Non-fungible tokens (NFTs) have many use cases in blockchain, both real and imagined, and the new and controversial idea is that it would work well for identity on the blockchain. NFT properties work very well with ID cards, creating an identity system to connect a blockchain wallet to a real person that can unlock online citizenship and financial services that would otherwise be impossible. However, using NFTs to identify the owner of a cryptocurrency wallet is a highly controversial idea, and for good reason.
Blockchain wallets are ‘pseudonymous’, meaning they are only anonymous as long as the user’s real-world identity is never connected to the wallet, but once their identity is discovered (willingly or unintentionally), they can never be separated. One of the problems with aliases is that decentralized applications, also called “dApps”, have no way of proving the uniqueness of any user and must be designed around a complete lack of trust between the user and the application. Decentralized finance (‘DeFi’) applications get around this problem by requiring users to deposit one cryptocurrency as collateral before borrowing another. This severely limits the borrowing potential of users who do not own many on-chain assets. The inability to connect a crypto wallet to a person’s true unique identity limits the services that can be offered across the chain and prevents the formation of an Internet-based community.
In May 2022, Ethereum co-founder Vitalik Buterin and several colleagues published a research paper on SSRN entitled “The Decentralized Community: Searching for the Soul of Web3,“Where he discussed an idea”Tokens“or”SBTs.“The name comes from the popular MMORPG World of Warcraft, where the game’s non-tradable items are ‘soul bound’ to the user’s character. It is easy to modify the NFT’s blockchain smart contract to become non-transferable, which is where the SBTs come in. They will be issued. SBTs by a company, government, or blockchain protocol that takes real identity documents and other reliable sources to prove a user’s identity.No one can have more than one SBT.Any crypto wallet that contains an SBT is therefore unique and secure user to set a credit history and enter into legal contracts with. .
Revolutionary but controversial
The problem with SBTs is that they are considered highly controversial among the crypto community. Determining and recording crypto wallet addresses is a sensitive topic for people who wish to maintain their anonymity on the chain and transact privately. This concern is justified given the privacy issues of Web3 and the ease with which transactions can be tracked and traced. However, with NFT domains for crypto wallets and people posting NFTs and addresses of crypto wallets on social media, it’s clear that many people either don’t care about their privacy or don’t know their exposure on the blockchain.
If privacy issues are resolved, SBTs will open up new forms of DeFi, blockchain gaming, business applications, governance systems, and more. Financial credit scoring will be possible, loans without collateral deposits will be allowed, decentralized autonomous organizations (DAOs) will become more resistant to governance attacks, and social media accounts can be automatically verified. A fully on-chain decentralized community (or “DeSoc“) of blockchain-verified citizenship. If SBTs were adopted by governments, they could transfer citizens’ records to the blockchain, reducing their energy costs for maintaining databases, dramatically improving records retrieval and updating time, and potentially eliminating fake IDs.
Identity on the blockchain is a controversial topic, but it is also necessary for further progress. Privacy and security issues on Web3 are legitimate concerns that must be addressed before identities can be implemented in the real world, but if these issues are resolved, identity solutions can reduce waste, fraud, and storage costs for governments and businesses alike. In addition, the idea of online citizenship could finally emerge, providing the ability to weed out fake accounts and hold people accountable for what they do online. with blockchain Identity solutions, many benefits can be achieved, but it can also lead to a miserable nightmare if people are not careful how to use it.