The dilemma of soulbound tokens

"So what can I tell you, my brother, my killer, what can I possibly say"

A digest of The Dilemma of Soulbound Tokens by Isabel Orchard, Mike Alliegro and Raphael Spannocchi.

Why Bitcoin works: incentive joins reputation

Cryptocurrencies represent the first major innovation in coordination technology since the industrial revolution established the chain of command as the de-facto standard to do work at scale.

Instead of command-and-control structures, cryptocurrencies set the incentives in a way that individual actors optimize their own utility if they cooperate according to the rules of the game.

The brilliant idea was first implemented by Satoshi Nakamoto in his landmark 2008 white paper titled: Bitcoin, a peer to peer electronic cash system.

From a perspective of pure financial utility this was not a straightforward decision. Economies of scale would have rewarded a collusion, especially if it was covert. But the trust of participants in Bitcoin could have been irreversibly damaged if fraudulent transactions would ever be detected.

When participants act only for their own profit, with no regard for the long game, every system is doomed. We could also say that Bitcoin miners didn't collude because they were worried about their reputation, and the reputation of the Bitcoin blockchain as a whole.

We will see how soulbound tokens might be useful tools to establish on-chain reputation.

Token-based voting and plutocracy

Token-based voting in DAOs falls victim to one major criticism — the detour into plutocracy.

For a proposal to pass in a token-based governance system, it must first hit quorum (the necessary participation rate established by DAO founders), and then secure more votes in favor than against.

Simply put, if one (purchasable) token equals one vote in a DAO, then it only takes a wealthy and determined entity to purchase a substantial number of tokens and concentrate majority voting power in their hands. A more sophisticated version of this would be a Sybil attack, whereby one user employs multiple wallets to accrue the majority vote share.

Plutocracy breeds voter apathy. As individual community members watch whale token holders dominate the outcome of proposals, they become less and less inclined to participate. The fact that even after a series of equally weighted temperature checks and open-to-all discussions, your final vote still carries minimal marginal utility, is bound to dissuade users from engaging.

As participation declines, the addresses choosing the direction of the DAO by moving votes forward become fewer and fewer. This results in stunted development of the DAO.

For the same reason that cumulative intelligence across large populations is greater than one highly intelligent individual, DAOs flourish when more heads are put together to solve each problem.

Another risk to consider is the centralization of decision-making power without even holding the necessary capital. Instead of a slow acquisition of tokens in order to gradually become a whale and increase one’s influence over the direction of a DAO, a user with a hefty interest in the outcome of one specific proposal could mobilize and strike at once.

This was the case for MakerDAO on October 26, 2020 when BProtocol borrowed 13,000 MKR tokens (approximately $7 million) in order to push through the votes for the proposal regarding its own project on MakerDAO. BProtocol took out a flash loan from the dYdX platform in order to temporarily acquire the capital needed. Flash loans are short-term and must be paid back in one block space, which makes them rather attractive as means for a governance attack without having to incur long term expenses.

Soulbound tokens

Vitalik Buterin, no less, has co-authored a paper with Glen Weyl and Puja Ohlhaver introducing the concept of Soulbound Tokens (SBTs).

Soulbound tokens are non-transferable (but possibly revocable), publicly visible, non-fungible tokens. Unlike most existing NFTs, SBTs must be issued (or attested to) and cannot be transferred or sold, which makes them a more suitable primitive for establishing robust digital identities.

Bound to an address, non-transferable and thereby not tradable, soulbound tokens are meant to represent something purer, and more tied to the identity of contributors.

SBTs can represent any aspect of a users’ identity, like education credentials, work history, or conference attendance, which together create an extended, on-chain resume.

SBTs are valuable, precisely because they are not transferable. But their value is not financial, at least not straight away. Instead they represent a way to gain access, including access to people. And they command respect and give their holder instant recognition if a DAO supports their specific data set.

This combination of access, respect and recognition is a priceless asset that can only be achieved through good work, and not bought and sold on an exchange.

The non-financial dimension of SBTs make reputation layers desirable for governance who increasingly look for ways to complement or replace token-based reward mechanisms.

On-chain reputation offers a way for DAO governance to encourage contributors and reward the most outstanding members. Since DAOs strive towards automation of processes, they need to have a way so that smart contracts can identify who has been rewarded.

Reputation layers want to identify the persons that do the most for a DAO and make them visible. So they implement mechanisms that allow them to be attached to an entity or person and are not transferable.

Failures modes of Soulbound Tokens

Any transformational technology has the possibility of veering off into a dystopian nightmare. For SBTs, two hypothetical worst-case scenarios come to mind:

1. First, SBTs could give states unprecedented ways to track citizen behavior and then gate access to services to only allow citizens with a certain conduct, similar to what is already happening in China, with its social score system. We'll call this failure mode population scale surveillance.

2. Second, the unwarranted dilution of voting power by factoring out SBT correlation. Let’s call this failure mode algorithmic bias.

Population scale surveillance

If we assume that a citizen’s SBT starts at their birth, with their basic identification and then tracks activities throughout their life, then access to services, from traveling abroad and staying at great hotels, down to access to the labor market and basic necessities could be gated by certain aspects of an SBT.

Coupled with central bank issued digital currencies, that could be revoked or restricted on a per address basis, this opens up command and control possibilities that even the most nefarious and paranoid dictators of the past would never have dreamed.

Algorithmic bias

Token-based voting allows a sort of Sybil attack, in which one user employs multiple wallets to accrue the majority of tokens and centralize decision making power. The advantage this move has over purely purchasing the majority of tokens outright is that it masks the attacker’s centralization of power.

SBT mitigate the risk of hard Sybil attacks. However, in their paper on SBTs, Weyl, Ohlhaver and Buterin pose what could be described as a soft Sybil attack in which a vote is supported by a large number of Souls (even representing different individuals) with highly correlating SBTs. The level of correlation between Souls would be measured with a SBT correlation score. A high correlation score indicates that Souls share partialities. A low correlation score indicates that Souls are acting as independent agents.

They further suggest that in the case of a soft Sybil attack, the correlation score for groups of Souls could be tracked. A higher correlation could result in a lower overall vote weight. On the other hand, the same tally from a more diverse collection of souls, with a low correlation score, would have a higher weight.

The justification for modifying vote weight based on SBT correlation is based on the claim that votes cast by Souls with a high correlation score are votes cast under the same bias or judgment in error.

Now picture this: DAO administrators purposefully deem a high SBT correlation score with another Soul as active collusion, and reduce these voters' weight by a significant amount. All of these Souls now have less influence simply because an algorithm deemed them to be correlated.

Here’s an even worse scenario: A Soul that is deemed to be in cahoots with a group of others by a high correlation score is viewed as part of a Sybil attack. Not only is their collective vote weight now a fraction of what it was, but their reputation is also tarnished.

The leap of faith to infer collusion from correlation is significant and we should be wary of the dangerous assumption that digital affiliation can accurately map out the thoughts that lead a user to vote a certain way opening the floodgates for censorship.

The dilemma

"So what can I tell you, my brother, my killer, what can I possibly say", Leonard Cohen croons in his revered song Famous Blue Raincoat. The poignant dichotomy between brother and killer makes this line memorable and elicits the kind of sharp ambivalence that Cohen wants to convey.

Soulbound Tokens evoke similar sentiments and offer a fascinating dilemma:

• They offer an attractive alternative to financial rewards helping to attract and retain the talent that matters most.

• They have the potential to introduce surveillance capabilities that would make Orwell’s 1984 read like a holiday diary.

Ultimately it is up to us, the community and the practitioners in this space to make sure we resolve this dilemma and develop SBTs to their maximum potential for good.