The first generation of digital assets was built to be transferrable, which limited their use cases when it came to making identity and reputation digital.
Much of physical society depends on the non-transferrable nature of identity and reputation, so why not apply the same structure to digital society? A social security number is non-transferable because it represents the credit history of an individual that can be used to determine creditworthiness in the future. Being able to “buy” credit history from a historically responsible borrower would kill the purpose.
As the name suggests, soulbound assets are bound to a single identity and are non-transferrable in nature. Vitalik came up with the concept as a derivation of items in World of Warcraft that are bound to the player who picks them up and cannot be transferred or sold to another player. Soulbound game items fundamentally changed games by preventing players from winning by simply outspending their competition.
Soulbound digital assets could considerably change the web3 ecosystem: making NFTs soulbound would kill the speculative nature of their trading, adding soulbound credit history could allow for uncollateralized lending in decentralized finance, making governance rights soulbound would prevent hostile takeovers, etc.
Further reading: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4105763