In 2030, imagine receiving a digital diploma from Harvard via the Ethereum blockchain, confirming your completion of their MBA Executive program, funded by an undercollateralized loan through the DeFi platform, Compound.

Sounds far-fetched?

Currently, it may seem like a distant possibility. However, a groundbreaking paper released in May introduced a concept that could elevate the Crypto industry to new heights, enabling scenarios such as this one.

Prepare to embrace this change, as it is not only on the horizon—it’s already unfolding.

This innovation signifies a shift from a speculative Crypto market to one that delivers genuine value to society, all rooted in this transformative idea.

Now, a prototype of this revolutionary concept is being introduced as a product, marking a historic moment in the Crypto realm. However, there might be a twist to consider.

Understanding the Importance of Identity in Crypto

Crypto challenges traditional systems built on trust.

The reality is that the existing systems are entirely reliant on trust; they cannot function without it.

• Trust that your product will be compensated.
• Trust that services will be remunerated.
• Trust that the currency used has intrinsic value.
• Trust that justice will prevail in cases of fraud.

The emphasis is on trust, with an additional layer just to be safe.

The Dual Nature of Trust

As Warren Buffett wisely stated:

“It takes 20 years to build a reputation and five minutes to ruin it.”

Trust is fragile and can be easily lost, making trust-based systems dependent on centralized entities to maintain that trust.

• Central banks are essential to uphold trust in currency.
• Banks manage transactions to prevent double-spending, a critical issue in both Crypto and fiat systems.
• Courts exist to ensure that wrongdoers face consequences.

These institutions wield significant power, exercising it through constant monitoring of participants.

Consequently, individuals are often required to provide extensive personal information, rooted in the assumption that participants will act honestly.

In essence, trust-based frameworks are inherently flawed; their functionality hinges on societal trust.

As these frameworks become increasingly complex, they require more detailed information about individuals, eroding personal privacy and the right to safeguard personal data—all purportedly for the benefit of societal protection.

But who truly benefits from these systems?

The reality is that only a select few gain from this arrangement, while the majority simply acquiesce, often due to the lack of alternatives.

This issue is rarely discussed, yet Crypto's most significant impact lies in its development of trustless systems.

The Innovation of Bitcoin

Bitcoin's whitepaper was the catalyst for the Crypto movement. It is dense but crucial for understanding the true breakthrough that Bitcoin—and by extension, Crypto—has introduced.

At its core, Bitcoin's primary contribution is the establishment of the first trustless system, one that operates on mathematical principles and cryptography.

This innovation eliminates the need for centralized entities that traditionally uphold trust.

How Does Blockchain Achieve This?

Blockchain utilizes a decentralized network of nodes, each holding an updated record of all transactions. This system reaches consensus by verifying all actions recorded on the blockchain, eliminating the need for intermediaries to validate transactions.

However, true blockchains lack certain capabilities found in conventional systems:

• They cannot assess creditworthiness (which is crucial for loans).
• They cannot enforce KYC (Know Your Customer) protocols to prevent illegal activities.
• They cannot issue tokenized versions of non-transferable real-world assets (e.g., IDs, diplomas, insurance policies).

Introducing SoulBound Tokens as a Solution

What if I told you that a new development addresses these limitations, effectively making blockchain the ultimate infrastructure for future financial, economic, and digital systems?

Enter SoulBound Tokens (SBTs).

I have explored the concept of SoulBound Tokens in previous articles. These tokens are unique like NFTs but come with a critical distinction—they are non-transferable. They cannot be sent to another address, thereby becoming "attached" to the owner's wallet.

SBTs have several applications:

• Undercollateralized loans: They provide necessary information about a wallet to establish creditworthiness, allowing loans with collateral valued less than the loan itself.
• Proof of humanity: SBTs can validate human identity without revealing personal details, making decentralized autonomous organizations (DAOs) resistant to sybil attacks by ensuring one-person-one-vote principles.
• Tokenization of non-transferable real-world assets: SBTs facilitate the tokenization of assets that should not be transferable, expanding blockchain's utility.

According to BCG, asset tokenization could represent a $16 trillion market by 2030—an astonishing figure.

Now that we grasp the significance of SBTs, let’s discuss their practical implementation.

The Launch of the First SoulBound Token

The wait is over!

Binance has introduced the Binance Account Bound (BAB) token, a SoulBound token that verifies the identity of users who complete KYC verification.

Users can mint BAB tokens on Binance Chain, confirming their identity while participating in various projects and earning rewards.

This marks the first application of SoulBound tokens, initially proposed by Ethereum's founder, Vitalik Buterin, in May.

However, Binance's approach diverges from Vitalik's original vision. The BAB token is issued only after users complete KYC, whereas Vitalik envisioned SBTs as a means of providing information about wallet owners without disclosing their identities.

In conclusion, Binance’s strategy involves deploying smart contracts with code preventing the tokens from being transferred to other wallets.

Is This a Revolutionary Move?

In my opinion, not quite. While this implementation does facilitate undercollateralized loans, verify humanity, and tokenize non-transferable assets, it does not significantly differ from traditional methods.

It merely utilizes existing market strategies, albeit on a blockchain, which adds no unique value—especially given the centralized nature of Binance Smart Chain.

This initiative appears more as a marketing ploy than a groundbreaking innovation.

As with many blockchain advancements, the consistent issue is that they often “resolve” traditional challenges by repeating the same processes under the guise of blockchain technology.

If this pattern continues, blockchain may not endure, as society will eventually recognize the lack of substantial change.

Nonetheless, the news is not entirely negative.

This is the inaugural implementation of SBTs, and while it may not be perfect, Binance's significant role in the Crypto sphere will bring attention to this new concept, placing SBTs in a spotlight.

We owe thanks to Binance for its swift innovation, albeit in a landscape fraught with regulatory pressures.

It’s important to recognize that trustless systems present challenges for regulators, so any advancements in this direction will likely face scrutiny and regulatory obstacles.

While I appreciate Binance's approach to SBTs, we must acknowledge that this implementation does not align with the original vision set forth by Vitalik and others.

It’s only a matter of time before we see SBT implementations that stay true to their foundational intent, propelling blockchains into a realm where they can genuinely compete with traditional systems.

Final Thoughts

If you found this article insightful, consider subscribing to my newsletter, where I delve into complex subjects in an accessible manner.

Stay informed about the technologies shaping our future and prepare to capitalize on that knowledge.

For further exploration, visit the landing page of The Tech Oasis newsletter for digestible insights into technology, crypto, and markets.

www.thetechoasis.com

Alternatively, become a Medium member to access countless articles on topics of your interest.

Join here!