- Digital identity is a central issue that will be of great importance in the coming years, and blockchain technology is highly suited to solve problems around it.
- In Web3, the identity of a user is decentralised and based on blockchain wallets, with users’ personal data controlled by themselves.
- Soulbound tokens are non-transferable and non-tradeable NFTs tied to an individual or entity. They aim to represent the holder’s social identity by containing their commitments, credentials, and affiliations.
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Web3 and Digital Identity
Evolving web identities. The web is evolving. In Web1, the typical identity model is centralised, where each platform stores the usernames and passwords of their users in a database. In Web2, the model shifted to ‘federated identity’, such as signing in with social media platforms like Google, Twitter, and Facebook. In Web3, the identity of a user is decentralised and based on blockchain wallets.
- Self-sovereign identity and decentralised identifiers. One key concept of Web3 identity is self-sovereign identity (SSI). This refers to the approach that enables users to control the information they use to prove their identity to websites and online applications. A closely related concept, decentralised identifiers (DIDs) are a novel identifier type that enables verifiable and decentralised digital identity, and can be used to enable SSIs.
What are Web3 domains?
Web3 domains are a popular type of Web3 identity, taking the form of a human-readable address that represents a crypto wallet and can end with extensions such as .crypto, .dao, or .eth. A Web3 domain is also typically a non-fungible token, which means it can be minted and sold just like any other NFT.
Web3 domains provide greater convenience for transactions and remembering wallet addresses. They can be a much shorter string that symbolises the same Web3 address. Here are some popular examples:
- ENS: Ethereum Name Service is one of the most popular Web3 domains with over 2.17 million names and 541,000 owners. The main goal of ENS is to map human-readable names, such as ‘alice.eth’, to machine-readable identifiers like Ethereum addresses.
- Unstoppable Domains: Similar to ENS, Unstoppable Domains also offers NFT domains to replace cryptocurrency addresses with a human-readable name. Some of its key features include no renewal fees, no minting fees (on Polygon), and no gas fees (on Polygon). The Unstoppable Domains model is about ownership, not subscriptions.
- Cronos ID: Cronos ID offers NFT domains with the ‘.cro’ extension. Users are able to send and receive funds with Cronos ID in dApps and the Crypto.com Defi Wallet. Outside of Web3 domains, Cronos ID also offers Cronos Notifications and Cronos ID Messaging – services that allow users to receive notifications of on-chain events (without the need to manually check dApps) and communicate via wallet addresses, respectively.
Other Examples of Web3 Identities
- BrightID is a social identity network that allows users to prove to applications that they are not using multiple accounts. It solves the unique identity problem through the creation and analysis of a giant social graph of people all around the world.
Proof-of-Attendance Protocol (POAP)
- POAP enables users who take part in an event to receive a unique badge that is supported by a cryptographic record. Each POAP is a digital record held by users as a proof that they attended a physical or virtual event.
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Soulbound Tokens: Powering a Decentralised Society?
A common criticism of the Web3 space is that everything is money-oriented or “hyper-financialised”. Chasing profits may become the only objective of Web3 residents and there is the risk that new technologies could cause wealth to be reshuffled, resulting in a centralised system wrapped in decentralised narratives.
In Web3, how can the reputation of an individual or entity be trusted in a system designed to be trustless? As Web3 lacks primitives to represent social identity and trust, it has become fundamentally dependent on centralised Web2 structures. Examples of these dependencies include:
- Most NFT artists rely on centralised platforms like OpenSea and Twitter to commit to scarcity and initial provenance (i.e., processes used for verification, storing, tracing, and auditing ownership data).
- DAOs that try to move beyond simple coin-voting often rely on Web2 infrastructure, such as social media profiles, for resistance to sybil attacks (i.e., a type of attack that attempts to gain disproportionate influence over decisions on the network).
- Users have to rely on custodial wallets to manage their funds.
To avoid hyper-financialisation in today’s Web3 ecosystem, Ethereum Co-founder Vitalik Buterin proposed a way to move to a decentralised society that “encodes social ties of trust” via soulbound tokens (SBTs). The concept of “soulbound” assets on the blockchain was first discussed in a blog post by Buterin in January 2022 to solve the above identity and trust issues.
- SBTs are NFTs tied to an individual or entity that are non-transferable and non-tradeable. They aim to represent the holder’s social identity by containing the holder’s commitments, credentials, and affiliations. It is similar to the concept of a resume or CV.
- Souls are accounts or wallets that hold SBTs. For example, a person may have a Soul that stores SBTs representing educational credentials, employment history, or participation in an event. SBTs are publicly visible and revocable by the issuers.
- SBTs held by one Soul can be issued or attested by other Souls. These Souls could be individuals, companies, or institutions. For instance, a university could be a Soul that issues SBTs to the graduates.
Decentralised Society (DeSoc) is a co-determined sociality, where Souls and communities convene in a bottom-up way, as emergent properties of each other to produce plural network goods across different scales. SBTs aim to be the cornerstone of DeSoc. The primitives of DeSoc, centred around non-transferable SBTs, represent the commitments, credentials, and affiliations of ‘Souls’ that can encode the trust networks of the real economy to establish provenance and reputation.
Use Cases of Soulbound Tokens
SBTs can generally represent and manage assets and goods that are on the spectrum between being fully private and fully public. The prominent use cases of SBTs in Web3 include:
- Decentralised Key Management
- Undercollateralised Lending
- DAO Governance
- Programmable Privacy
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Drawbacks of Soulbound Tokens
There are debates about SBTs’ drawbacks and potential dystopian scenarios:
- SBTs could provide a way to automate redlining by being used to target and limit members of specific communities. For example, holders of a specific SBT could be denied entrance to facilities, their voting rights could be revoked, and more.
- Privacy could also be a concern, as SBTs and the information contained within are public. But solutions like off-chain storage and zero-knowledge could help alleviate this issue.
What’s Next for Soulbound Tokens?
- SBTs are in their infancy. The ideas, use cases, and implementations have yet to be fully discussed, designed, and fleshed out. In this respect, the future of SBTs is a blank slate.
- Eric Glen Weyl, one of the co-authors (along with Vitalik Buterin) of the paper Decentralized Society: Finding Web3’s Soul, predicted that early use cases of SBTs will be available by the end of 2022.
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Crypto.com Research and Insights team
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