Why will soul bound tokens lead to large-scale adoption of DeFi

Author: Ignas, compiled by DeFi

In my opinion, the soul bound token (SBT) will lead to large-scale adoption of DeFi.

The concept of soul binding was first introduced by God V and his colleagues a few months ago. Now, many projects have used soul binding tokens!

Tiezi, let me introduce the working principle of soul binding token and some projects that have adopted it.

About soul bound tokens

The soul bound token represents a person's identity on the chain.

The soul bound tokens are like NFT, but they are not transferable, so these tokens are actually "bound" to your "soul (identity on the chain)".

The soul bound token can record your education, employment, medical treatment and even credit history, or it can also be used as a certificate of attendance.

Due to the lack of original Web3 identity, DeFi cannot enter some real world economic fields, such as loans and apartment leasing involving insufficient guarantee.

In a word, God V and his colleagues believe that soul bound tokens are a key part of building a decentralized Web3 society.

Tiezi can learn more about soul bound tokens by checking the original paper, or check Jason Levin

Interview summary with the co-author of the article on soul bound tokens, who claims that the next bull market cycle in 2024 will focus on soul bound tokens:

What is the future of Ethereum?
Last week, God V jointly published a paper predicting the future of Ethereum.
I read this 37 page paper and interviewed the co authors of this article, so we don't need to read that long article, just look at my summary.

Interestingly, co author Glen Weyl predicted that soul bound tokens would be used for early use by the end of 2022.

Now, his view is right!

Although the soul bound token is still in its early stage, there are several projects that are experimenting with it.

Several projects using soul bound tokens

Goldfinch.fi

Goldfinch. Fi brings real world investment to DeFi, which uses unsecured loans.

The borrower of the agreement did not make excessive mortgage, but showed the credit according to the collective assessment of other participants.

At present, the yield of USDC in the agreement is about 17%.

Goldfinch. The fi agreement has three roles: investor, borrower and auditor.

The auditor votes to approve the borrower. They are randomly selected as candidates in the dermatologist to provide real inspection, prevent fraudulent activities and obtain rewards.

In order to avoid witch attacks, all participants of the protocol need to pass the "unique entity check".

The sole entity inspection mainly refers to the SBT verified on the chain mainly in the form of non transferable NFT (KYC), Know Your Business (KYB) and/or American investor certification.

There are currently 5 types of unique identities:

ID_ TYPE=0, non US individuals can vote and provide funds in the agreement.

ID_ TYPE=1, an individual recognized by the United States: can vote and provide funds to the senior pool, and provide funds to the borrower pool according to the specific situation (depending on the requirements of the borrower).

ID_ TYPE=2, US non certified individual: can vote, but cannot provide funds

ID_ TYPE=3, US certified entity: can vote and fund the priority fund pool and the borrower's fund pool, depending on the situation (depending on the borrower's requirements)

ID_ TYPE=4, non US entity: can vote in the agreement and provide funds.

Why is unique identity important?

Having one identity on the chain can realize two main unlocks. First, it opened DeFi to a new group of real-world participants, especially companies and financial institutions. It also greatly expands the design space of new functions and mechanisms of DeFi protocol.

Due to concerns about KYC/KYB and competitors, many companies do not interact with DeFi today. But their unique identity solves these problems for them. Many companies are already borrowing through Goldfinch. Without KYC/KYB and certification verification, they cannot borrow. As companies become more familiar with cryptocurrencies, they can bring a lot of new business to the DeFi protocol.

The unique identity is fully interoperable with other parts of DeFi. It is a standard ERC-1155 contract, so any protocol can benefit without establishing its own KYC process or processing any data.

It is also important to emphasize that a unique identity takes privacy seriously. The chain does not store any personally identifiable data. Goldfinch cooperates with Persona to manage KYC processes and data, and with Parallel Markets to manage KYB and certification processes and data. They all offer industry-leading privacy and security practices and are trusted by many of the largest technology companies.

In order to obtain a unique identity, users submit an Ethereum transaction to forge a unique identity and send it to their address.

The coolest thing about Goldfinch soul bound tokens is that they can be freely used by any other protocol. Therefore, users who have forged the tokens do not need to re pass KYC on other protocols.

Masa

Masa's soul bound identity aims to provide impetus for the adoption of mainstream online credit for the next 1 billion users.

It allows people to connect their traditional accounts and cryptocurrency accounts and create a decentralized credit report as a "soulful" NFT.

Masa can create a "comprehensive financial situation" report on users by connecting them to the cryptocurrency exchanges or cryptocurrency addresses such as Metamask and Coinsecurity.

Compared with Goldfinch, Masa will realize unsecured borrowing for individuals on companies outside the chain.

Proof of Humanity

Proof of Humanity is a system that combines social authentication and video submission. It can help create a list of human users who can prevent witches from attacking.

In essence, he is actually the presentation of his real identity on the chain.

Each applicant must be guaranteed by an identified identity. Use cases include insurance, credit scoring, secondary financing, anti witch airdrop, DAO, or general basic income.

It will change the voting mode of DeFi DAO from one token and one vote to one person and one vote.

The first version of Proof of Humanity does not use soul bound tokens, but the upcoming V2 will introduce the concept of soul bound identity.

Each unique identity will correspond to an address of a real human.

If you lose your Ethereum address, you can apply for the same ID with another address.

BAB of Jin'an

Coin security recently launched the Coin security Account Binding (BAB) token, which is a soul bound token and is mainly used as the identity certificate of Coin security users for KYC.

Users can now cast BAB tokens on the Coin Security intelligent chain chain, participate in the construction of multiple projects and obtain rewards.

The benefits of owning BAB tokens include air drop and VIP benefits to the new function access of the entire BNB ecosystem.

For example, ApeSwap will create a claimable NFT that represents a raffle for BAB holders.

Nexus Mutual

Finally, I want to add Nexus Mutual to this list.

Although NXM is not strictly a soul bound token, it represents a

Tokenized membership on agreements

To become a member of this agreement, users need to pass KYC, and only through KYC can they buy NXM.

More importantly, the token cannot be traded on Uniswap or any other exchange.

NXM was launched several years ago, and the concept of soul bound token was not introduced at that time.

For this reason, I included it in the most innovative DeFi token economics list:

It is difficult to innovate from zero to one in token economics.
However, occasionally there will be a token, which has strong innovation ability and has changed the development track of the industry.
There were several such examples in the last DeFi bull market.
The following are the top seven items in my opinion.

It is still in the early stage for soul binding tokens, but some use cases have been put into practice.

I am glad to see that more protocols will use soul bound tokens to build a decentralized Web3 society. I will pay close attention to this trend.