From ERC20 to Soulbound Foundations of DeFi Asset Standards

When I first stepped out of the corporate world, I thought I could bring the same precision and discipline I used on the trading floor to everyday investors. The idea was simple: if I can translate complex market concepts into plain language, maybe I can help people avoid the panic of a tightening market or the excitement of a sudden rally that turns out to be a bubble. I got into a lot of work, but one of my favourite things to explain to friends over coffee is how a token works on the blockchain. I start with the familiar ERc‑20 standard because it offers a clean, step‑by‑step example of how the market builds standards. Then I move into the newest idea that has caught my curiosity this year – the soul‑bound token – and why it may be the last word in the way we think about identity and ownership in DeFi.

The ERC‑20 standard was born out of a need for a common interface. Think of the early days of the web: dozens of companies ran their own HTTP servers, each with a different way of handling GET and POST requests. A developer who wanted to build a web form had to reinvent the wheel for every site they hit. The HTTP standard solved that mess – a shared contract that everyone could reference. The same happened on Ethereum. In 2015, a small group of developers decided “let’s create a simple, reproducible interface for a fungible token on Ethereum.” The result was ERC‑20: a set of functions that a contract must expose – “totalSupply”, “balanceOf”, “transfer”, and a few others that let you keep track of where your tokens are and how they move.

A few things made ERC‑20 popular:

1. Composability. Once you had a token that followed the same rules, you could write any contract on top that expected tokens in exchange for services, and you wouldn’t have to worry about the token’s inner workings.
2. Interoperability. Exchanges could read your token’s total supply, watch for transfers, and list it. Wallets could render the same UI for any token following the standard.
3. Simplicity. Its binary interface had only a handful of functions, making for cheap interactions (a few gas costs) and quick audits.

This standard underlies the market’s first “currency” on the blockchain – Ethereum. It gave liquidity, pricing, and a sense of trust. For the next few years investors could see their holdings in a spreadsheet, a chart of price action, or a wallet screenshot. All of this felt reassuring because it mirrored the clarity of a stock’s ticker.

Yet ERC‑20 has its blind spots. It is fungible: every token is indistinguishable from every other token in the same supply. That is great for a money‑like asset, but it leaves you without a way to capture attributes that differentiate one token from another. Think of a real‑world example: a concert ticket for a particular seat. Even though each ticket is an identical share of a bigger event, the second seat is different from the first. ERC‑20 cannot express that nuance. It merely tells you “x tokens” and nothing about their provenance, condition, or status.

This limitation pushed the community to the next standards. ERC‑1155, for instance, lets a single contract hold multiple token types – fungible, semi‑fungible, and non‑fungible – all within one address space. It introduced a more efficient batch transfer and made it easier to combine gaming, collectibles, and finance. ERC‑777 added operator patterns to let developers create advanced permission systems. But beyond the flexibility in type, all of these still supported transfer – the ability to hand an asset to another party or burn it.

So why the concept of a “soul‑bound token” and where do we begin? The word "soulbound" is a nod to games like The Elder Scrolls, where a character's soul might bind to a particular sword, preventing it from being sold or transferred. In the blockchain context, a soul‑bound token (SBT) is a non‑transferable credential that represents a reputation, a piece of identity, or a qualification. The creator of the token determines that it can never be moved from one address to another. Once it is minted, it stays with the contract address that created it.

What problem does that solve? At the heart of DeFi is trust, and trust is more than just a score in a credit report; it’s also a record of behavior, achievements, or ownership in a decentralized ecosystem. Imagine a professional network like LinkedIn built on the blockchain. Each professional could receive SBTs for training certifications, code contributions, or community moderation. These credentials are immutable and portable: anyone can verify that a person actually owns that qualification. Because SBTs cannot be transferred or sold, the holder is bound to the authenticity of their record. That removes a layer of fraud that exists in the off‑chain credential space.

In a world where “self‑sovereign identity” is a buzzword, SBTs provide a technical token that carries your personal history to the block. You cannot cheat or hoard others’ achievements; you only get tokens from your own actions or the organization that grants you the right. For those in the community who trust that the certifying organization has done its due diligence, that is a powerful concept. That’s the same motivation behind ERC‑721 non‑fungible tokens – each asset is unique – but SBTs go further by making that uniqueness non‑transferable.

How does an SBT differ from a normal NFT? An NFT is a token that represents a unique piece of digital property – usually an artwork, a game item, or a piece of land in a metaverse. Even though a single NFT is different from another, you can trade it. An SBT, by contrast, says “you cannot trade me.” It might be a badge of completion for a DeFi governance course, or a record of holding a certain yield farming contract. The non‑transferability means that you are bound to that claim permanently. There is no market for it; it is not a speculative asset. That has implications for how people view and use those tokens.

Implementing an SBT requires a slightly different approach from typical ERC‑20. The standard that surfaced to facilitate this in 2022 defines a set of functions: ownerOf, isValidAt, credentialOf, and transfer. The latter is overridden to revert any call. Because the token never flows, gas costs for minting and transferring (i.e., issuing the token) are significantly lower than for transfer‑heavy contracts. That is a boon for low‑budget projects and education platforms.

The first real‑world examples for SBTs have sprung from both open‑source projects and corporate initiatives. A project called “DIMO” creates SBTs for verified car owners that certify that a car has never been stolen or had major accidents. When that car is parked in a garage, a parking service can query the owner’s wallet address and instantly see the SBT attestations to make decisions. Another initiative is the “GitHub” SBT for developers who have contributed to open‑source repositories. Pulling that token into your portfolio shows that you have real, verified contributions.

In the DeFi realm we see a new breed of projects exploring “credit” and “risk” without exposing people’s credit history to the public. The idea is to use SBTs to tag a wallet with a “credit score” or “default risk” level. Because SBTs are non‑transferable, the algorithm that sets that level can be transparent. The algorithm itself might be open‑source, or it can be a governance‑driven module that changes with community votes. If the score is too high, you can lock a specific yield farming strategy or exclude it from certain liquidity pools. Those decisions become data‑driven, reducing the human bias that plagues traditional credit.

What is the broader picture? In the early days of DeFi, markets were constructed around fungible tokens. That allowed anyone to buy a share of a liquidity pool or hold a governance token. Everything moved freely; the system was almost a market for markets. But we were missing a way to capture information about the people who used those markets. That is where SBTs step in, providing an immutable record of identity, credentials, and historical performance. In a future where DeFi products want to use “social proof” to set terms, risk, or access, SBTs could become a foundational building block.

One striking use case that makes sense for the everyday investor is “portfolio ownership SBTs.” Imagine a custodial platform that issues you an SBT when you open a funded account. That token could contain metadata about your account tier, the documents you submitted, your compliance level, or a verification that you have read the risk disclosures. Because the token is non‑transferable and tamper‑proof, the platform has a verifiable record of compliance. Regulators could check that, and your risk exposure is clear.

Similarly, DeFi protocols seeking to give preferential interest rates to users who have contributed to community governance could use SBTs that encode “governance participation.” Each time you vote on a proposal, a new SBT is minted or updated to represent that. Protocols could then compute a weighted average to determine your rate or the amount of liquidity you can lock. That creates an ecosystem where active participants directly feed into the protocol’s economics.

But a cautionary note: SBTs, by their nature, remove the possibility of selling them. That can limit liquidity and utility. For some stakeholders that is a benefit – you don’t create a market where people can trade credentials – but for others it can be a drawback if the credential’s value depends on being liquid. For example, a company might want to issue SBTs for employee benefits but still allow employees to trade them as part of a stock‑like incentive plan. That might require a special protocol design or a hybrid approach that blends transferable and non‑transferable properties.

The technical landscape is still evolving. Since SBTs are a new standard, there has been a flurry of research papers and proposals by groups like the Ethereum Foundation’s Standard Track. Several companies are already building SDKs that natively support non‑transferable tokens. Yet the standards are still nascent, and the best practices are under discussion. That means that as an investor or a developer, you should stay informed of community updates. I often skim the Ethereum Improvement Proposal (EIP) threads – they are like reading a research journal but with more immediate impact.

When I think about the future, I imagine a world where your wallet can carry two kinds of tokens side by side:

• “Fungible assets” – your liquidity tokens, stablecoins, or yield‑bearing tokenized vaults that you can trade.
• “Personal attributes” – your education badges, governance participation, and compliance checks.

In that world, the boundary between the financial and the social becomes soft. You cannot buy an SBT that says you are a verified DeFi strategist; you earn it by contributing to the community. That fosters an environment where expertise is recognized, not marketed as a commodity.

The big take‑away for you, whether you’re a long‑term saver or a curious novice, is that your wallet is not just a ledger of balances. It can become a passport, a credential, and a record of your participation in financial ecosystems. By embracing these new standards – first understanding the old ones like ERC‑20, then embracing the new wave of Soulbound Tokens – you position yourself to appreciate what’s possible beyond simple trading.

How to get involved

1. Read the official EIPs – It doesn’t have to be a wall of code. Skimming the introduction and a few examples can give you context.
2. Connect with the developer community – Platforms like Discord, Twitter, and GitHub have space for discussing SBTs. You’ll find people debating best practice and design choices.
3. Experiment – Many testnets have wallets that support SBTs. Try minting one for yourself from an educational platform that offers it.
4. Ask your network – If you know someone in the blockchain community, ask how they use SBTs. Stories are powerful.

We are no longer in an era where only a handful of assets matter. Every transaction, every interaction, can leave a mark. Soulbound tokens are the frontier that lets us preserve those marks in a way that is secure, unique, and untransferable. That means that identity and ownership will no longer be just a part of who you are, but also a verifiable part of your digital footprint.

The most valuable lesson, as ever in finance: it’s not just what you hold, but also what you provenly earned or achieved that will set you apart. Let them become visible, authentic, and, above all, immutable in the ledger.