What Are Decentralized Digital Identities and What Purpose Do They Serve?

6 Min Read
1234 words

Photo Source


Tedious. That is the perfect word to describe the current state of providing and verifying your identity on-line. Other descriptive words and phrases include: repetitive; boring; time consuming; and let's face it, the all encompassing 'pain in the ass'.

Wouldn't it be so much easier to only have to submit your data once and have it work for everything requiring identity verification on-line? Also, wouldn't you like to control how much of your data is transmitted (only releasing relevant data)? Of course the answer to both questions is a resounding yes and decentralized digital identities might just prove to be the vehicle to make it a reality. So...

What are Decentralized Digital Identities?

The concept of a decentralized digital identity is one that returns control of identity back to the consumer. A user collects relevant verified information about themselves (driver's license, passport, college degrees, professional certifications, social media accounts, etc.) from certified issuers (i.e. the Government) and stores said information in an 'identity wallet'.

This mechanism permits users to control and limit just what information is transmitted from the 'identity wallet' to the third-party requesting identity information. Very useful in the case of having to comply with multiple KYC and AML requirements across different platforms. Plus, say you are asked to prove you are over 21 years of age to purchase a drink in New York State; using your 'identity wallet' you could verify you are over 21 without providing your date of birth.

Current System for Identity Verification

Presently, a user wanting to register for multiple platforms must register to each individually providing an independent user name and password for each. This is known as 'Siloed Identity':

20211229 2.png
Photo Source

The users' identity in the present system is managed individually by each service provider:

20211229 2.png
Photo Source

The Decentralized Digital Identification System

Within this protocol, users themselves receive the required credentials to prove their own identity from the various third party issuers. Once assembled, the user stores this information in an 'information wallet' secured by the blockchain:

20211229 4.png
Photo Source

When needed, users can transmit only the necessary proofs of identity to the third-party requesting it. The third-party may then verify the transmitted information is true by way of the blockchain distributed ledger:

20211229 6.png
Photo Source

In this system there is no central authority present to manage the users' identity, rather, it is a distributed ledger on the blockchain that acts to verify the truth. None of the identity documents or information is stored on the distributed ledger but remains in the possession and control of the user within their 'identity wallet':

20211229 8.png
Photo Source

Some Identified Use Cases for Decentralized Digital Identities

Self Sovereign Identity

As mentioned above but not identified, the concept of self sovereign identity permits users (both people and/or businesses) to store their necessary identity information on their personal devices and to pick and choose what information should be shared with third-party requestors - all in the absence of a central authority.

Data Monetization

Data monetization is the concept of utilizing your personal data to gain a quantifiable economic benefit. On its own, data has value. But add to this data the comprehension gained by making it personally identifiable the base data becomes all the more valuable. Self sovereign identity allows users to attribute their on-line data to their decentralized digital identity. This would allow users to monetize the data they generate (i.e. sell the data to advertisers). But the converse also holds true in that users would be able under this system to hide the data they want from any third-party (government, corporation, etc.).

Data Portability

Data portability relates to the users right to have their personal data transmitted from one third-party to another (in several jurisdictions this right is conferred by law, such as Article 20 of European Union General Data Protection Regulation). Utilizing decentralized digital identities, migration of an identity established on one target platform to a different platform is an easy process, removing the necessity of reverifying the identity cross platform.

What Purposes Do Decentralized Digital Identities Serve?

In Decentralized Finance

  • Airdrops: If projects conducting an airdrop solely dropped to users who were verified by decentralized digital identity protocols, there would result a fair distribution of dropped tokens across the participant pools. Having authenticated users in this system would ease the problem of bots intervening and draining the airdrop contract as can occur using present mechanisms.
  • Credit Evaluation: Use of decentralized digital identity protocols permit DeFi credit evaluation systems to obtain users credit backgrounds (to the extent permitted by the user) and credit scores from stored data within their identity wallet. As such, users seeking credit can maintain control over their identity credit proofs when accessing credit based lending protocols.
  • Reputation Systems: Reputation systems measuring on blockchain actions and behaviors will help separate the degens from the responsible borrowers. This adds significantly to the reliability of the system as a whole.

Non-Fungible Tokens (NFTs)

NFTs have gained much of their popularity in the area of digital art and decentralized digital identity implementation in this area is highly beneficial. Using decentralized digital identity protocols with NFTs would allow buyers and sellers to verify the creator and/or the collector of any item of digital art all from the blockchain ledger. The result of a system as such makes sure that the true representative value of the digital art is correctly conveyed to the creator or collector as the case may be.

Decentralized Autonomous Organizations (DAOs)

In the absence of proper mechanisms to assess the needs of the platform's community as well as the relative measure of member's contributions, the DAO can stop meeting community needs and wholly fail to properly and fairly incentivize good contributors to the system.

By solely using a token-based governance mechanism, DAOs may be taking the opinions and needs of the large stakeholders as a priority, even though they fail to qualify as active community contributors. This mechanism omits the platform users who are active community contributors but hold small stakes of tokens.

Decentralized digital identity protocols can allow DAO governance to be able to more accurately assess the opinions of the entire community and identify member contributions proficiently permitting incentives to reward good contributors to be appropriately directed and to retain good community members.

Some Final Thoughts on Decentralized Digital Identities

"The more the lines are blurred between digital and physical life, the more our online identities will grow and evolve in complexity". [Calderon, H. How Decentralized Identity Can Take Crypto to the Next Level. (Accessed December 29, 2021).

By continuing to use the siloed centralized identity mechanisms as the blockchain expands, identity management will become harder and harder to control and manage. However, decentralization can remove the difficulties in identity management the future impact of which will be remarkable.

Finally, it's an exciting time! Right now, digital services can already build passwordless and even usernameless experiences so that people can have the best of both worlds — a strongly authenticated and smooth user experience with the services they want and need.

[Maler, E. To Succeed In Decentralizing Digital Identity, Focus On Relationships First. (Accessed December 29, 2021).

And best of all, there is more significant innovation to come in this area.

Posted Using LeoFinance Beta