What Are Identity NFTs & How Can They Be Used For Blockchain IDs?

Non-fungible tokens (NFTs) have many use cases in blockchain, both real and imagined, and a very new and controversial idea is that they would work well for identity on the blockchain. NFT properties work very well for ID cards, and creating an identity system to associate a blockchain wallet with a real-world person could unlock internet citizenship and financial services otherwise impossible. However, using NFTs to identify the owner of a crypto wallet is a highly controversial idea, and for a 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 not), it can never be disconnected. One of the issues with pseudonymity is that decentralized applications, also called ‘dApps,’ have no way to prove the uniqueness of any user and have to be designed around the complete absence of trust between the user and the application. Decentralized finance (‘DeFi’) applications get around this issue by requiring users to deposit one cryptocurrency as collateral before borrowing another. This severely limits borrowing capabilities for users who do not own many on-chain assets. The inability to connect a crypto wallet to a person’s unique real-world identity limits the services that can be offered on-chain and prevent the formation of an internet-based society.

Related: Why NFTs Are So Misunderstood (And Why That’s An Issue)

In May 2022, Ethereum co-founder Vitalik Buterin and several colleagues published a paper on SSRN titled “Decentralized Society: Finding Web3’s Soul,” where he discussed the idea of “soulbound tokens,” or “SBTs.” The name comes from the popular MMORPG game World of Warcraft, where non-tradable items in the game are ‘soulbound’ to the user’s character. It is easy to modify an NFT’s blockchain smart contract to become non-transferrable, which is where SBTs come in. SBTs would be issued by a company, government or blockchain protocol that takes real-world identity documents and other trusted sources to prove a user’s identity. Nobody can obtain more than one SBT. Thus, any crypto wallet holding an SBT is a unique user and is safe to assign credit history and enter into legal contracts with.

Revolutionary, But Controversial

The problem with SBTs is they are considered highly controversial among the crypto community. Identification and registration of crypto wallet addresses is a sensitive topic for people who want to maintain their anonymity on-chain and transact in private. This concern is justifiable given the privacy issues of Web3 and the ease with which transactions can be traced and tracked. However, with NFT domains for crypto wallets and people posting NFTs and crypto wallet addresses to social media, it is evident that many people either do not care about their privacy or do not know how exposed they are on the…