Uncovering Soulbound Tokens: What The New KYC Check Means For The Crypto Ecosystem
2022.08.22 02:58
Uncovering Soulbound Tokens: What The New KYC Check Means For The Crypto Ecosystem
The cryptocurrency sector has grown tremendously in importance since its inception, but just as dangerous to boot. Recosnizing the growing risk, exchanges implemented the ‘Know Your Customer’ (KYC) protective measure as part of an effort to mitigate fraud and identity theft. For this, businesses typically require users to submit important information about themselves in order to be able to verify their identities.
As the same verification protocol used by traditional banks to checkmate the vices employed against them, KYC checks aim to identify and verify clients before allowing them to make transactions. Despite the measure, there are still reports of customers’ identities being stolen, indicating that KYC systems may not be all that safe for exchanges.
KYC checks offer, among other things: improved customer transparency and trust; reduced potential for money laundering and other such scams; reduced legal risks; and enhanced stability in the crypto market. Even despite that, the bad eggs masquerading around the crypto world work to actively ruin what good has been built up so far.
As a result, many are asking the question: “what if there was a better way to effectively verify and document personal customer information in such a way that it can never be transferred from a single place all at once?” That’s just one of the many solutions that ‘SoulBound Tokens‘ (SBTs) aim to offer the decentralized economy. But what exactly are SBTs, and how do they help in the fight against identity theft and cybercrime at large?
In this piece, we will share everything you need to know about SoulBound Tokens, and what they mean for the crypto ecosystem.
What Are SoulBound Tokens?
The concept of SBTs was conceptualizd sometimes in May 2022 by three proponents: Ethereum Co-Founder Vitalik Buterin, lawyer Puja Ohlhaver, and E. Glen Weyl, who is an economist and social technologist.
Essentially, SBTs are non-transferable, publicly-verifiable, digital tokens that can act as a type of CV for Web 3.0 users, providing an individual’s memberships, credentials, and affiliations. Although SBTs are primarily non-fungible tokens (NFTs) in nature, their ownership is non-transferrable, contrary to standard NFTs.
The non-transferable property of SBTs therefore implies that they are indefinitely bound to an individual, thus the prefix “soulbound”. It is for this reasion that Buterin describes these NFTs as an “extended resume,” whereby all information on a “soul” would be stored on the blockchain, acting as a sense of evidence provenance and reputation.
Binance and Other Crypto Platforms Adopt Soulbound Tokens
Despite the concept being in its infancy, several platforms are already actively using SoulBound Tokens as a means of certifying and even incentivizing the credibility of their users. The following are prominent examples of some of the platforms to have adopted SBTs so far:
1. Binance
Binance is the most recent crypto exchange to have launched ‘BAB’, a SoulBound Token on the BNB Chain which serves as a decentralized equivalent to the KYC requirements upheld on the exchange.
The token is officially called the ‘Binance Account Bound’ (BAB) token, and will act as certification of a wallet owner’s verified user status on Binance. BAB will also be available for use by third-party protocols.
Ownership of BAB tokens is optional for Binance customers, who can choose whether to complete KYC checks via the SoulBound Token system, or by more traditional means.
2. Phala Network
In June, the Phala Network announced the official release of the first use case for SoulBound Tokens in ‘PhalaWorld’, a metaverse gamification extension based on the Phala Network blockchain.
The new ‘Play to Build’ concept combines user behaviour, characters, communities, and sci-fi stories on the Phala blockchain, integrating strategy, development, MMORPG, and other game genres.
Inside PhalaWorld, players control NFT entities called ‘Spirits’, and use ‘Fat Contracts’ to tie their in-game and off-chain identities to external social media platforms and services, such as Twitter (NYSE:TWTR), TikTok, and Instagram.
3. Idexo
In July, Idexo, announced support for SoulBound Tokens within its Web 3.0 SDK, allowing developers to add the tokens to projects “with just 1 line of code.”
Idexo also offers non-coders a simplified means of doing this with just a few clicks in its web application. Idexo customers and users can create SBTs on Avalanche, BNBChain, Ethereum, Fantom, and Polygon, with more blockchains expected to be added soon.
The Pros & Cons of Soulbound Tokens
SoulBound Tokens have the potential to change the cryptocurrency industry in many ways. Naturally, however, they are not without their drawbacks, especially since the concept is still in the early stages of implementation. Regardless, the following are some of benefits of SBTs:
1. Digital Resumes: SoulBound Tokens can hold records such as academic credentials and employment details, enabling prospective employers to accurately verify a candidate’s work history and qualifications.
This use case helps to weed out those who may otherwise lie on their CVs while looking for a job, as happens in many cases. Since SBTs can be publicly verified, they provide organizations and corporate bodies with a smoother process in the recruitment stage.
2. Defi Borrowing and Lending: Another potential benefit of SBTs lies in the documentation of personal credit reports, making the borrowing and lending process more transparent and frictionless.
Additionally, using SBTs, DeFi protocols gain the ability to issue uncollateralized loans by leveraging a Soul’s real time relationship level across multiple communities as a social credit score.
3. Reputation Preservation and Accolade System: Corporate entities can issue important certificates, such as letters of participation, honorary awards, and letters of commendation, as SoulBound NFTs.
4. Souldrops: Crypto projects typically form the basis of their communities by launching airdrops and carrying out token sales. However, these processes are often subject to Sybil attacks, or simply fail to attract the right community.
According to the concept of ‘Souldrops’, as described in Vitalik Buterin’s whitepaper, projects could potentially attract the right communities for them by conducting airdrops based on computations from SBTs, or other tokens within a Soul.
For example, a project based on improving sustainability can airdrop governance tokens to Souls with SBTs that signify involvement in past, sustainability-related activities.
On the Flipside
As previously noted, SBTs are a novel concept, but are not without flaws, and there are a number of obstacles that make them challenging to adopt outright. Some such drawbacks are listed below:
1. “Too Much” Information: SBTs run the risk of holding too much sensitive information about a person, which could lead to customers feeling vulnerable.
2. Complexity: SBTs are a new concept, so their implementation and use can prove to be quite complicated, especially for those who are not yet familiar with the core concept of NFTs.
3. Criticism of Proof of Work: SBTs may come under criticism for their lack of energy efficiency if launched on Proof of Work blockchains.
What the Latest KYC Check Means for the Crypto Ecosystem
The new use cases introduced by the advent of SBTs stand to break new ground in the crypto industry. Exchanges, in particular, now have a new way of safeguarding customers against the likelihood of being hacked, and to protect themselves from mingling with fraudulent actors posing as clients.
Regarding governance rights on the blockchain, terrible events can easily occur when governance power is easily transferable. Woth the implementation of SoulBound Tokens, on-chain voting requirements can be enforced through single-person, single-vote rules for proposals.
Perhaps the foremost value of non-transferrable SoulBound NFTs would lies in the facility of provenance for NFTs. NFT owners currently have to depend on centralized systems, such as OpenSea, in order to prove ownership for their unique digital assets; SoulBound NFT could resolve this problem, as creators would be able to mint NFTs from their blockchain accounts or wallets, AKA Soul. The more tokens a Soul accumulates, the easier it would become to verify the legitimacy of an NFT.
Why You Should Care
SBTs are revolutionizing KYC protocols in the crypto ecosystem, particularly in light of Binance’s recent integration of BAB. Many crypto investors are excited to see just how the use of BAB will unfold on Binance as the crypto exchange continues to explore them. Of course, the potential use cases of SBTs are endless; and the way SBTs stand to redefine digital identity and governance on DAOs is just the start.
SBTs now serve as a benchmark for creating a decentralized society in the Web 3.0 ecosystem, with attested proof of skills and credentials. Although applying the “soulbound” attribute to NFTs requires a lot of effort and technical knowledge, as Buterin himself said: ” it could open a much wider door to blockchains being at the centre of ecosystems that are collaborative and fun, and not just about money.”
Read more about Phala Network’s first-ever SBTs release:
Phala Network Releases First Soulbound Token Use Case With PhalaWorld
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