introduce many negative factors into the decentralized society (DeSoc). In a DeSoc, relying solely on on-chain credit may not be sufficient; authoritative institutions may still be needed to lend credibility.

Currently, SBTs are still in a nascent stage, and all assessments of application scenarios, trends, and issues are based on the existing environment. The true future of SBTs will require time to validate.