A look into decentralized identity and its use cases, along with the emerging companies operating in the space, and how decentralized digital identities can address the shortcomings of traditional identities.
Digital transformation relies heavily on “identity” because it enables both governments and businesses the ability to provide secure access to data for users such as employees, partners, customers, and citizens. As organizations transform digitally, digital identity is becoming essential. It is becoming the most important component of security because of the increasing amounts of data on different devices and networks that are difficult to define.
Most of the digital identity systems currently in use are exclusive, insufficiently secured, and fragmented. Service providers help control digital identity systems and their respective data. These centralized systems are often prone to privacy breaches and cyberattacks, leading to theft and misuse of personal information. Additionally, users find it difficult to control their digital identities and revoke access if required. According to PurpleSec, cybercrimes affect 71.1 million people annually, with an average individual loss of $4,476. Extortion, identity theft, and personal data breaches were the top 3 cybercrimes in 2021. According to Immunefi, Crypto losses in H1’22 amounted to $1.9B.
Decentralized identity solutions can overcome these security issues. Internet of Things management systems, enterprises, and individuals will benefit from blockchain-based digital identity solutions because they provide better security, storage, and an interoperable, unified, and tamper-proof infrastructure.
What is decentralized identity?
Decentralized identity is a type of identity management that permits people to control their own digital identity without being dependent on any service provider.
A decentralized identity system is made up of three pillars: blockchain, verifiable credentials (VCs), and decentralized identifiers (DIDs).
A DID enables a verifiable, decentralized digital identity. The controller of a DID is the entity (e.g., a person, organization, thing, data model, or abstract entity) that has the capability to make changes to a DID document. DIDs also work across different Web3 platforms and can be used to prove ownership of non-fungible tokens (NFTs), social media accounts, and other assets on the blockchain.
A DID is a string of letters and numbers known as “identity wallets.” These wallets contain verified credentials and data that users generate on the blockchain. The identity wallet grants its owner access to applications and works as a quasi-anonymous identifier for that owner. A private key protects each DID. Only the owner of the private key can control or prove their identity. An entity can own different DIDs for all its activities. For example, an owner can have a DID for an online shopping platform and a separate one for a gaming site. This feature reduces the extent to which an entity may be tracked across its different activities.
VCs are a series of attestations issued for a DID by other DIDs. These certify certain aspects of the DID, such as age and location. The issuers of VCs cryptographically sign them, enabling the owners of the DIDs to take custody of and store the credentials themselves. This reduces reliance on third-party profile providers, such as Google and Facebook.
What are some examples of VCs?
VCs have several applications, including:
- Self-sovereign identity (SSI)
- Data monetization
- Data portability
SSI implies that entities can store and control their identity data on their own devices independent of central identity authorities such as registration and certification issuers, identity providers, nation states, global organizations, and companies. An SSI allows an entity to choose which pieces of its data to share with validators.
Data monetization refers to the potential value that can be gained from user-generated data. Ceding control of personal data to third parties implies that they may profit from it. In contrast, blockchain-based SSIs attribute data generation to DIDs, giving owners control over their personal data; this gives owners the potential to profit from the sale of their data to advertisers or corporations.
Data portability gives owners the ability to move their personal data freely between data controllers. According to Article 20 of the EU’s General Data Protection Regulation (GDPR), data subjects have the right to data portability whenever it is technically feasible.
Data portability has multiple advantages. It can improve user experience by reducing the identity re-verification complexities of platforms and services. This simplifies sign-up procedures and boosts user adoption. DID data portability ensures that credentials can be reused by the data subject for know-your-customer (KYC) needs because the information can be reverified swiftly. As a result, the time taken for customer onboarding is reduced. Therefore, financial companies will reduce costs because KYC documentation will not be necessary.
Benefits of blockchain-based decentralized identity solutions
Blockchain acts as a distributed ledger that runs on a globally distributed network of computers, making it difficult for individuals or organizations to change information without the necessary credentials. Blockchain technology ensures that network information is accurate as tempered blocks are rejected by network nodes.
The benefits of these solutions include:
- Trustworthiness: Blockchain technology uses a trust-based system and consensus-centric approach to verify the identity of the data subject (i.e., those whose personal data is recorded on the blockchain). Each block has a highly encrypted record of entries and contains data and hashes that change if there is any data tampering. These entries are shared via network nodes.
- Data integrity: The blockchain’s data storage procedure is entrenched and permanent, making it impossible for external parties to delete or alter information.
- Security: The maintenance of data in a high-encryption environment provides more security than traditional centralized identity storage systems. In addition, decentralized data, along with its tools such as digital signatures, cryptographic hash features, and consensus algorithms, provide additional security layers to protect users from identity theft, cyberattacks, and fraud.
- Privacy: A centralized system makes user identity data susceptible to cyberattacks and privacy breaches. In a decentralized system, data subjects’ concerns are mitigated via the use of blockchain technology that assures privacy through decentralized networks.
- Simplicity: Identity verifiers can help onboard new users quickly by utilizing the information validation procedure. Data subjects can also easily store and manage data contained in their identity wallets.
Here’s an illustration of how a decentralized identity may work in practice.
