DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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Ethereum is the world's largest blockchain which runs smart contracts. There are numerous projects based on this blockchain. However, due to congestion and scalability issues, the Ethereum blockchain is suffering.
Additionally, due to the older PoW consensus mechanism, the gas fees on Ethereum sometimes go as high as $80 which causes inconvenience for many. Even the energy consumption is on the concerning side.
Even though the Ethereum blockchain has a handful of issues, it is still a house for a lot of blockchains, smart contracts and dApps. Therefore, to solve all these issues and secure the future of Ethereum blockchain, the Ethereum 2.0 update was pushed.
Moreover, the founder of Ethereum “Vitalik Buterin” believes that Ethereum 2.0 along with the induction of Soul Bound Tokens are going to decide the future of Ethereum. Now what are these soul bound tokens, how do they work and how we will be using them is all we are going to talk about in this article.
On 11 May 2022, a whitepaper was published by E. Glen Wey, Puja Ohlhaver and Vitalik Buterin about the Decentralized Society where they talked about the direction in which the web3 community is growing.
The whole whitepaper is regarding the idea of “ Non-transferable Soul Bound tokens” where its working and use cases are discussed in a detailed manner. Before we get into technicalities, let’s first understand what a Soul Bound Token is.
In the simplest terms, a Soul Bound Token aka SBT, is a token which, once transferred to one address, cannot again be transferred to any other address. But the token can be burned or revoked by the issuer who transferred it in the first place.
Let’s break down the name to understand the concept of SBT even better.
The Soul is the most important aspect of SBTs. In the whitepaper, Vitalik Buterin has referred to the accounts holding SBTs as “souls''. These accounts or wallet addresses will be the ones holding the Non-transferable tokens.
Here, Bound means once the SBTs are issued to any particular wallet address by the issuer, that token will be bound with that address permanently and the account holder then cannot transfer this token to anyone else.
A soul bound token is
SBT being a fairly new concept, these tokens held by souls will initially be kept publicly visible to validate as a proof-of-concept. However, at later stages, users can customize the privacy levels with the help of “programmable privacy” feature.
Depending on the use case, the soul bound tokens can either be self-certified like our personal CVs or may require to be attested by the issuer in some cases. For example, The resume built by you in the form of SBT, will be self-certified and won’t require any other soul to attest to the SBT.
Whereas, If you are to be issued with a license by an organization, the SBT will be attested by the souls issuing the license to you. The above mentioned two examples are just one of many use cases the SBTs would bring to the web3 space.
There are several use cases of SBTs in the practical world. Let us see how a person can implement these uses.
Educational institutes can use the Soul Bound Tokens as a form of degrees to give to their students that graduate. Usually this could be done in the form of NFTs but the usual NFTs could be sold to anyone online. Hence, an SBT NFT would be a great idea for a degree as a person can't sell or transfer it.
If a conference or meeting was held and several SBTs were handed out, they could later be used to filter out what people attended the meetings or conferences by DAOs and hence determine whether a person would be eligible for a particular task like a job or becoming a part of a community.
Similarly, Web3 companies can make use of SBTs to determine what people have completed what programs and then consider them for any particular role.
If a person is renting their property, they can give the ownership of the property in the form of Soul Bound Tokens so they can burn them at the end of the renting period.
A company can make use of SBTs as a form of recommendation letter for an employee that wants to switch companies.
So basically Soul Bound Tokens can be used in any place where the ownership of a particular thing should not be transferred to other people like with degrees or licenses. They can also be revoked if the period of agreement ends like in the case of rent agreements. Now let us move on to the concerns surrounding SBTs and the solutions that were offered.
When the concept of SBTs was introduced, several concerns were raised with it. Vitalik Buterin answered these concerns in the whitepaper itself. Let us have a look at what they were.
Now that you know that the ownership of the SBTs cannot be transferred, you will raise the question 'What if we lose the SBTs?'. Buterin explained this scenario in the Ethereum whitepaper. He said that in the case the owner loses an SBT, the issuer of the SBT can help in recovering them.
Vitalik stated that SBTs can be recovered using the community recovery idea where the Soul would be the social network's 'intersectional vote'. What this means is that a user will have to assign a number of guardians to the SBT and give them access to the soul wallet's key.
Now the guardians may be any amount of individuals or institutions. Although, the one drawback with that issue would be the possible falling out with the guardians or them passing away. But if that does not happen, you can recover your SBT using community recovery.
We know that SBTs are non-transferrable. But what if we do want to migrate them from one personal wallet to another? How do we do that? Well Buterin offered a few simple solutions to that problem and they are:
A. You should store the item or SBT in an address that is the hash of:
I. An Index
II. The recipient address
III. A secret belonging to the recipient.
After that you can disclose your secret to an interface and they would see all the possible items belonging to you but your secret would not be disclosed as they won't see which items are yours.
B. You could also publish a number of items and then give all the recipients a Merkle branch.
C. Making use of a smart contract would be a good idea too because if they need to see what type of item you possess, you can simply give a ZK-SNARK.
So basically these transfers can be carried out on the chain and the simplest way to implement that would be to use a factory contract that would render the old item invalid and give validity to the new item using a ZK-SNARK to prove the validity of the operation.
SBTs are a very new concept and the sooner everyone understands them, the sooner it will start benefiting everyone. Vitalik Buterin has said that the SBTs would be available by the end of 2022 and that they would become very popular after a year's time.
Buterin said that SBTs could help us solve some issues in DeFi like scams and thefts. If SBTs could really do all these things then they would truly prove to be a boost to the crypto world. If you need help understanding more such topics surrounding the crypto world, check out our website.
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