The first step in creating a sturdy governance framework is to establish clear goals, including broad stakeholder participation, resistance to capture by whales, resistance to governance attack vectors, transparency of information, and alignment of incentives to promote the protocol’s sustainability.

However, the quality of most of these goals is solely related to the capital one has, or in other words, the number of tokens owned. For example, Uniswap, the biggest DEX by market cap, distributed 40% of Uniswap tokens to a small number of users and investors. The difficulty in reaching the quorum and uneven distribution of tokens makes Uniswap susceptible to centralization.

The idea of a non-financial and non-transferable token based on reputation could serve as a strong primitive for forming capture-resistant governance mechanisms. Soulbound Tokens (SBTs) could potentially act as an alternative to coin-based voting mechanisms or be used in combination with such mechanisms to resist Sybil attacks.

Soulbound Tokens have been proposed by Glen Weyl, Puja Ohlhaver, and Vitalik Buterin. As non-transferable NFTs, they can be issued to a wallet, made revocable by the issuer, and made either visible or private. Wallets that hold SBTs are called “souls,” and a person can have multiple souls.

The non-transferable feature of SBTs enables various use cases, such as voting rights, property rights, access rights, or the right to purchase an asset. The potential impact of SBTs on the adoption of Web3 cannot be overstated, as they can be instrumental in onboarding new users by providing real-world applications.

The non-tradable feature of SBT will make it a strong primitive in governance and rewards distribution. Implementations of SBTs are currently possible through modification of ERC-721 (NFTs) and ERC-4973 (Account-bound Tokens). While anyone can mint and issue SBTs, their viability and dependability depend on the reputation of the issuer.

Examining Criticisms and Misconceptions around SBTs

SBTs have been the subject of a lot of negative attention, with concerns raised about their potential to be used non-consensually and to permanently tie public information to user accounts.

Another widely discussed criticism is that SBTs eliminate key rotation practices, which are standard security practices in the blockchain ecosystem. Kate Sills has criticized SBTs as just claims, questioning their legitimacy as tokens on the blockchain. Evin McMullen has also expressed concern over the non-consensual nature of SBTs and how they go against the concept of sovereignty.

However, most of these problems could be addressed as features, including the ability to disassociate them from the NFT and the option for consensual minting. Additionally, the implementation of social recovery of private keys can aid in key rotation practices.

In this article we discuss some of the use cases of SBTs in decentralized community management and governance.

Social Structure

Though SBTs, DAOs could become a focal point in social coordination.

As DAOs try to stick to their ethos of sharing collective resources to bring meaningful deliverables, certain trade-offs are made between centralization and efficiency. SBTs could help in shaping the social structure of DAOs through issuing role-based tokens similar to Hats protocol — revocable tokens that grant access to things like Twitter, delegation, Discord, or even a multisig.

SBTs as badges act similarly, although they are just data primitives that gather information related to achievements or milestones. Role-based tokenslike Hats are more composable in design by accommodating multiple parameters for which a Hat could be issued. This could be based on holding specified badges or even attestations.

Managing membership levels and guilds via off-chain channels like Discord can be challenging and operationally difficult. As an example of a solution, BanklessDAO has introduced transparent and on-chain verifiable Otterspacebadges for managing membership levels and guilds.

Delegation

Voter delegation is becoming increasingly popular as DAOs recognize that not all members have the expertise to make all decisions, and that delegates can make better decisions on their behalf.

To incentivize meaningful contributions, SBTs can be assigned as rewards to delegates on a tiered basis, similar to Gitcoin’s Steward Health Card. Badges can be issued on a milestone basis for creating a number of proposals, voting on them, and reviewing them continuously. Token holders seeking to be a delegate in a particular protocol can use this token to display a verifiable reputation.

ZK badges such as Sismo badges let delegates keep their decisions anonymous and only like to show they have voted, enabling private voting.

Contribution-based Governance

Participating in governance from writing proposals, giving feedback on proposals, and voting on proposals takes effort and time. But, contributors often do not get rewarded for these efforts, resulting in voter apathy.

To move away from pure token weighted voting, DAOs could use earnable SBTs to reward contributors. These tokens can then be used to grant more authority across the DAO, or to simply exercise voting rights.

SBTs could also be offered as badges in a tiered structure, where you can mint higher tiers as your contributions grow. Voting power can be assigned to each of these badges on an incremental basis as members reach higher tiers. Thus, a potential solution could be to eliminate one person one vote, and instead weigh voting based on contribution. This could then be used in tandem with token weighted voting and transferrable NFT voting to create a multi-token governance structure.

Another possibility is rewarding contributors with native tokens of the project, and giving an option to vest these tokens for a particular time, becoming eligible to mint SBTs that can be used for governance.

Sismo badges has been experimenting with contribution based governance and Metopia is building a NFT membership system that tracks member participation in DAO events and creates credentials based on NFT metadata and enables governance right customizations.

Resistance to Sybil Attacks

In a Sybil attack, the attacker subverts the reputation system of a network service by creating pseudonymous identities in the form of bots to gain influence. Sybil attacks can be directed from simple mechanisms such as referral reward distribution to complex mechanisms such as taking over the nodes and potentially taking over the entire system.

Sybil-resistant decentralized systems are being built with tools like Gitcoin passport, BrightID, PoH, POAPs, etc. Using multiple off-chain and on-chain credentials to arrive at a social graph in a privacy-preserving manner could prove to be highly resistant to Sybil attacks.

Clustering credentials such as attestation for Gitcoin contribution, Twitter followers, Github works, IRL POAPs, BrightID, etc could be used to build SBTs that draw a Sybil-resistant social graph.

Gitcoin is exploring Soulbound Tokens, where contributors could maintain soulbound journals with attestations. These attestations could be participating in Gitcoin grants, project contributions, GitHub works, Twitter following, etc.

Interestingly, quadratic funding programs of Gitcoin could query these soulbound journals to quantify the cooperation between contributors, thus eliminating Sybil attacks.

Closing Thoughts

The success of Web2 can be largely attributed towards building a reputation layer that becomes a foundation to build new products.

SBTs in the blockchain ecosystem could be instrumental in creating a similarly impactful reputational layer that would facilitate equitable governance designs and a responsive contributor community.

As most of the criticisms surrounding Soulbound tokens have been addressed, adding a layer of privacy through zero-knowledge proofs and enabling social recovery of keys could further drive the adoption of the token. By representing various aspects of identities, SBTs could provide DAOs with the means to reward contributors and create innovative governance designs.

Although it remains to be seen how SBTs will ultimately fit into the broader blockchain ecosystem, they certainly offer the potential to venture into new and exciting possibilities.