If the metaverse is intrinsically anonymous, how do you encode trust?

Soulbound tokens (SBTs) are set to change the game when it comes to social interactions in the metaverse.

In brief

• The decentralized and anonymous nature of the metaverse has enabled decentralized finance to grow at speed – but a lack of trust is a barrier to other aspects of virtual life
• Soulbound tokens (SBTs) are set to launch in 2024 as a way to verify and attest information linked to a specific “soul”
• Alongside NFTs and other token types, SBTs will support the development of a more transformative, pluralist decentralized society

NFTs have been instrumental in creating a sophisticated and open ecosystem for expressing financial transactions. This parallel economy is possible thanks to the creativity and technological advances that have brought us smart contracts, proof of work and public key cryptography, among other things.

Impressive though the possibilities of NFTs, they fail to replicate one of the leading drivers of economic value: the trust that is built through persistent, non-transferable relationships. In their 2022 paper on decentralized society, Weyl, Ohlhaver and Buterin attribute this in part to the lack of primitives (the basic segment of code used to build more sophisticated element) to represent social identity.

In an anonymous world, it’s hard to build trust.

Of course, the Web 3.0 community has tried to find ways around this issue. Weyl et al. highlight the role of centralized entities, for example social media platforms to commit to scarcity and initial provenance of work by NFT artists, and custodial wallets to keep digital assets safe. But it’s a workaround, at best, and the authors propose a new way to encode the trust networks we know and value in the real economy: soulbound tokens (SBTs).  In this article, we shine the spotlight on SBTs, explain the benefits and explore their role in the future of the metaverse.

1. What are SBTs and what makes them special?

Very similar to NFTs in their structure, mode of functioning and non-fungibility, SBTs differ in that they’re also non-transferrable. The information is unique and allocated to an individual “soul”. It’s this that enables provenance and reputation to be established and attested by other “souls” in the community. It’s also a key advantage compared to existing tokens. After all, there are already token standards available to represent digital assets. The popular standard ERC-20 is one example. Introduced by Ethereum, the tokens run on blockchain and have smart contract capabilities. The high degree of standardization makes them fully transferable and fungible. In other words, every ERC-20 is interchangeable and with every other and can be used to represent virtually anything in Ethereum, from a player’s skills to lottery tickets to fiat currency. This interoperability is key to building the ecosystem, but the fungibility of ERC-20 tokens exposes them to the risk of loss.

Key takeaway: SBTs complement the existing possibilities offered by NFTs and ERC-20 by combining the characteristics of non-transferability and non-fungibility.

2. What are the benefits and use cases of SBTs?

Use cases for SBTs include event ticketing, issue of degree certificates, confirmation of conference attendance or even proof of employment. Digital artists will be able to assert their identity as the creators of NFTs, adding value for artist and owner alike. Users can use SBTs to demonstrate their borrowing history, while lenders can verify creditworthiness. It means users will be able to access previously unavailable products and services, such as uncollateralized loans.

SBTs can also enhance governance within decentralized autonomous organizations (DAOs). At present, DAOs are often forced to rely on web 2.0 infrastructure such as social media profiles to prevent fake identities being created to out-vote honest nodes on a network. SBTs would offer a way to intrinsically identify nodes within the native web 3.0 context and prevent Sybil attacks.

A final key benefit of SBTs is that the information is always uniquely allocated to one individual “soul”, enabling provenance and reputation to be established and attested by other souls in the community. In this set-up, a lost SBT can be restored by a community of trusted “guardians”.

Key takeaway: SBTs are an exciting new enabler of security and previously inaccessible but core economic and social activities in the metaverse.