Why Transferable Reputation is a Flawed Model

Reputation is not fungible. A user's trust score for lending on Aave is irrelevant for their behavior as a Uniswap liquidity provider. Transferring this score across contexts creates a false sense of security and dilutes signal integrity.

Sybil attacks are trivial. A high-reputation account on Gitcoin Grants or a Snapshot voter can be sold, instantly laundering a malicious actor's identity. This commoditization defeats the purpose of persistent identity.

The market misprices risk. Projects like EigenLayer and EigenDA demonstrate that staked economic security is quantifiable. Reputation lacks this clear valuation, leading to systemic mispricing when traded as an asset.

Evidence: The failure of Soulbound Tokens (SBTs) as a liquid asset class proves the market rejects non-transferable social constructs. True trust emerges from verifiable actions, not portable scores.

Reputation is a non-transferable signal. Its value stems from its direct, costly association with a single identity. The act of selling it severs this link, destroying the information it was meant to convey. This is a fundamental property of signaling theory, not a market inefficiency.

A market for reputation is self-defeating. If a validator's reputation score is a liquid asset, its price reflects the market's belief in its future utility. A high price incentivizes the validator to sell, which immediately invalidates the score for the buyer. This creates a classic adverse selection death spiral where only worthless reputation is for sale.

Compare this to staking. A validator's stake is a bond, not a signal. It is inherently transferable and fungible because its value is its economic guarantee, not its informational content. Protocols like EigenLayer monetize stake restaking, not reputation. Selling stake doesn't degrade its function.

Evidence: Look at failed soulbound token (SBT) markets. Attempts to create liquidity for non-transferable assets like POAPs or attestations fail because the market price reveals the asset's lack of authentic, sticky signaling value. The moment an SBT is listed for sale, its original semantic meaning is voided.

Transferable tokens become commodities. A user's reputation score, when made into a liquid ERC-20, decouples from its original source. The token's market value, driven by speculation on platforms like Uniswap, supersedes its function as a trust signal.

Sybil attacks become profitable. The cost of forgery is the token's market price, not the effort to build genuine reputation. This mirrors the failure of Proof-of-Stake systems without slashing, where capital replaces work.

Reputation loses its signaling power. A wallet holding a 'high-reputation' token proves capital, not history. This is the fundamental flaw of Soulbound Token (SBT) alternatives that permit transfer—they are just NFTs.

Evidence: The 2022 collapse of the Olympus DAO (OHM) 'protocol-owned liquidity' model demonstrated how financial abstraction of a governance right destroyed its underlying utility and led to hyperinflation.

Reputation is not capital. The core flaw is treating a non-fungible social signal as a liquid, tradeable asset. This divorces reputation from the entity that earned it, creating an immediate principal-agent problem where the new owner's incentives are misaligned with the network's needs.

Sybil attacks become profitable. A market for reputation tokens creates a direct price floor for identity forgery. Projects like Worldcoin and Gitcoin Passport fight to make Sybil attacks expensive, but a liquid reputation market subsidizes and monetizes the attack vector, undermining their work.

The oracle problem re-emerges. Systems like Chainlink and Pyth solve data oracle problems with cryptoeconomic security. A reputation oracle requires judging subjective, off-chain behavior—a task that liquid markets price based on speculation, not truth, leading to manipulable governance.

Evidence from DeFi composability. In lending protocols like Aave, reputation-based underwriting without skin-in-the-game collateral failed. The 2008 financial crisis demonstrated that tradeable mortgage-backed securities (MBS) incentivized originators to lower standards, a direct analog to sellable reputation.