Why NFTs and SBTs are not the best solution for digital identity

by James · August 10, 2022

Currently vying for attention within the web3 digital identity space are non-fungible tokens (NFTs), verifiable credentials (VCs) and soulbound tokens (SBTs).

Each has its own strengths and weaknesses, and it is important to understand the uses of the different tokens individually, to understand where each will be best placed in an ever-changing digital market.

Given the extremely fast growing popularity of NFTs – tell us what hasn’t been NFT’ed Nevertheless – and the appearance of SBTs, the natural desire to use them in every possible way is understandable. Despite the enthusiasm, someone has to break the news; often NFTs and SBTs are not fit for purpose. From fraud to privacy issues, here are the most popular use cases that NFTs and SBTs fail to deliver on, or would be better “enhanced” by appropriate digital identity solutions, such as self-surrendering identity (SSI) including VCs.

Using NFTs to access Discord servers

Based on the use case above, in the perceived absence of decentralized digital identity solutions, NFTs began to be used as an identity proof of membership of decentralized autonomous organizations (DAOs) on Discord. People join the DAO’s private channels by proving they own an NFT issued by the DAO. However, they have often been able to sell NFT and still be in the private channels of the DAO’s Discord server. This is because very few DAOs have the ability to constantly monitor whether the NFTs still belong to their members. On the other hand, SSI circumvents this problem by using a VC’s that can be easily checked regularly with new approaches becoming available to ensure that the same person accesses the community.

As soon as a collection is launched on one chain, people tend to copy and “recreate” that NFT on another chain. Market forces price them accordingly. This can lead to situations where there are several versions of an NFT. For now, we let the free market decide, which can lead to speculation as to which one is authentic. Imagine if we could prove NFT’s origin, cross-chain, and then link it to an identity? This is already possible with SSIs and VCs proving ownership over an account or address.

In addition to NFT creation, SSIs and VCs can help prove who has owned and/or currently owns NFTs throughout their lifecycle.

Peer-to-peer trading

Outside of NFT marketplaces, such as OpenSea, peer-to-peer (P2P) trading appears on Discord and other platforms. However, unlike the former, there are no ways to verify whether a person has actual control over the assets or funds, leading to fraud. Instead, via SSI and VCs, it would be possible to prove ownership of an NFT without exposing the account outside of the individual’s trading

The same approach can be extended beyond NFTs to other assets or evidence. For example, it will be possible to prove ownership of fungible tokens above a certain token threshold (let’s call this the whale threshold) without exposing the underlying account.

Overall, SSI can reduce the potential for fraud and fraudulent behavior around the trading of tokens (fungible or not) through p2p trading.

What about SBTs?

Vitalik Buterin (founder of Ethereum) and co-authors Puja Ohlhaver, E. Glen Weyl recently introduced a new token concept for web3 – soulbound tokens (SBT). These are described as a non-transferable type of non-fungible token. Unlike regular NFTs, SBTs will not be transferable, but they may be revocable. Issued by an entity or an individual, they are intended to be linked to a specific organization or identity. SBTs are proposed to represent different types of personal information, similar to an NFT, but with an increased level of security because it cannot be transferred to another person through a transaction.

However, SBTs seem to come from the opposite privacy paradigm than SSI. This can have some dangerous unintended consequences, such as the Decentralized Society (DeSoc) being public by default in philosophy and as a result publishing data on the ledger publicly for better or worse. No wonder why they have received a significant amount of criticism for creating a system similar to China’s “social credit system” where an individual’s behavior is public to others, worsening the individual’s privacy (E. Barrett, Fortune, 2022).

privacy

Finally, to illustrate the difference between the alphabet soup of NFTs, SBTs and VCs, take a look at the chart below. The differences largely come down to the privacy stance each technology takes with VCs to avoid traceable transactions on the ledger, while NFTs and SBTs aim for the opposite.

Ultimately, each of these will find their uses, but care should be taken to avoid creating another scandal similar to Clearview AI, where people release data into the world without fully realizing the downsides it can create. Privacy, you don’t know what you’ve got until it’s gone!

If you enjoyed this blog, check out our thoughts on how NFT and SSI combined unlock a new gaming experience.

About the author

Fraser Edwards is co-founder and CEO of cheqd. Fraser Edwards (Managing Director) has a rare expertise, mixing technology and business acumen andrarer experience. He has a deep consortium and the self-sovereign identity knowledge. He is led the Famous traveler Digital Identity (KTDI.org) project with the The world’s economic Toaround and Dutch and Canadian governments among the stakeholders. He also has expertise in blockchain payments through building across blockchain payments theJasper-Ubin project with the Singaporean and Canadian central banks. Fraser has patents in cross-ledger payments. His career has been a series of unique challenges, one after another the other and he is excited to get going the adoption of sovereign identity as his next.