Soulbound Tokens, DAOs, and the Rise of the Decentralized Society: Examining the Path to a New Paradigm

Contribution of SIMONE GOZZINI

Introduction

The concept of Web3 represents a transformative shift in the internet landscape, aiming to move away from centralized models and foster a more transparent, user-centric online ecosystem. This disruptive innovation has particularly profound implications for the financial world. However, one key aspect that currently lacks in this paradigm is the ability to represent identities, which could unlock numerous new applications.

In their influential papers, Weyl et al. (2022) and Buterin (2022) introduce an intriguing addition to this evolving world: Soulbound tokens (SBTs). These tokens, unlike traditional transferable tokens , symbolize affiliations, commitments, and social relations. They envision a Web3 where individuals, embodied by their Souls (i.e., digital wallets), can accumulate multiple SBTs to form a comprehensive self-portrait. This innovative approach enables the creation of reputation systems, revolutionizing the way Web3 is conceived. For instance, it opens doors to undercollateralized lending, property rental, and various other possibilities.

Moreover, SBTs have the potential to revolutionize the functioning of decentralized autonomous organizations (DAOs) by addressing concerns related to colluding accounts and bots in voting processes. By discounting the voting power of colluding accounts and unveiling bots, SBTs can enhance the governance mechanisms of DAOs significantly.

Ultimately, this groundbreaking technology can pave the way for the establishment of a Decentralized Society. Such a society operates on decentralized principles, facilitated by blockchain technology and other Web3 protocols. It empowers individuals with greater control over their data, digital assets, and online interactions, leading to a more democratic and inclusive digital realm.

The structure of the paper is as follows: Section 2 delves into the concept of Soulbound tokens (SBTs) and explores why individuals would find it beneficial to have an identity on Web3; Section 3 provides valuable insights into the research conducted by various authors regarding the applications of SBTs; Section 4 focuses on the relationship between SBTs and Decentralized Autonomous Organizations (DAOs), with a specific emphasis on how SBTs can enhance voting and funding mechanisms within DAOs; finally, Section 5 presents the concept of a Decentralized Society, which is a social and governance structure enabled by blockchain technology and Web3 protocols. This section explores the potential implications and advantages of a decentralized society in terms of individual control over data, digital assets, and online interactions.

Soulbound Tokens

The Concept

Web3 represents a groundbreaking innovation with the capacity to revolutionize numerous industries, ranging from finance and governance to supply chain and social media. Its primary objective is to redefine the internet as a more democratic, secure, and user-centric environment, thereby nurturing innovation, collaboration, and the emergence of new economic models. However, it is noteworthy that developers have predominantly concentrated on exploring Web3’s potential within the realm of finance, leading to the creation of the decentralized finance (DeFi) ecosystem. Despite these advancements, certain activities, such as undercollateralized lending, remain unachievable within this ecosystem as of today.

According to Buterin (2022) and Weyl et al. (2022), a notable absence in the current Web3 landscape is the ability to incorporate social identity. Specifically, there is a need for a mechanism to establish a reputation tied to an individual agent, which can be defined based on their past histories and interactions.

The concept of Soulbound tokens draws inspiration from the world of Minecraft, where certain items are designated as soulbound, meaning they cannot be bought, sold, or transferred. Instead, they can only be earned by completing specific tasks. In the context of Web3, Soulbound tokens can be defined as “non-transferable (initially public) tokens representing commitments, credentials, and affiliations. Such tokens would be like an extended resume, issued by other wallets that attest to these social relations” (Weyl et al., 2022, p.1). According to the authors, Soulbound tokens have the potential to enhance Web3 in several ways. They can establish the provenance of assets, allowing for greater transparency and traceability. Additionally, they can facilitate lending opportunities in undercollateralized markets, opening up new avenues for financial inclusion. Furthermore, Soulbound tokens can introduce decomposable shared rights and permissions, creating new markets and opportunities. Lastly, they can be used as a measure of decentralization within the Web3 ecosystem.

The concept of Souls is introduced as “accounts, or wallets, that hold publicly visible, non-transferable (but possibly revocable-by-the-issuer) tokens" (Weyl et al., 2022, p.2). Souls, by storing SBTs, can be regarded as a representation of a user’s history and serve as a form of resume, contributing to the creation of a reputation. It’s important to note that Souls are not necessarily associated with legal names, and there is no explicit protocol-level requirement enforcing a "one Soul per human" rule. Furthermore, the authors do not assume that Souls are non-transferable between humans.

In addition, SBTs play a crucial role in facilitating the formation of communities through unique intersections of Souls. Traditionally, Web3 has relied on airdrops as a means to create communities. Airdrops involve distributing tokens for free to a specific set of wallets that meet certain eligibility criteria, such as holding a minimum amount of a particular token or actively participating in a specific community or platform. However, this approach is susceptible to Sybil attacks and strategic behavior. SBTs offer a solution to these challenges through a process known as "Souldrops." Souldrops allow for a targeted selection of Souls based on their specific characteristics and reputation. For instance, a DAO aiming to gather a community within a particular layer 1 protocol could souldrop to developers who possess a certain number of conference attendance SBTs. By leveraging Souldrops, communities can be formed more effectively, ensuring a higher degree of authenticity and engagement while mitigating the risks associated with sybil attacks and strategic behavior.

Community Recovery

Preserving one’s Soul is of utmost importance. The authors introduce the concept of community recovery , "where the Soul is the intersectional vote of its social network" (Weyl et al., 2022, p.6). The system involves a group of guardians who possess the authority to modify a user’s wallet keys through a majority vote. However, a challenge arises from the need for users to regularly update and maintain their relationships with these guardians, ensuring that changes can be made when necessary. A stronger approach entails linking Soul recovery to a Soul’s affiliations within various communities. Instead of selectively curating connections, this solution relies on an expansive range of real-time relationships to ensure maximum security. In a community recovery model, the retrieval of a Soul’s private keys would necessitate the consent of a qualified majority of members from a (random subset of) the Soul’s communities. By integrating security into social interactions, a Soul can consistently regenerate their keys through community recovery, effectively deterring Soul theft or sale. This is due to the fact that a potential Seller would have to provide evidence of selling the recovery relationships, making any attempt to sell a Soul lack credibility.

During its early stages, this system encounters a challenge: SBTs are not transferable, which raises the importance of community recovery to enable identity retrieval in case of lost keys. However, community recovery is only feasible when a substantial number of SBTs are already in circulation across various communities. Unfortunately, many individuals may hesitate to participate until a significant number of SBTs are in circulation and community recovery mechanisms are established. To address this issue, the authors propose the introduction of Proto-SBTs. These tokens are both recoverable and transferable, allowing them to be burnt and reissued in a new wallet if needed. This approach ensures the birth of a sufficient number of Souls and enables community recovery before transitioning Proto-SBTs into actual SBTs. By implementing Proto-SBTs as an intermediary step, the system can overcome the initial barrier and facilitate the generation of an ample number of Souls, paving the way for community recovery to become a reality.

Why a Digital Identity

The potential of SBTs is multifaceted, encompassing various aspects, as explained in the previous section. However, it raises a fundamental question: why would individuals adopt a digital identity in Web3? To address this query, Chaffer and Goldston (2022) explore the Terror Management Theory (TMT), a model rooted in social and evolutionary psychology that elucidates how individuals safeguard themselves from existential concerns tied to mortality.

In their analysis, they define Web3 identity as a "collection of digital assets" (Chaffer & Goldston, 2022, p.2). A notable characteristic of digital identity is its potential for permanence, allowing individuals to leave behind a long-lasting legacy and thus achieve digital immortality (Allen, 2016). TMT provides insights into why individuals amass digital assets, which contribute to their identity, and why the immortal nature of digital identity holds significance. According to TMT, humans grapple with an existential dread of death, a realization of its inevitability, which conflicts with the innate instinct for self-preservation. To mitigate this existential fear, individuals seek solace in a realm of symbolic existence, such as culture, aiming to live on in the memories and minds of others. Digital identity serves this purpose effectively: given that the Internet does not have a predetermined endpoint, individuals perceive the accumulation of digital assets as a means to validate their existence and etch themselves into the annals of Web3’s history. This is particularly true for those who lack alternative paths to transcendence, such as religious beliefs. However, this assumption relies on the premise that Web3 achieves mainstream adoption; otherwise, insufficient recognition of the digital existence of the deceased would occur. The authors highlight that the sustainability of employing digital identity with this purpose hinges on the self-esteem that individuals derive from the system. In other words, the value people place on their digital identity as a conduit for achieving immortality determines their willingness to combat cyber attacks and identity theft, ensuring the preservation of their online image.

Lastly, the authors underscore the value of SBTs through the lens of logotherapy, a theory emphasizing the pursuit of meaning in one’s life. While holding digital assets in the form of NFTs to construct an identity may lack inherent meaning for some individuals, SBTs hold greater significance. Since SBTs encapsulate the digital history of a user, they enable the preservation not only of assets but also of reputation and transactional history. Consequently, the endeavor to transcend mortality through digital identity becomes more meaningful and valuable.

Exploring the Diverse Applications of SBTs

SBTs, although a relatively new concept, have already piqued the interest of authors who are delving into various potential applications of this innovative tool.

Digital Art

Weyl et al. (2022) discover significant implications for the realm of digital art. They highlight that an artist’s identity can be established through a soul possessing multiple STBs, which allows for the development and establishment of their reputation. This, in turn, ensures that the NFTs issued by the artist are legitimate and not counterfeit. Furthermore, this approach enables the verification of the authenticity of photographs and videos by not only tracing the time of creation but also capturing their social provenance. Indeed, by utilizing a Soul, it becomes possible to maintain a faithful record of the artist’s history.

Lending

Weyl et al. (2022) find that uncollateralized lending is not widely supported in Web3 due to the absence of systems that can assess credit trustworthiness, challenges in verifying identities, and susceptibility to sybil attacks involving the creation of multiple fraudulent accounts. However, SBTs can address these issues and enable uncollateralized lending by establishing a credit score to evaluate the trustworthiness and reputation of borrowers. SBTs can record the credit transaction history, education, and work background of the associated Soul, providing insights into the likelihood of repayment. Algorithms can then analyze this information to generate a meaningful credit score. Loans can be represented by non-transferable but revocable SBTs, which can be replaced with proof of payment once the loan is fully repaid. This mechanism ensures that borrowers who attempt to evade their obligations by creating new Souls will lack the necessary SBTs to establish a reliable reputation.

However, the challenge lies in initiating this process, as there is no repayment history available initially since Souls have not yet accumulated any debt. To address this, other pertinent information such as education and work history can be considered to enable lending, particularly within social connections. By leveraging these additional factors, lenders can make informed decisions even in the absence of a repayment track record.

Students

Tejashwin et al. (2023) propose a model that utilizes Souls and SBTs as a means to store and authenticate academic achievements. They argue that this approach offers greater privacy and security compared to centralized models, which are susceptible to document forgery and database tampering. The authors demonstrate that their model enables efficient access to student data by universities and recruiters, reducing verification time and ensuring reliable and immutable records.

According to the authors, each student should possess a wallet (a Soul) to store their data. To address privacy concerns regarding school-related information, SBTs can be utilized to store the data off-chain. Students have the flexibility to choose the storage method for their on-chain data, whether it be on their own devices, trusted cloud providers, or decentralized networks like IPFS (Interplanetary File System). Storing data on-chain allows for the utilization of smart contracts , granting permissions to write SBT data while managing different levels of access rights. Students retain the option to selectively disclose the contents of their SBTs or associated data stores as desired.

The process involves the issuer uploading the record onto the blockchain , where it is encrypted and divided into multiple blocks. These blocks are distributed and stored across nodes within the DCS network. The data undergoes hashing, resulting in hashed values that are utilized for storage and retrieval purposes in decentralized applications.

Property Rental

In their study, Sharma et al. (2023) delve into the role of SBTs in facilitating transactions on property rental websites. They highlight the prevalent issue of scams and fraud in the realm of online real estate, involving both landlords and potential tenants. To address this problem, the authors propose a blockchain-based model that focuses on establishing a robust online reputation through the use of SBTs, thereby instilling trust in the rental process.

To begin, upon user registration, an Entry SBT linked to the user’s personal wallet is created. Landlords, as users, can utilize smart contracts to list their properties on the website. The property information is stored on the InterPlanetary File System (IPFS), a decentralized file sharing peer-to-peer network. Subsequently, when a prospective tenant negotiates terms with a landlord to initiate a rental agreement, they are required to submit a security fee in the form of cryptocurrencies, acting as collateral. In return, the tenant receives a Deal Token SBT, enabling them to pay rent and access other property-related features. Smart contracts replace traditional rental agreements, ensuring the execution of predetermined terms without deviation. Upon the conclusion of the rental contract, the tenant can withdraw the deposit, while the Deal Token remains associated with the Entry Token. The authors propose the use of administrative smart contract "Admin.sol" for issuing Entry Tokens, "PropertyFactory.sol" as a smart contract for uploading property data, and "Property.sol" as a template for property contracts and Deal Token creation. Furthermore, to ensure the credibility of the platform, a comprehensive review system has been implemented. This system allows landlords and tenants to review each other based on a star rating system ranging from 1 to 5. These reviews are permanently linked to their respective Entry Tokens and contracts, providing transparency and accountability. The current reputation at time ${\textstyle t}$ can be obtained through the following equation:

$$R={\frac {\left[1.01\times \left(R_{\text{max}}-\left(R_{\text{min}}\times \left[1-\log _{5}x)\right]\right)\right)\right]+\left[R\times (n-1)\right]}{n}}$$

where ${\textstyle R_{max}}$ is the maximum reputation score possible (set to 100), ${\textstyle R_{min}}$ is the minimum reputation score possible (set to 50), ${\textstyle n}$ is the total number of reviews received and ${\textstyle x}$ is the current rating score. The factor of ${\textstyle 1.01}$ is utilized to assign higher importance to the most recent reviews. If, for any reason, the calculated reputation score ${\textstyle R}$ falls below ${\textstyle R_{\text{min}}}$, the user’s collateral will be liquidated, and they will be prohibited from further transactions on the website. This measure ensures that users with inadequate reputation scores are unable to engage in transactions.

The benefits of this system are manifold. By leveraging blockchain-based payments, the flexibility of transactions is increased, as it is not constrained by commercial bank working hours. Moreover, it facilitates easier cross-border payments and incurs lower transaction fees compared to traditional online rental platforms. The use of smart contracts enables the automation of various rental property operations, such as eviction procedures for tenants in arrears, resulting in time savings. Lastly, the implementation of peer-to-peer reputation systems resolves the vulnerabilities associated with centralized reputation systems, which are susceptible to attacks and manipulation (Dennis & Owen, 2015).

Inheritance

Goldston et al. (2023) present a novel model for digital inheritance, focusing on the Polkadot and Kusama blockchain networks and utilizing SBTs and the social recovery pallet as a practical application. As technology and digital assets like NFTs and cryptocurrencies play an increasingly prominent role in everyday life, the need for effective transfer mechanisms to heirs has become paramount. The model introduces key entities involved in the digital inheritance process. The "testator" is the individual creating their will concerning their assets, while the "executor" is responsible for carrying out the testator’s wishes. The "trustee" manages the assets within a trust, and the "beneficiary" is the recipient of the testator’s wealth. SBTs can be utilized within this framework to offer proof of existence for the entities involved. If the testator, executors, trustees, and beneficiaries have SBTs generated by the testator and transferred to their respective wallets, it would become an integral component of the digital inheritance plan. Such a process has the potential to validate the existence of all users and enhance the security of the testator’s digital assets. To implement their solution, the authors leverage the Substrate framework, a versatile and modular platform that empowers developers to build customized blockchain applications. Within Substrate, "pallets" serve as self-contained units of code, offering various functionalities such as governance, staking, and consensus. Developers can choose from prebuilt pallets or create their own, tailoring their blockchain to specific requirements.

The proposed model incorporates a "Social Recovery" pallet built on the Substrate framework. This pallet addresses the issue of lost credentials by generating a new key and account to recover assets. The process involves the setup of a "createRecovery" mechanism in an individual’s account, where the user designates a group of trustees. Through a multi-signature approach , these trustees can approve the recovery process to regain access to the account. In the context of digital inheritance, the testator collaborates with their executor to select friends as trustees. Additionally, determining a "delay period" is crucial. This period represents the time required to pass after the testator’s death before account recovery becomes possible. By incorporating this delay, the model enhances security, mitigating potential fraud attempts while the testator is alive. Upon the testator’s demise, either the digital executor or a designated trustee must initiate the recovery process by submitting a security deposit. This deposit distinguishes the initiating party from others and can be utilized to halt the recovery process if necessary, using the "closeRecovery" function. The executor subsequently contacts all trustees, requesting their participation in a "vouchRecovery" transaction. If the multi-signature approach yields positive results and the delay period has elapsed, the executor gains access to the inheritance via the original account. Assets can then be distributed to beneficiaries through the creation of a new account. After completing this distribution, the "closeRecovery" option is invoked to reclaim the security deposit. Finally, the "removeRecovery" option is called, ensuring the irreversibility of transactions.

In addition to its applicability to Web3 applications, the authors suggest that the proposed process can be expanded using SBTs to enhance interoperability between Web2 and Web3 digital assets. This extension enables the retrieval and inheritance of not only blockchain-based assets but also social media accounts and associated content.

SBTs, Prediction Markets and AI

According to Weyl et al. (2022), SBTs can find applications in various predictive models that utilize user data, such as artificial intelligence (AI) systems and prediction markets. AI models rely on data feeds and employ nonlinear models to generate predictions, while prediction markets serve as platforms enabling individuals to trade contracts based on future events. These markets facilitate the buying and selling of shares or contracts representing potential outcomes, with contract prices reflecting the aggregated beliefs of the market participants regarding the probability of those outcomes.

However, prediction markets face a challenge. Although they claim to aggregate the beliefs of all participants, they often primarily elicit the beliefs of individuals prone to gambling, resulting in enrichment for the winners while impoverishing others and discouraging risk-averse individuals from participating. To address this issue, quadratic rules (see Section 4.1) can be implemented to elicit precise probability estimates from all participants. Furthermore, SBTs can enhance prediction markets by allowing the computation and synthesis of diverse beliefs, taking into account social context, reputation, credentials, and affiliations, which form the essence of a participant’s Soul.

SBTs also have the potential to transform the field of AI. AI systems heavily rely on data, yet the creators of the surveilled data often remain unaware of their role in shaping these models. They typically retain no residual rights to the data they generate and are considered "incidental" rather than essential participants. Moreover, the process of gathering extensive data divorces models from their social context, concealing their biases and limitations, and hindering our ability to address and compensate for them. By integrating SBTs, AI can be augmented in a natural manner. SBTs enable the programming of economic incentives that reward data creators with rich provenance while empowering them with residual governance rights over their data. Specifically, SBTs allow the implementation of carefully targeted incentives for data (including data quality) tailored to individuals and communities based on their unique characteristics. Concurrently, model-makers can track the characteristics of the collected data and its social context, as reflected by SBTs, and identify contributors who can offset biases and compensate for limitations.

SBTs and DAOs

Weyl et al. (2022) study how SBTs can offer several benefits to improve DAOs. Firstly, they can serve as a deterrent against "vampire attacks", which are a type of malicious activity where an attacker exploits the functionality of decentralized finance (DeFi) protocols to drain liquidity and assets from other projects or platforms. To discourage free-riders, one approach is to establish a social norm around souldropping, potentially by vesting SBTs exclusively to Sybil-resistant Souls who have contributed liquidity. Moreover, souldrops can be withheld from Souls involved in vampire attacks by shifting their liquidity.

Secondly, SBTs can facilitate dynamic leadership roles in DAOs, adapting as community compositions change, as reflected by the types of SBTs individuals possess.

Furthermore, SBTs enable DAOs to represent property contracts and decompose property rights that were not feasible with transferable tokens like NFTs. For instance, permissioning access to privately or publicly controlled resources (such as homes, cars, museums) can be accomplished without the risk of the right being transferred to an untrusted user, as SBTs are non-transferable.

DAOs are particularly susceptible to sybil attacks, where a single user gains majority voting power, leading to complete control. SBTs can help mitigate this issue in DAOs through the following features:

• Identifying Souls from bots using the reputation mechanism enabled by SBTs.
• Granting more voting power to Souls with reputable SBTs.
• Checking for correlations between SBTs held by supporting voters and assigning a lower vote weight to highly correlated voters.

The latter element is especially crucial, as a vote from multiple Souls with identical SBTs may indicate a Sybil attack or a group prone to judgment errors, warranting a reduction in vote weight.

Moreover, SBTs facilitate the measurement of decentralization and pluralism in a DAO. This can be achieved by granting voting power only to Sybil-resistant Souls, discounting voting power for correlated Souls with many common SBTs, and assessing correlations between SBTs across different layers of the network stack to gauge decentralization.

Quadratic Mechanisms, Weighted Voting and Collusion

The authors propose the introduction of various weighted voting mechanisms as a solution to the issues discussed in the previous section. Their models address biases and tendencies towards excessive coordination by acknowledging the presence of partial and pre-existing cooperation. This recognition is crucial also in public funding models, which are used to raise funds for blockchain-based projects or initiatives from the public, because it corrects the assumption that agents are purely selfish. In reality, humans are rarely completely selfish or completely cooperative.

Excessive coordination among agents in public funding models can result in collusion, which can take on different manifestations, such as:

• Token allocation manipulation: colluding parties may coordinate their actions to manipulate the allocation of tokens during token sales or fundraising events. By colluding, they can unfairly influence the distribution of tokens to their advantage.
• Insider collusion: This form of collusion involves individuals or groups working together to gain unfair advantages within the public funding process. They may have privileged access or information that enables them to manipulate the system for personal gain.
• Market manipulation: Colluding parties can engage in market manipulation by deliberately influencing the prices of tokens. This can involve coordinated buying or selling activities to create artificial price movements, exploiting the market for their own benefit.

To mitigate these risks, the authors emphasize the importance of SBTs, which promote cooperation among diverse entities by reducing the cooperative rewards given to correlated Souls (Souls that share some degree of SBTs).

The authors provide an illustrative example using the Quadratic Funding (QF) model, but the same principles can be applied to Quadratic Voting (QV). Quadratic mechanisms, by their nature, encourage collaboration starting from a self-centered perspective, assuming agents are selfish. However, these mechanisms can be vulnerable to groups that already exhibit cooperative behavior.

Quadratic Funding (QF) operates by allocating funds from a community to shared projects in a manner that is proportional to the square of the sum of the square roots of individual contributions. In this model, for a set level of contributions, the matching funds increase exponentially with the number of individual contributors, illustrating increasing returns to collective action. However, individual contributions experience diminishing returns, meaning that concentrated individual action yields less relative impact. In other words, as more individuals contribute to a project, the matching funds available for that project grow quadratically. This encourages collective participation and rewards the collaborative efforts of the community. Conversely, the impact of an individual’s contribution diminishes as more contributors join, emphasizing the need for collective action rather than relying solely on concentrated individual efforts. QF thus fosters an environment where collective engagement and collaboration are incentivized and can yield greater overall results.

Suppose that there are 3 non cooperating individuals who contribute, respectively, with a sum A, B and C. In this case, we have:

$${\text{Simple Match}}\sim ({\sqrt {A}}+{\sqrt {B}}+{\sqrt {C}})^{2}-(A+B+C)$$

Suppose now that two of the 3 individuals work in the same place (so they both have the same SBT which attests where they work) and let’s suppose that, for this reason, they coordinate. An approach useful to take into account this would be clustering their contributions (in this example A and B), obtaining:

$${\text{Cluster Match}}\sim ({\sqrt {A+B}}+{\sqrt {C}})^{2}-(A+B+C)$$

Considering the coordination between the co-workers, the two coordinated contributions will be given less weight, while the individual contribution will carry more significance. In the case of perfect coordination, they will evenly divide their joint contribution, resulting in:

$${\text{Cluster Match}}\sim ({\sqrt {2A}}+{\sqrt {C}})^{2}-(2A+C)$$

Another adjustment could be obtained by reducing the weight of the two co-worker’s contribution by a factor of ${\textstyle {\sqrt {2}}}$ to compensate for their coordination, obtaining:

$${\text{Offset Match}}\sim ({\frac {{\sqrt {A}}+{\sqrt {B}}}{\sqrt {2}}}+{\sqrt {C}})^{2}-(A+B+C)$$

In the case of perfect coordination, it remains optimal for both individuals to make the same contribution ${\textstyle A=B}$, as they effectively act as a single agent.

However, assuming a single common membership is an oversimplification as individuals often have multiple affiliations, some of which may be shared with other users. To address this, the authors propose a general model that considers these complexities. For each individual ${\textstyle i=1,\ldots ,N}$, let ${\textstyle T_{i}}$ be the number of affiliations he has. It is also assumed that each affiliation carries equal importance, meaning they have the same weight. Let ${\textstyle \sum }$ represent the set of all "affiliation groups," which are projects formed by a specific set of holders belonging to a given affiliation. These affiliation groups are associated with the set of participants in the match. A typical element in this set can be denoted as ${\textstyle \sigma _{j}}$, representing an individual affiliation group within ${\textstyle \sum }$. Let ${\textstyle T_{i}=\sum _{j=1}^{|\Sigma |}1_{i\in \sigma _{j}}}$, where 1 is the indicator function. Let ${\textstyle c_{i}}$ be the individual contribution of ${\textstyle i}$. The general formula for Cluster Matching will be:

$$ClusterMatch\sim \left(\sum _{j=1}^{|\Sigma |}{\sqrt {\sum _{i=1}^{|\sigma _{j}|}{\frac {c_{i}}{T_{i}}}}}\right)^{2}-\sum _{i=1}^{N}c_{i}.$$

Now let ${\textstyle s_{i,k}={\frac {\sum _{j=1}^{|\Sigma |}1_{i\in \sigma _{j}}1_{k\in \sigma _{j}}}{T_{i}}}}$ be the correlation score between any ordered pair of individuals ${\textstyle i}$ and ${\textstyle k}$. Let ${\textstyle \alpha _{i}}$ be the offset coefficient that solves the system of equations (one of each individual) ${\textstyle \alpha _{i}+\sum \limits _{\begin{array}{c}k\neq i\\\end{array}}^{N}\alpha _{k}s_{k,i}=1.}$ Then we obtain:

$${\text{OffsetMatch}}\sim \sum _{i=1}^{N}\left({\sqrt {\alpha _{i}c_{i}}}\right)^{2}-\sum _{i=1}^{N}c_{i}.$$

This solution is generally able to achieve optimality (i.e. welfare maximization).

A third mechanism, known as the "Pairwise mechanism" , does not aim for optimality but derives its strength from obtaining coordination information from the contribution values themselves. This approach is particularly relevant in the context of multiple projects and operates under a per-pair matching capacity limit, denoted as ${\textstyle M}$. ${\textstyle \forall }$ pair of agents ${\textstyle (A,{\text{ }}B)}$, if they contribute ${\textstyle x_{A\rightarrow P}}$ and ${\textstyle x_{B\rightarrow P}}$ to the same project ${\textstyle P}$, they obtain a subsidy

$${\text{Match}}_{{\text{AB}}\rightarrow P}={\frac {2M{\sqrt {x_{A\rightarrow P}x_{B\rightarrow P}}}}{M+{\text{CorrelationScore}}_{AB}}}$$

where ${\textstyle M}$ is a parameter and ${\textstyle {\text{CorrelationScore}}_{AB}=\sum _{\text{all projects P }}{\sqrt {x_{A\rightarrow P}x_{B\rightarrow P}}}}$, which is designed to indicate the degree of overlap in project contributions between two participants. When participants A and B both contribute ${\textstyle x}$ to a project, the ${\textstyle {\text{CorrelationScore}}_{AB}}$ increases by ${\textstyle x}$. However, if they contribute different amounts, the ${\textstyle {\text{CorrelationScore}}_{AB}}$ increases by the geometric mean of their contributions. A low ${\textstyle {\text{CorrelationScore}}_{AB}}$ means that agents are independent, and, when they contribute to the same project, the subsidy given will be close to the maximum. If participants A and B contribute frequently and/or in large amounts to the same project, it is assumed that they are highly coordinated and behave more like a unified entity. In such cases, the subsidies to projects they co-fund are discounted, acknowledging their collaborative nature. It is possible to demonstrate that the losses incurred from misidentifying a colluding group as separate, independent agents are limited, while this is not the case for Simple Matching and Cluster Matching. As previously mentioned, Pairwise Matching does not achieve optimality. Colluding actors still maintain an incentive to slightly overstate the value they assign to certain projects, and can even exploit the system by contributing to a fictitious project under their control. Instead, this approach serves as a second-best solution, specifically designed for scenarios where there is limited external information available regarding which actors are genuinely colluding.

Nevertheless, these approaches are not without their risks. When SBTs are employed to quantify and mitigate coordination, there is a possibility that individuals may intentionally evade or avoid using SBTs in order to maximize their influence through their vote or contribution (Hildebrandt, 2022; Weyl et al., 2022).

SBTs and the Decentralized Society

According to Weyl et al. (2022), the integration of SBTs within the Web3 environment has the potential to catalyze the emergence of a Decentralized Society (DeSoc). DeSoc is defined as "a co-determined sociality, where Souls and Communities convene bottom-up, as emergent properties of each other to produce plural network goods across different scales" (Weyl et al., 2022, p.17).

Plural network goods are a fundamental aspect of this paradigm, representing goods or resources that are generated, exchanged, and utilized within decentralized networks built on blockchain technology. These goods possess the traits of being non-excludable and non-rivalrous, while their creation, governance, and ownership are primarily driven by the network’s participants through the application of smart contracts, decentralized protocols, and blockchain-based systems. They contribute to the economic growth facilitated by increasing network returns.

DeSoc transforms the competitive race for control and speculation over network value in decentralized finance (DeFi) into a collaborative endeavor focused on building, participating in, and governing these networks from the grassroots level. At the very least, DeSoc’s social foundation can ensure sybil-resistance (enabling community governance) within DeFi, safeguard against vampiric tendencies (internalizing positive externalities to foster open-source networks), and prevent collusion (preserving network decentralization). Through these structural corrections, DeFi can support and expand plural networks that provide broad benefits.

The primary strength of DeSoc lies in its network decomposability, which enables the proliferation and intersection of nested networks. Rather than solely relying on the trustless premise of DeFi, DeSoc incorporates trust networks that underpin the existing real economy. This integration empowers the generation of plural network goods that are resilient against capture, extraction, or dominance. With such an enhanced social fabric, Web3 can move away from short-term hyper-financialization and embrace an expansive future characterized by increasing returns across social distances.

Challenges

DeSoc can give rise to various challenges, among which the following problems stand out:

• Privacy: One of the significant concerns with DeSoc is the potential exposure of sensitive information about an individual’s Soul due to the public nature of the blockchain. One approach to addressing this issue is by adopting multiple identities based on the context, although these identities can still be easily uncovered. Another solution involves allowing SBTs to store data off-chain, such as on personal devices or in cloud services. By doing so, explicit permission would be required to access the data, enabling a Soul to decide when and if they want to disclose the contents of their SBTs. Additionally, the use of "zero-knowledge proofs," a cryptographic technique, can provide a means for individuals to prove statements without revealing any additional information beyond the statement itself.
• Cheating: There is a risk that Souls may engage in fraudulent activities to gain entry into communities and exploit their governance and property rights. Through bribery, both humans and bots could fabricate a counterfeit social network that creates the illusion of an authentic human Soul, complete with (fake) SBTs. To mitigate this issue, various measures can be implemented. One approach involves incentivizing whistleblowers to expose collusions of significant magnitude, making such collusion untenable. Another strategy is to leverage ZK technology, which can cryptographically prevent certain attestations made by a Soul from being verifiable. Consequently, attempts to sell specific types of attestations would lack credibility, as the briber would have no means of determining whether the recipient of the bribe fulfilled their part of the agreement.

The strengths of DeSoc

DeSoc, empowered by Souls and SBTs, represents a significant advancement over other paradigms in Web3, such as the traditional "legacy" identity ecosystem, the pseudonymous economy, and proof of personhood.

The legacy identity system relies on physical documents or ID cards issued and managed by a third party, such as a government, university, or employer. These identities are verified through communication with the respective third parties. However, this system is centralized, inefficient, and lacks composability. In contrast, DeSoc offers a decentralized and horizontal approach, providing a more efficient way to meet the security requirements of government IDs.

The pseudonymous economy involves individuals accumulating transferable zero knowledge (ZK) attestations in their wallets and, in order to evade reputational attacks, they may transfer a subset of attestations to new wallets or split them among multiple wallets, without traceability. However, this approach faces challenges when it comes to initiating a new identity to escape attacks, complicating reputation-staking for lending and provenance. It also doesn’t integrate well with governance mechanisms aiming to correct correlations or address Sybil attacks. In contrast, DeSoc does not heavily rely on identity separation and allows for contextualizing attackers, thereby improving provenance and accountability.

Proof of personhood shares a similar approach to DeSoc by providing tokens with individual uniqueness to represent identities. However, its main limitation is that it only represents individual identities and fails to capture the broader aspects of social identity, including reputation, relationships, and solidarities. DeSoc, on the other hand, offers a more comprehensive framework that encompasses these social aspects, enhancing the representation and understanding of identities.

References

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