What the new KYC check means for the crypto ecosystem by DailyCoin

The cryptocurrency sector has grown tremendously in importance since its inception, but just as dangerous to start up. Recognizing the growing risk, exchanges implemented the “Know Your Customer” (KYC) safeguard as part of an effort to reduce fraud and identity theft. For this, companies usually require users to submit important information about themselves in order to verify their identity.

Like the same verification protocol used by traditional banks to checkmate the vices used against them, KYC checks aim to identify and verify clients before allowing them to transact. Despite the measure, there are still reports of customers’ identities being stolen, indicating that KYC systems may not be as secure for exchanges.

KYC checks offer, among other things: improved customer transparency and trust; reduced potential for money laundering and other such fraud; reduced legal risk; and increased stability in the crypto market. Even in spite of that, the bad eggs masquerading around the crypto world are working to actively destroy the good that has been built up so far.

As a result, many are asking the question, “What if there was a better way to effectively verify and document personal customer information in such a way that it can never be transferred from one place at a time?” It is just one of the many solutions that ‘SoulBound Tokens’ (SBTs) aim to offer the decentralized economy. But what exactly are SBTs, and how do they help in the fight against identity theft and cybercrime in general?

In this piece, we will share everything you need to know about SoulBound Tokens, and what they mean for the crypto ecosystem.

What are SoulBound Tokens?

The concept of SBTs was conceptualized sometime in May 2022 by three proponents: Co-founder Vitalik Buterin, attorney Puja Ohlhaver, and E. Glen Weyl, who is an economist and social technologist.

Essentially, SBTs are non-transferable, publicly verifiable, digital tokens that can act as a type of resume for Web 3.0 users, providing a person’s membership, credentials, and affiliation. Although SBTs are primarily non-fungible tokens (NFTs) in nature, their ownership is non-transferable, unlike standard NFTs.

The non-transferable property of SBTs therefore implies that they are bound indefinitely to an individual, hence the prefix “soul-bound”. It is for this reason that Buterin describes these NFTs as an “extended CV”, where all information about a “soul” will be stored on the blockchain, acting as a sense of provenance and reputation.

Binance and other crypto platforms are adopting Soulbound Tokens

Despite the concept being in its infancy, several platforms are already actively using SoulBound Tokens as a means of certifying and even incentivizing user credibility. The following are prominent examples of some of the platforms that have adopted SBTs so far:

1. Binance

Binance is the latest crypto exchange to launch ‘BAB’, a SoulBound Token on the BNB chain that acts as a decentralized equivalent to the KYC requirements maintained on the exchange.

The token is officially called the ‘Binance Account Bound’ (BAB) token, and will act as certification of a wallet owner’s verified user status on Binance. BAB will also be available for use by third-party protocols.

Ownership of BAB tokens is optional for Binance customers, who can choose whether to complete KYC checks via the SoulBound Token system, or through more traditional means.

2. Phala Network

In June, Phala Network announced the official release of the first use case for SoulBound Tokens in ‘PhalaWorld’, a metaverse gamification expansion based on the Phala Network blockchain.

The new “Play to Build” concept combines user behavior, characters, community and sci-fi stories on the Phala blockchain, integrating strategy, development, MMORPG and other game genres.

Inside PhalaWorld, players control NFT entities called “Spirits” and use “Fat Contracts” to link their in-game and off-chain identities to external social media platforms and services, such as Twitter (NYSE: ), TikTok and Instagram.

3. Idexo

In July, Idexo announced support for SoulBound Tokens in its Web 3.0 SDK, allowing developers to add tokens to projects “with just 1 line of code.”

Idexo also offers non-coders a simplified way to do this with just a few clicks in its web application. Idexo customers and users can create SBTs on , BNBChain, Ethereum, Fantom and Polygon, with more blockchains expected to be added soon.

Pros and cons of Soulbound Tokens

SoulBound Tokens has the potential to change the cryptocurrency industry in many ways. Naturally, however, they are not without drawbacks, especially since the concept is still in the early stages of implementation. Anyway, the following are some of the benefits of SBTs:

1. Digital CVs: SoulBound Tokens can contain records such as academic credentials and employment details, enabling potential employers to accurately verify a candidate’s work history and qualifications.

This use case helps to weed out those who might otherwise be on the CV while they are looking for a job, as happens in many cases. As SBTs can be publicly verified, they provide organizations and corporate bodies with a smoother process in the recruitment phase.

2. Defi loans and lending: Another potential benefit of SBTs lies in the documentation of personal credit reports, making the borrowing and lending process more transparent and frictionless.

In addition, by using SBTs, DeFi protocols gain the ability to issue unsecured loans by leveraging a soul’s real-time relationship level across multiple communities as a social credit score.

3. System for the preservation of reputation and distinction: Corporate entities can issue important certificates, such as letters of participation, honorary awards, and commendations, such as SoulBound NFTs.

4. Souldrops: Crypto projects usually form the foundation of their communities by launching airdrops and conducting token sales. However, these processes are often subject to Sybil attacks or simply fail to attract the right community.

According to the concept of ‘Souldrops’, as described in Vitalik Buterin’s whitepaper, projects can potentially attract the right communities for them by conducting airdrops based on calculations from SBTs, or other tokens in a soul.

For example, a project based on improving sustainability may drop governance symbols to Souls with SBTs signifying involvement in past sustainability-related activities.

On the other side

As previously mentioned, SBTs are a new concept but are not without flaws, and there are a number of obstacles that make them challenging to adopt outright. Some such disadvantages are listed below:

1. “Too much” information: SBTs run the risk of having too much sensitive information about an individual, which can leave customers feeling vulnerable.

2. Complexity: SBTs are a new concept, so their implementation and use can prove quite complicated, especially for those who are not yet familiar with the core concept of NFTs.

3. Criticism of evidence of work: SBTs may come under fire for their lack of energy efficiency if launched on Proof of Work blockchains.

What the latest KYC check means for the crypto ecosystem

The new use cases introduced using SBTs will break new ground in the crypto industry. Exchanges in particular now have a new way to secure customers against the likelihood of being hacked, and to protect themselves from mingling with fraudulent actors posing as clients.

When it comes to governance rights on the blockchain, terrible events can easily occur when governance power can be easily transferred. With the implementation of SoulBound Tokens, on-chain voting requirements can be enforced through one-person one-vote rules for proposals.

Perhaps the foremost value of non-transferable SoulBound NFTs will lie in the provenance facility of NFTs. NFT owners must currently rely on centralized systems, such as OpenSea, to prove ownership of their unique digital assets; SoulBound NFT could solve this problem, as the creators would be able to create NFTs from blockchain accounts or wallets, AKA Soul. The more tokens a soul accumulates, the easier it becomes to verify the legitimacy of an NFT.

Why you should care

SBTs are revolutionizing KYC protocols in the crypto ecosystem, especially in light of Binance’s recent integration of BAB. Many crypto investors are excited to see how the use of BAB will play out on Binance as the crypto exchange continues to explore them. Of course, the potential use cases of SBTs are endless; and the way SBTs stand to redefine digital identity and governance on DAOs is just the beginning.

SBTs now serve as a benchmark for creating a decentralized community in the Web 3.0 ecosystem, with attested proof of skills and credentials. Although it requires a lot of effort and technical know-how to use the “soul-bound” feature of NFTs, as Buterin himself said: “it can open a much wider door to blockchains that are at the center of ecosystems that are collaborative and fun, and not only about money..”

Read more about Phala Network’s first SBT release:

Phala Network launches first Soulbound Token Use Case with PhalaWorld

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