But are we? When you start to unpack
When asked to prove who we are, we tend to hand over a government-issued document such as a passport. Is that your identity? I'd argue you're much more complex than a little booklet with your name, birthdate and citizenship would suggest.
Let's say you're trying to open an account at a U.S. bank. It will have a long checklist of
Taking a closer look at instances when identity checks are needed, in whatever form, helps to see why deeper consideration of the term is useful. If a bartender asks to see your ID, she only needs to know you're over 21, not your full name nor where you live. To benefit from a loyalty discount, a store only needs to know you're a long-time customer, nothing else. Our identity is a complex mosaic of pieces of information, and life has become an obstacle course of which parts need to be shown and when.
The migration online of significant parts of our lives has made this more complex by attaching a constellation of passwords, handles and avatars to our identity. And as blockchain services slide into our financial stacks, wallet addresses join the picture.
Only, unlike passwords or avatars that can be duplicated, on-chain addresses are unique. And, on decentralized networks, no one can take them away from us. Could these characteristics be leveraged to give us a unique financial identity that can be used across applications?
Here is where "soulbound tokens" enter the picture.
Soulbound tokens, or SBTs, are non-fungible tokens issued to a specific wallet address on a blockchain. They can represent one or several attributes associated with an individual or entity, such as credentials, certifications, memberships, age, affiliation or credit history — the specifics would depend on the issuer and the use case. A key feature is that they cannot be transferred; they "belong" to your wallet address. They can, however, be revoked should user characteristics change.
The tokens would be issued by any entity that needs to verify information attached to an on-chain account. These issuers could be banks, in order to verify eligibility for certain services; asset managers, to determine accredited investor status; universities, to represent earned degrees; medical centers, to certify health checks; event organizers, to confirm attendance; boards of directors, to validate on-chain voting rights — essentially, any issuer with identification information they wish for the users themselves to store, in a standardized format that can slot into on-chain applications.
A new industry standard from the Cloud Security Alliance aims to solve major security challenges for companies that rely heavily on cloud-based operations.
The term was coined in a 2022 paper by Vitalik Buterin, E. Glen Weyl and Puja Ohlhaver called "
Many of these are well-suited for finance, which has long grappled with the cost of centralized compliance as well as its vulnerability to data theft and manipulation. The vast troves of information institutions accumulate may help to create a competitive moat — but they also result in a siloed and inefficient business structure that could be more about service and less about constant and repetitive data verification.
Distributing identity verification tokens to relevant wallet addresses would, in theory, not only alleviate data management risk for the issuer, but it could also streamline financial and other on-chain services, while setting the stage for further business evolution.
For instance, a financial institution could issue SBTs to clients who have passed know-your-customer and anti-money-laundering checks. The receiving wallets would then be able to access all on-chain services offered across the firm without repeating onboarding for each. They could also transfer on-chain assets between each other, potentially expanding out to include affiliated systems.
An example is asset manager WisdomTree, which issues SBTs to verified users of its WisdomTree Connect platform. This smooths the purchase and transfer of any of the firm's tokenized funds, putting the "whitelist" at the wallet level and reducing the centralized compliance burden. It also enables the peer-to-peer transfer of assets, while ensuring they only occur between verified accounts.
What's more, looking forward, WisdomTree could enter into agreements with third parties to expand the token utility — allowing its SBT-identified wallets to be compatible with other asset managers and their funds, and vice versa. Approved decentralized applications could recognize WisdomTree's SBTs and offer compliant peer-to-peer lending or swap services.
Looking beyond institutional finance, SBTs could be used by decentralized lending platforms to assign on-chain credit scores, even for those without bank accounts. They could be used by protocols to automatically assign voting rights according to ecosystem activity, rather than just an economic stake. NFT platforms could give first priority for new series to accounts with an "elite user" SBT.
By decentralizing compliance, SBTs leverage blockchain technology's flexibility and "composability," which refers to the relative ease with which different tokens and applications can connect and interact with each other, creating new services. They also potentially stem the escalation of compliance costs while offering a better client service and enabling new lines of business.
And zooming out, they represent yet another example of how new technologies change the lens through which we view societal concepts and interactions we once took for granted. By encoding and fragmenting identity, SBTs change our understanding of the concept while enhancing our appreciation of its utility — in turn, this is likely to open up even further avenues of innovation.
