Soul Memory is the overall amount of souls you have gained through gameplay, regardless of whether you spent them, or lost them. There is a stat for it in player status screen, next to your Soul level and souls to level stat at the top of the page. The matchmaking for online interaction relies heavily on this Soul Memory number. In NG, SL and SM are taken into account for player matching, in NG+ and beyond, SM is the only matchmaking factor. There are different brackets of matchmaking that depend on what range your SM is.
Not sure on the actual numbers, but it's usually with 3 million SM up to 6 Million I think, then it goes up to 12. After 12M, everyone matches together post 12M Soul Memory. So a player with 100M SM can play with someone at say 15M. That 100M player could have never spent those souls on leveling and still be at a low level, or they could have spent all those souls on leveling and be nearly unkillable because of how insane defense scaling gets as you continue to grind out levels all the way up to the max of 838.
This mechanic breaks the notion for a PvP meta because everyone matches with everyone regardless of Soul Level, it's also similar for PvE co op, you can summon any SL for co op, as long as you match together based off SM. In past Souls games, Invaders could always invade up infinitely in Soul level, but never way below their level, and co op always had to be within a certain range. Most players decided on constraining builds to around 120 because of soft caps on stats and build diversity and fairness. With SM, a lot less player are inclined to do that, and because of how strong you get as you continue to level, players that keep themselves at lower SL will be at a severe disadvantage against really high SL players. In the past games you could always compete against insane high SL players with your 120-130 build. With how insane defense scaling works, and the inclusion of the Mundane upgrade path, it becomes less likely that you can even compete with a few hundred SL difference between players.
