What are Identity NFTs and how can they be used for Blockchain Identities?

Non-fungible tokens (NFTs) have many use cases on the blockchain, both real and imagined, and a very new and controversial idea is that they would work well for identification on the blockchain. The properties of NFTs are great for identity cards, and creating an identity system to link a blockchain wallet to a real person could open up otherwise impossible internet citizenship and financial services. However, using NFTs to identify the owner of a crypto wallet is a hotly debated idea, and for good reason.


Blockchain wallets are “pseudo-named”, which means that they are only anonymous as long as the user’s real identity is never associated with the wallet, but once their identity is discovered (whether voluntarily or not), it cannot be disabled. One problem with pseudonymization is that decentralized applications, also known as “dApps”, have no way of proving the uniqueness of a user and must be designed with complete lack of trust between user and application in mind. Decentralized finance (“DeFi”) applications get around this problem by requiring users to deposit one cryptocurrency as collateral before taking another. This severely limits borrowing options for users who do not have many network assets. The inability to tie a crypto wallet to a person’s unique real identity limits the services that can be offered online and hinders the formation of an online society.

Related: Why NFTs are so misunderstood (and why it’s a problem)

In May 2022, Ethereum co-founder Vitalik Buterin and several of his colleagues published an article on SSRN entitled “Decentralized Society: In Search of the Soul of Web3″ in which he discussed the idea of ​​”soul-bound tokens” or “SBTs”. The name comes from the popular MMORPG game World of Warcraft, in which non-tradable items are “soul-bound” to the user’s character. The NFT blockchain smart contract is easy to modify to become non-transferable, and this is where SBTs come into play. SBTs will be issued by a company, government, or blockchain protocol that accepts documents with real IDs and other trusted sources to verify the user. personality. to identify. No one can receive more than one SBT. Thus, any crypto wallet containing SBT is a unique user with whom it is safe to assign a credit history and enter into legal contracts.

Revolutionary but controversial

The problem with SBTs is that they are considered very controversial within the crypto community. Identifying and recording cryptocurrency wallet addresses is a delicate topic for people who want to remain anonymous online and transact privately. This concern is justified given Web3’s concern for privacy and ease of tracking transactions. However, with NFT domains for crypto wallets and people posting NFTs and crypto wallet addresses on social media, it is clear that many people do not care about their privacy or know how open they are on the blockchain.

If privacy concerns were resolved, SBTs would open up new forms of DeFi, blockchain games, business applications, governance systems, and more. Financial credit scoring will be possible to allow borrowing without collateral, decentralized autonomous organizations (DAOs) will become more resilient to governance attacks, and social media accounts can be automatically verified. An entire decentralized on-chain community (or “DeSoc”) could emerge from blockchain-verified citizenship. If governments adopt SBT, then they can move citizen records onto the blockchain, reducing their own database maintenance costs, vastly improving record lookup and update times, 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 in Web3 are legitimate issues that need to be addressed before real identities can be implemented, but if these issues are addressed, identity solutions can reduce loss, fraud, and storage costs for governments and businesses. In addition, the idea of ​​online citizenship may finally emerge, offering the ability to weed out fake accounts and hold people accountable for what they do online. There are many benefits that can be realized with blockchain-based identity solutions, but it can also lead to a dystopian nightmare if people are not careful about how they are used.

Source: SSRN

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