Non-fungible tokens (NFTs) have many use cases in blockchain, both real and imagined, and a very new and controversial idea is that they would work well for identity on the blockchain. NFT properties work very well for ID cards, and creating an identity system to associate a blockchain wallet with a real-world person could unlock internet citizenship and financial services otherwise impossible. However, using NFTs to identify the owner of a crypto wallet is a highly controversial idea, and for a good reason.
Blockchain wallets are ‘pseudonymous,’ meaning they are only anonymous as long as the user’s real-world identity is never connected to the wallet, but once their identity is discovered (willingly or not), it can never be disconnected. One of the issues with pseudonymity is that decentralized applications, also called ‘dApps,’ have no way to prove the uniqueness of any user and have to be designed around the complete absence of trust between the user and the application. Decentralized finance (‘DeFi’) applications get around this issue by requiring users to deposit one cryptocurrency as collateral before borrowing another. This severely limits borrowing capabilities for users who do not own many on-chain assets. The inability to connect a crypto wallet to a person’s unique real-world identity limits the services that can be offered on-chain and prevent the formation of an internet-based society.
In May 2022, Ethereum co-founder Vitalik Buterin and several colleagues published a paper on SSRN titled “Decentralized Society: Finding Web3’s Soul,” where he discussed the idea of “soulbound tokens,” or “SBTs.” The name comes from the popular MMORPG game World of Warcraft, where non-tradable items in the game are ‘soulbound’ to the user’s character. It is easy to modify an NFT’s blockchain smart contract to become non-transferrable, which is where SBTs come in. SBTs would be issued by a company, government or blockchain protocol that takes real-world identity documents and other trusted sources to prove a user’s identity. Nobody can obtain more than one SBT. Thus, any crypto wallet holding an SBT is a unique user and is safe to assign credit history and enter into legal contracts with.
Revolutionary, But Controversial
The problem with SBTs is they are considered highly controversial among the crypto community. Identification and registration of crypto wallet addresses is a sensitive topic for people who want to maintain their anonymity on-chain and transact in private. This concern is justifiable given the privacy issues of Web3 and the ease with which transactions can be traced and tracked. However, with NFT domains for crypto wallets and people posting NFTs and crypto wallet addresses to social media, it is evident that many people either do not care about their privacy or do not know how exposed they are on the blockchain.
Should the privacy issues be resolved, then SBTs would unlock new forms of DeFi, blockchain gaming, business applications, governance systems, and much more. Financial credit scoring would be possible, permitting loans to be taken out without collateral deposits, decentralized autonomous organizations (DAOs) would become more resistant to governance attacks, and social media accounts could be automatically verified. An entire on-chain decentralized society (or “DeSoc“) could emerge from blockchain-verified citizenship. If governments adopted SBTs, then they could transfer citizen records to the blockchain, reducing their own energy costs for maintaining databases, massively improving the time to retrieve and update records, and potentially eliminating fake IDs.
Identity on the blockchain is a controversial subject, but it is also needed for further advancement. Privacy issues and safety on Web3 are legitimate concerns that need to be addressed before real-world identities can be implemented, but if these issues are resolved, then identity solutions can reduce waste, fraud and storage costs for governments and businesses alike. In addition, the idea of internet citizenship could finally emerge, providing the ability to eliminate fake accounts and hold people accountable for what they do online. With blockchain identity solutions, many benefits could be realized, but it could also result in a dystopian nightmare if people are not careful with how it is used.
Source: SSRN