CBDCs and Soulbound Token Explained

Digital money and NFT landmasses are constantly experiencing developments. The Soulbound token and CBDC are some of the latest entries to hit the scenes, and they may disrupt both spaces. Fiat is known to be paper money and NFTs are meant to be transferable. The CBDC—A digital fiat (nonpaper money) and the Soulbound token—A non-transferrable NFT are two developments going against the inherent natures of what we’ve known.

Will CBDCs replace cryptocurrency? Will Soulbound tokens -  as touted by Vitalik Buterin- help to overcome some of NFTs’ challenges? Let’s take a deep dive in!

Central Bank Digital Currencies (CBDC)

The world has gone digital and is tending speedily towards decentralization more recently with the introduction of Web3 and Blockchain technology. Cryptocurrency, due to its decentralized nature is becoming the new money, poised to quench the governments’ overarching lordship over mainstream fiat.

Governments are under pressure to be relevant in this very digitally decentralized future we’re transitioning into while still retaining control. Hence, the introduction of central bank digital currencies to replace cryptocurrency. A move leaving behind decentralization, embracing only digitalization. The reason for this pressure-motivated move isn’t far-fetched.

“The next generation may grow up entirely on the blockchain. That means the first account they’ll ever open may just be a crypto wallet with a decentralized currency. I think the banks know that and this is their way to stop the currencies from falling into the blockchain.” says Mark Basa of Hokk Finance.

Will this happen or not? Only time will tell.  But there’s been lots of skepticism and many negative reactionsto the CBDC proposal.

CBDC bears an almost absolute resemblance to regular fiat, carrying its demerits with very few additional benefits and has almost no edge when compared to cryptocurrency.

As Barton Warn says puts CBDCs, “they’re just a different flavor of fiat. CBDCs do not solve any of the fundamental problems of fiat and only serve to further entrench the interests of the central banks.” Obviously so, as the problem with fiat is clearly the control (Centralisation) not a change in the form (Paper to digital) which happens to be the focus of the central banks. Let’s take a look at some of the inherent flaws of the regular fiat the digital version might carry.

The Fiat Problem

Fiat dates back to 1900 and became more mainstream in 1971. Money has always evolved historically—In no particular order from cigarettes, stones, salt, and copper to gold and now, fiat. Each money is timely and in most cases solves issues the previous had.

But has money hit an evolutionary peak with fiat? Definitely not!

It makes sense for money to evolve again. And cryptocurrencies seem inevitable as the new currency. Bearing in mind that the space is still evolving to be stable and solid enough for mass adoption, why may cryptocurrency be a better means of payment?

The quality of money has always been directly related to the quality of life of people. While deflation increases it, i__nflation__ does the opposite. Beyond determining the quality of life, it also determines the strength of a nation. It’s not surprising some of the strongest countries in the world today have the highest valued currencies.

The problem with fiat is it leaves the well-being of the people hanging in the balance, totally dependent on the discretion and integrity of governments. This is because they have control of its supply and can print more at will to fund wars and other causes whose purposes are highly debatable.

However, this control of supply forms one of the basic grounds for money’s hardness or soundness, one which our governments have abused and are still exploiting. Take a look at these statistics;

• 80% of all the US dollars in circulation were printed (Increased supply) between January 2020 - October 2021 ($4 trillion - $20 trillion). Due to this;
• The US inflation rate sits at 8.58% as of July 2022. Meanwhile, statistics show that employees are likely to earn only a 3% raise in 2022. This means prices are going up without a commensurate increase in purchasing power.

This is one of the strongest economies in the world. Imagine the anguish in struggling nations. These facts about inflation show that fiat is a contributory factor to the compromise on money’s hardness because it can be easily created. And also on soundness because it has proven not to be a reliable store of value. $1 in 1970 has the exact samepurchasing power as $7.53 today.

Since the soundness and hardness of money mean they maintain a stable value, over time cryptocurrencies may prove to be a better form of money than fiat. This is because there’s no good stock to flow with fiat but with Bitcoin especially, there might just be.

Stock to flow in economics implies the amount of money that can be “printed” in the future should be less than the amount currently in circulation. That way, artificial price movements, and manipulations can be avoided. Only 21 million Bitcoin will ever be created  and over 18 million of these have been mined.

Cryptocurrency (Bitcoin especially) by nature, although largely volatile at the moment because of speculators and other factors, has the framework to maintain a good stock to flow. And also potentially prove to be the hardest and most sound currency the world has seen so far. Needless to say, it is trustless, and it’s 100% peer-to-peer.

Gold is also a typical example. It can’t be manufactured in a lab and the unmined quantity in the world is less than what is available.  Talk about hard and sound money!

To give credit to CBDCs, it may help facilitate cross-border payments better than crypto, depending on how it’s created. This, especially in respect to the exorbitant gas charges customary with cryptocurrencies. This is debatable because the crypto world is still evolving and may very well be the future of cross-border payments.

The Soulbound Token

Soulbound tokens are non-transferrable NFTs meant to possess more socially-inclined use cases. And it is part of the building blocks of a decentralized society (DeSoc) Vitalik Buterin and a couple of other guys are proposing.

What makes up a society? Identities of different people. And what makes up identities? “Commitments, affiliations and credentials.” of people. According to the SBT paper, these are what SBTs embody.

It is not wrong to say an SBT is a unit of an identity in Web3 embedded in the blockchain in the form of Non-transferrable NFTs. How will this work out? We discuss it below with relatable examples.

First, SBTs are credentials like your birth and educational certificates, membership credentials, and other forms of identification that should not be transferrable. It is more of an “extended resume” as the paper has dubbed it. SBTs will typically be issued by a “soul” which might be your institution issuing your credentials upon completion to another “soul” (you).

Buterin says, “The idea is to bolster people’s social identities by customizing them with unique, non-exchangeable badges. In theory, the token could help solve some of the problems ravaging decentralized finance, like scams and theft.” Let’s dive further into some of the advantages of SBTs.

The Benefits of Soulbound Tokens

SBTs can potentially help solve a myriad of problems associated with NFTs. Let’s take a look at some of them;

Provenance

Provenance refers to the earliest known history of a thing and this is one of the issues plaguing the NFT space. Since SBTs contain commitments, affiliations, and credentials of artists for example in their Souls, it allows their reputations to precede them in marketplace places. Potential buyers can easily verify the authenticity of the buyers based on SBTs in their souls.

SBTs can help prevent scams and theft in the NFT space. As Vitalik opines, “While blockchain inclusion enables us to trace the time a particular art was made, SBTs would enable us to trace the social provenance, giving us rich social context to the Soul that issued the work…” This is because deep fake art usually happens outside concrete social contexts.

This coupled with the fact that artists can issue NFTs connected to their souls makes it easy for people to verify their “membership to a collection”. And also enables the verification of the total supply the artist claims. This will ultimately replace Twitter and Opensea as a more reliable means of verification.

Lending

The DeFi space has found it hard to develop a reputation system for uncollateralized loans as it’s heavily based on credit scores. Even the traditional rating systems are flawed because they “reinforce discrimination”.

SBTs can help solve this problem by “nesting” a form of revocable “proof of debt” among a soul’s SBTs and burning them when they eventually pay. Also, it provides a long list of data for better decision-making for loan providers. And may reasonably exclude unnecessary sentiments, metrics, and bias that come to play in uncollateralized loan approvals traditionally.

SBTs can also help;

• Prevent Sybil attacks in DAOs that rely on SBTs to accrue more voting power to users with more SBTs and less to those with extremely correlated SBTs or even outrightly rejecting them.

• Provide a solid form of verification for job seekers by serving as a digital CV.

• Target the right communities for crypto participation by reviewing SBTs and also help to prevent Sybil attacks.

Problems With Soulbound Tokens

Although souls can choose to hide what SBTs reveal, in a way, they could also foster discrimination by revealing too many details in specific situations or contexts. This is particularly true for marginalized social groups who are more likely to experience disfavor.

Soulbound tokens is still an idea purely in theory and according to Buterin, experiments will begin with SBTs on the Ethereum blockchain soon. But based on Jason Levin’s interview with the co-author of the SBT white paper, it could be available sooner, towards the end of 2022.