Will the Soulbound Tokens be the Future of Decentralized Governance?

DeGov and DAO

Decentralized Governance, abbreviated as DeGov, is a reference to governance not by an individual or a small group, but instead empowering decision-making to the community of actual users.

DeFi protocols often have a governance mechanism under the DAO model, giving users the right to vote on important issues of the protocol rather than just following the intentions of the developer team. Since "DeFi Summer" 2020, many protocols with governance DAOs have been born, the dominant trend adopted by market leaders such as AAVE DAO, Curve DAO or Synthetix DAO.  DAO governance is normally through the proportional voting rights transferable tokens.  Because of this, under certain circumstances the DAO governance model can be gamed by validators and exchanges, or bought by large token holders.

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Barriers and Challenges

No model is without weaknesses. One liability of DeGov's comes from the system's uncertain decentralization. An illustrative example is the Terra 2.0 proposal. Although many small users did not want to fork the new chain, the decision is in the hands of the validators and other large holders of LUNA.

Some of the conflicts between DAOs include the Juno platform arbitrarily confiscating the funds of a whale through proposal 16, and Solend's proposal to take control of whale wallets to avoid liquidating $108 million SOL.  These extreme actions have made communities skeptical about the concentrated power of this model.

Small users more often prefer using their tokens for transacting or engaging in DeFi rather than staking and participating in governance.  This can leads to low rates of participation and influence concentrated with larger players.  Ethereum co-founder Vitalik Buterin has posted a lengthy article explaining the centralizing tendancies of some DAO models.

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Solution for Problem

Among the many solutions proposed to attack this problem is the concept of a “Soulbound” token (SBT).  “Decentralized governance is necessary, but coin voting governance in its current form has many acknowledged and unacknowledged dangers. Augmenting or moving beyond coin voting is a key part of the solution,” Buterin said on Twitter.

Interestingly, Vitalik Buterin once said that one of the reasons that pushed him to the decentralized ideal of cryptocurrencies was that he was very passionate about the World of Warcraft as a child.

The idea of an SBT was inspired by the Soulbound feature of World of Warcraft game items, which are not possible to sell or transfer, but instead are tied to the owner more or less permanently.

Users holding an SBT would not be able to trade or transfer that token through a variety of proposed mechanisms.  The token would act as an identifier, proving ownership, participation or obtaining recognition of performing an activity.  It could not be bought.

The Ethereum founder suggested that instead of a DAO model that favours large holders of governance tokens, we voting via SBRs would ensure broad participation by the community. This model would, for example, prevent staking pools from excercising undue influence.

Butering has expressed support for the proposed governance model of the Layer 2 scaling project Optimism because its proposal to use the SBT voting mechanism. Optimism has adopted a bicameral governance model consisting of two separate divisions, Token House and Citizens House.

• Token House: $OP holders can participate in governance via proportional voting on issues such as protocol upgrades, incentives for project development on Optimism and foundation grants.
• Citizens House: participates in governance on issues such as allocation of protocol revenue.  It is decided by holders of Soulbound Tokens or “Citizens”. SBT proof of Citizens House governance rights is to the individual and non-transferable.

Soulbound Tokens, New Trend?

Although in the early stages of development, SBTs are being piloted by a series of prominent platforms in the blockchain industry, such as Binance which released an SBT on BNB Chain, Phala Network launched an SBT for in-game avatars and Rh!noX's mission to promote SBT in a new whitepaper.

Despite technical challenges in implementation, SBTs look likey to become a trend as projects grapple with their governance models to move towards a more comprehensive decentralized solution.

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