Why Pseudo-Soulbound Tokens Are a Dangerous Compromise

Pseudo-soulbound tokens are a security illusion. They attempt to mimic the non-transferability of ERC-721S or ERC-5484 standards through centralized logic, creating a single point of failure. This defeats the purpose of decentralized identity.

The design is a dangerous regression. It reintroduces the same custodial risks that decentralized systems like Ethereum Name Service (ENS) and Proof of Humanity were built to eliminate. You trade cryptographic certainty for administrative convenience.

Evidence: The collapse of FTX demonstrated that centralized control over user assets is a systemic risk. A protocol's admin key for a pseudo-soulbound token is an identical attack vector.

Pseudo-soulbound tokens break composability. True soulbound tokens (SBTs) are permanent, enabling protocols like Aave's GHO or Compound's governance to build immutable reputation systems. A revocable token is just a permissioned NFT, forcing every downstream application to trust a central admin key.

The revocation backdoor is a systemic risk. Projects like Ethereum Attestation Service (EAS) and Verax demonstrate that attestations can be immutable. A revocable standard, like a flawed ERC-4973 implementation, creates a single point of failure that attackers or regulators will target first.

Evidence: Look at the failure of centrally upgradeable NFTs in DeFi. Protocols like Uniswap and Curve avoid integrating them because their value depends on unstoppable code. A revocable identity token has the same fatal flaw.

Pseudo-soulbound tokens are a liability. They are not native protocol primitives but smart contract constructs that attempt to enforce binding via centralized registries or off-chain attestations. This creates a critical dependency on external, mutable systems for a core property of the asset.

The compromise breaks composability. True primitives like native ETH are universally recognized by all contracts. A pseudo-soulbound token relying on a DAO-managed allowlist or an EAS attestation will fail in DeFi pools or bridges like LayerZero or Axelar that do not query its specific verification logic, fragmenting the ecosystem.

It invites regulatory capture. A system that centralizes the power to bind or unbind tokens creates a single point of enforcement. This is the exact antithesis of credibly neutral infrastructure and makes protocols like Aave or Compound vulnerable to legal demands targeting the registry controller.

Evidence: The collapse of Tornado Cash's front-end and subsequent sanctions demonstrate how permissioned entry points become attack vectors. A pseudo-soulbound system's registry is a far more powerful and destructive central point of failure than a UI.

Pseudo-SBTs enable immediate adoption by building on established wallets and standards like ERC-4337 account abstraction. This avoids the chicken-and-egg problem of requiring new, specialized identity wallets before any applications exist.

The compromise creates a functional spectrum from pseudonymous to verified identity. Projects like Gitcoin Passport demonstrate this model, using attestations to score reputation without mandating a single, immutable on-chain identifier.

This approach mitigates regulatory risk by not enforcing permanent, non-transferable links. It allows protocols to implement gradual KYC layers or compliance checks without redesigning their core token mechanics from scratch.

Evidence: The success of Ethereum Attestation Service (EAS) and Worldcoin's World ID shows demand for verifiable credentials. Their opt-in, composable model achieves network effects that a strict SBT standard cannot.