Understanding The Basics Of Souldbound Tokens (SBT)

Some may be old enough to remember the sensational game World of Warcraft. In the game, players could earn in-game items bound to their “soul,” meaning they couldn’t transfer them to others. The mechanism ensured that some items remained exclusive to the player who earned them. This concept is still prevalent in modern live-service games, where players can share functional items like weapons and tools but not cosmetics like character skins.

Inspired by World of Warcraft, a similar concept exists in Web3, known as Soulbound Tokens (SBTs). Like the game’s soulbound items, these tokens are non-transferable. Unlike cryptocurrencies or NFTs, which are actively traded, SBTs are permanently linked to a specific on-chain account. While this may initially seem counter-intuitive, non-transferable tokens unlock many potential applications. One of the most important is digital identity—after all, we don’t want someone to be able to transfer their identity to another person.

This article will explain everything you need to know about soulbound tokens, including their definition, use cases, and the projects advancing this concept.

What are Soulbound Tokens?

To clarify, Soulbound Tokens (SBTs) are not standardized technologies like cryptocurrencies or NFTs. Instead, they represent a conceptual framework in which tokens are permanently linked to a specific wallet, enabling projects to define unique parameters for their use cases. While implementations vary, SBTs share a core principle: non-transferability, enforced through smart contract logic.

Defining Soulbound Tokens

To grasp SBTs, we need to rewind to the basics of tokens. Cryptocurrencies like ETH or USDC are built for movement. Their smart contracts prioritize fungibility (one unit equals another), fractionalization (you can own 0.005 BTC), and transferability (send to any wallet). These features make them behave like digital cash.

Then came NFTs. Instead of mimicking money, they tokenize uniqueness. An NFT’s contract strips away fungibility and fractionalization, turning each token into a one-of-a-kind on-chain object (like a CryptoKitty or Bored Ape). But NFTs kept one critical feature: transferability. That’s why you can auction them on marketplaces.

SBTs take this evolution further. Imagine taking an NFT’s code and deleting the “transfer” function. Suddenly, the token becomes non-transferable and locked in the wallet that minted or received it. This isn’t a downgrade—it’s a deliberate design choice that unlocks entirely new use cases. For example, a university could issue a non-transferable NFT as a degree certificate, proving you (and only you) earned it. That’s the soulbound ethos: tokens that act as immutable proof of identity, achievements, or affiliations.

SBTs: Origin and Inspiration

“Soulbound” is widely attributed to Ethereum co-founder Vitalik Buterin, who drew inspiration from “soulbound items” in World of Warcraft. In the game, certain items bind to a player’s character (“soul”), preventing trade or transfer. Buterin theorized that similar mechanics could anchor decentralized identity systems, where on-chain activity (e.g., DAO participation, event attendance) forms the basis of verifiable reputation.

As blockchain adoption grows, pseudonymous wallets increasingly reflect real-world identities. SBTs address the need to tokenize traits or achievements specific to a user rather than transferable assets. For instance, POAPs (Proof of Attendance Protocol) emerged as early non-transferable tokens minted to prove event participation. While not explicitly labeled as SBTs, POAPs exemplify the concept: a tamper-proof record tied to a wallet, signaling trustworthiness or engagement.

In essence, SBTs transform NFTs from tradable commodities into persistent identifiers, enabling decentralized ecosystems to recognize users based on immutable, self-sovereign credentials.

Key Characteristics of SBTs

Inspired by Vitalik Buterin’s foundational 2022 blog post, Soulbound Tokens (SBTs) introduce a paradigm shift in how blockchain tokens represent value. Below are their defining characteristics, as outlined in the article:

1. Non-Transferable by Design

Unlike traditional NFTs or cryptocurrencies, SBTs are intentionally non-transferable, enforced through smart contract code. This ensures they remain permanently linked to a specific wallet, preventing sale or exchange. Vitalik argues this design allows SBTs to represent attributes beyond wealth, such as identity or community standing.

2. Represent Identity, Achievements, and Affiliations

SBTs tokenize verifiable traits or experiences tied to an individual or entity. For example:

• POAPs (Proof of Attendance Protocol) validate participation in events.
• Academic degrees, professional licenses, or club memberships could be issued as SBTs, functioning as tamper-proof credentials.
  This transforms wallets into decentralized résumés, where on-chain activity becomes a persistent record of reputation.

3. Mitigate Wealth Signaling

Transferable NFTs often serve as luxury goods, signaling purchasing power (e.g., a Bored Ape). SBTs, however, shift focus to non-financial signaling. By being non-transferable, they prove participation (e.g., DAO contributions) or expertise (e.g., completing a coding bootcamp), decoupling social capital from monetary value.

4. Improve Governance Systems

Vitalik highlights SBTs’ potential to curb governance centralization. If voting rights are issued as non-transferable SBTs, wealthy entities cannot hoard them. Instead, governance power aligns with proven engagement (e.g., a developer’s contributions to a protocol) rather than token holdings.

5. Privacy-Preserving Mechanisms

Publicly visible SBTs risk exposing sensitive identity data. To address this, the article proposes technical safeguards:

• Hashing: Storing SBT details off-chain, with only a hash on the blockchain.
• Merkle Proofs: Allowing selective verification of SBT claims without full disclosure.
• ZK-SNARKs: Enabling proof of SBT ownership (e.g., “I am over 18”) without revealing underlying data.
  These tools balance transparency with privacy, critical for identity-centric use cases.

In Summary, SBTs reimagine tokens as tools for provable personhood, not just profit. By anchoring non-transferable credentials to wallets, they pave the way for decentralized societies where reputation and participation outweigh pure financial capital.

How SBTs are Issued, Used, and Stored

Soulbound Tokens (SBTs) derive their value not from scarcity or market demand but from the context in which they are issued. Unlike NFTs, which rely on technical standards like ERC-721 to ensure interoperability, SBTs gain meaning through their issuer's authority, intent, or ecosystem. This creates a unique dynamic: minting an SBT yourself is often meaningless unless backed by a trusted entity or system.

The Role of Context in SBT Issuance

NFTs follow clear standards (e.g., ERC-721) that prioritize ownership transfer. Their value is tied to market perception, regardless of who mints them. You could mint an NFT on an on-chain marketplace or write its smart contract code yourself, the blockchain won’t differentiate between them as long both respect the token standards. SBTs, however, are designed for non-monetary utility, making their issuance context critical. For example:

• A university issuing an SBT diploma leverages its institutional authority to validate the credential.
• A DAO using SBTs to track contributions relies on its governance rules to define what constitutes a "valid" badge.
• Binance’s BAB Token serves as a KYC credential because Binance itself verifies user identities.

Without this contextual legitimacy, SBTs lose their purpose. Platforms and issuers define their own rules for minting, including exceptions to non-transferability. For instance, a DAO might allow governance rights to be delegated based on merit, not just ownership.

Differentiating Between Cryptocurrencies, NFTs and SBTs

This table clearly illustrates how SBTs differ from traditional crypto assets by focusing on identity and reputation rather than financial speculation. While cryptocurrencies power DeFi and payments, and NFTs serve as digital ownership certificates, SBTs introduce non-transferable, reputation-based applications in Web3.

Key SBT Projects and Their Use Cases

Below are notable implementations of SBTs, each tailored to specific applications:

1. Binance Account Bound (BAB) Token: Issued on BNB Chain, BAB acts as a decentralized KYC credential. Verified Binance users receive it, enabling access to exclusive airdrops or platform features.
2. Otterspace: Built on the ERC-4973 standard, Otterspace lets DAOs mint non-transferable badges for roles or achievements (e.g., "Top Contributor Q3"). These badges inform incentive systems and permissions.
3. Galxe (Project Galaxy): A credential network where projects issue badges for on-chain/off-chain actions. While some are transferable, Galxe emphasizes building Web3 reputations (e.g., "Uniswap LP Provider").
4. Educational Institutions: Spain’s IE University pioneered NFT diplomas in 2022, using SBTs as tamper-proof academic records.
5. Gaming and Metaverse: Games like Star Atlas use SBTs for non-tradable achievements, ensuring player skill—not wealth—defines status.
6. Financial Reputation (Arcx): Arcx compiles DeFi activity (loan repayments, liquidity provision) into SBT-based credit scores, enabling undercollateralized loans.
7. Government and Enterprise (SMBC): Japan’s Sumitomo Mitsui Banking Corporation trials SBTs for professional credentials, digitizing work history.
8. Proof of Humanity / BrightID: These platforms issue SBT-like attestations to prove unique personhood, combating Sybil attacks.
9. Gitcoin Passport: Aggregates "stamps" (e.g., POAPs, Twitter verification) into a Sybil-resistant score for governance participation.
10. Lens Protocol: Aave’s social graph protocol awards "Achievement" NFTs for milestones (e.g., 1,000 followers), functioning as SBTs tied to user influence.

Storage and Privacy Considerations

Most SBTs store minimal on-chain data to reduce costs and protect privacy. Common methods include:

• Off-Chain Storage: Details (e.g., event specifics in a POAP) are stored on IPFS or centralized servers, with only a hash recorded on-chain.
• Zero-Knowledge Proofs (ZKPs): Platforms like Masa Network use ZK-SNARKs to let users prove SBT ownership without exposing underlying data.
• Merkle Trees: Enable selective disclosure (e.g., proving you attended one event without revealing your entire POAP history).

Summary

SBTs thrive when their issuance aligns with real-world trust or on-chain utility. From DAO governance to credit scoring, their power lies in binding credentials to identity—not wallets to assets. As standards like ERC-7231 evolve, expect SBTs to become foundational to decentralized societies, where "who you are" matters more than "what you own."

Use Cases of Soulbound Tokens

SBTs can have many use cases spanning several industries. They’re not limited to digital identities but also find applications in healthcare, finance, cyber-security, and much more. I have created two lists of use cases of SBTs below; one list explores potential use cases that are still ideal or have found limited applications, while the other lists use cases that are actually widely implemented.

Speculated Potential Use Cases

Theoretical applications not yet widely adopted but under exploration:

1. Medical Records: Patient histories are securely stored via SBTs, accessible only to authorized healthcare providers (e.g., Cyfrin).
2. Voting Rights: Issuing non-transferable SBTs as digital voting credentials to prevent fraud in elections or DAO governance.
3. Academic Credentials: Broader adoption of SBT diplomas by universities, replacing paper certificates (e.g., Thirdweb-backed pilots).
4. Decentralized Credit Scoring: Expanding beyond current projects (e.g., Arcx) to create universal, cross-platform creditworthiness systems.
5. Professional Licenses: Government-issued SBTs for lawyers, doctors, or engineers to validate qualifications (e.g., SMBC’s early trials).
6. Healthcare Data Management: Tokenizing prescriptions, vaccination records, or clinical trial participation.
7. Legal Documents: Immutable SBTs for contracts, wills, or property deeds.
8. Supply Chain Provenance: Assigning SBTs to products to track ethical sourcing or manufacturing steps.
9. Personalized AI Training: SBTs as permission slips for using personal data to train AI models.
10. Cross-Platform Reputation: Aggregating SBTs from DAOs, games, and social platforms into a unified reputation score.

Implemented or Developed Use Cases

Real-world projects already leveraging SBTs:

1. Digital Identity Verification - Binance BAB Token: A KYC credential on BNB Chain for verified users.
2. Educational Credentials - IE University: NFT diplomas issued to graduates since 2022.
3. DAO Governance - Otterspace: Non-transferable badges for DAO contributions and voting rights (ERC-4973 standard).
4. Event Attendance - POAPs: Over 30 million "Proof of Attendance" tokens minted for events.
5. Gaming Achievements - Sequence: SBTs for in-game milestones in Web3 titles like Star Atlas.
6. Financial Reputation - Arcx: SBT-based credit scores using DeFi activity (loans, liquidity provision).
7. Professional Credentials - Sumitomo Mitsui Banking Corporation (SMBC): Career history SBTs for employees.
8. Decentralized Social Networking - Lens Protocol: Non-transferable social profiles and "Achievement" NFTs for milestones.
9. Proof of Personhood - Proof of Humanity / BrightID: SBT-like attestations to verify unique human identities.
10. Sybil Resistance - Gitcoin Passport: Aggregates SBT "stamps" (e.g., Twitter, POAPs) to combat fake accounts.
11. Healthcare Credentials - Early pilots: SBTs for COVID vaccination status (e.g., Vaccify).
12. Enterprise Identity - Civic: Chain-agnostic SBTs for dApp authentication.

Key Takeaway

While SBTs are already powering identity, governance, and reputation systems, their most transformative applications—like medical records or legal contracts—remain in speculative stages. Adoption hinges on regulatory alignment, privacy tech (e.g., ZKPs), and interoperability standards like ERC-7231.

Final Thoughts

Soulbound Tokens (SBTs) represent a fundamental shift in how we perceive digital identity and reputation on the blockchain. Unlike traditional cryptocurrencies or NFTs, SBTs are non-transferable, making them ideal for applications that require trust, authenticity, and permanence. From identity verification and academic credentials to DAO governance and financial reputation, their real-world implementations are already taking shape.

Looking ahead, the potential for SBTs is vast. As blockchain technology evolves, SBTs could play a crucial role in decentralized identity systems, digital voting, and professional certifications, reducing reliance on centralized verification authorities. However, privacy concerns, revocability, and security risks must be addressed to ensure responsible adoption.