Non-fungible tokens (NFTs) have many uses 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 link a blockchain wallet with a real person can 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 good reason.
Blockchain wallets are “pseudonymous”, meaning they are only anonymous as long as the user’s real identity is never connected to the wallet, but once their identity is discovered (intentionally or not), it can never be disconnected. One of the problems with pseudonymity is that decentralized applications, also called ‘dApps’, have no way of proving the uniqueness of any user and must be designed around the complete absence of trust between the user and the application. Decentralized finance applications (‘DeFi’) get around this problem by requiring users to deposit one cryptocurrency as collateral before borrowing another. This severely limits loan opportunities for users who do not own many assets in the chain. The inability to connect a crypto wallet to a person’s unique real-world identity limits the services that can be provided on-chain and prevents the formation of an internet-based community.
In May 2022, Ethereum co-founder Vitalik Buterin and several colleagues published an article on SSRN titled “Decentralized Society: Finding Web3’s Soul,“where he discussed the idea of”soul bound tokens,“or”SBTs.” The name comes from the popular MMORPG game World of Warcraft, where non-tradable in-game items are ‘soul-bound’ to the user’s character. It’s easy to change an NFT’s blockchain smart contract to become non-transferable, and that’s where SBT are coming in. SBTs will be issued by a company, government, or blockchain protocol that takes real identity documents and other trusted sources to prove a user’s identity. No one can get more than one SBT. Thus, any crypto wallet that has a SBT a unique user and is safe to assign credit history and enter into legal contracts with.
Revolutionary but controversial
The problem with SBTs is that 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 the chain and trade privately. This concern is justified given the privacy concerns of Web3 and the ease with which transactions can be tracked and traced. However, with NFT domains for crypto wallets and people posting NFTs and crypto wallet addresses to social media, it’s clear that many people either don’t care about their privacy or don’t know how exposed they are on the blockchain.
Should the privacy concerns be resolved, SBTs will unlock new forms of DeFi, blockchain gaming, business applications, governance systems and much more. Financial credit scoring would be possible, allowing loans to be taken out without a security deposit, decentralized autonomous organizations (DAOs) would become more resistant to governance attacks, and social media accounts could be automatically verified. A fully decentralized on-chain community (or “DeSoc“) could emerge from blockchain-verified citizenship. If governments adopted SBTs, they could transfer citizen records to the blockchain, reduce their own energy costs for database maintenance, significantly improve time to retrieve and update records, and potentially eliminate fake IDs is.
Identity on the blockchain is a controversial topic, but it is also necessary for further advancement. Web3 privacy and security issues are legitimate concerns that need to be addressed before real identities can be implemented, but if these issues are addressed, identity solutions can reduce waste, fraud, and storage costs for governments and businesses alike. In addition, the idea of internet citizenship may finally emerge, providing the opportunity to eliminate fake accounts and hold people accountable for what they do online. With blockchain identity solutions, many benefits can be realized, but it can also result in a dystopian nightmare if people are not careful how it is used.
Source: SSRN
