Decentralized Identity

Decentralized identity is a kind of identity management that allows individuals to control their digital identity without relying on any particular service provider. It aims to provide individuals with official identity proof in addition to complete control and ownership over their identities in a user-friendly and secure way.

This identity framework comprises information concerning an organization, individual, or any online electronic device. The data can include buying history, Social Security Number, search history, passwords, and usernames. With such a model, a user can control their personally identifiable information (PII) and give only the details required for verification.

• Decentralized identity refers to an identity framework utilizing independent and self-owned verifiable credentials and Decentralised Identifiers (DID)s to ensure secure data exchange. It enables users to entirely control their private data.
• Some key challenges of decentralized identity solutions are complexity, governance, security, and interoperability. 
• There are various benefits of decentralized identity. For example, they improve users’ data privacy and allow an organization to complete data verification fast.
• Some use cases of this data identity approach are KYC authentication, online communities and voting, and universal logins.

Decentralized identity management refers to an approach that involves identifying and authenticating entities and individuals without the involvement of a centralized authority. One of the key purposes of this concept is to help Web3 users ensure their data remains secure by allowing them complete control over their digital personas.

Like every Web 3.0 technology, this concept’s foundation is blockchain distributed ledger technology or DLT. This kind of identity management relies on public key infrastructure (PKI) cryptography to manage and secure identity. With PKI, there are public and private keys for data encryption. A key characteristic of all transactions taking place on the blockchain platform is immutability. This means one cannot tamper with the transactions. Moreover, such transactions get distributed to every node within the distributed ledger.

This approach replaces password-based sign-ins with decentralized authentication, which ensures improved privacy and control, allowing a user to have improved control over their information. For instance, it allows users to share only the details necessary for identity verification instead of providing broad access to their personal information. The framework helps prevent issues resulting from poor cyber hygiene and centralized systems’ inherent insecurity.

Let us understand the different components of this framework for better understanding.

• Identity Wallet: This refers to a digital wallet allowing an issuer to manage and create their decentralized identity.
• Decentralized Identifier (DID) Document: This document describes the DID, which contains the verification information, public key, and service endpoints that ensure secure authentication and interaction with DID. Note that users own and create it.
• Verifier: A verifier is the destination or receiver responsible for verifying the verifiable credentials or authenticity by utilizing the DID of the issuer from the ledger.
• Issuer: This is the entity that is responsible for issuing and signing a Verifiable Credential (VC).
• Holder: A holder is an identity’s owner and user. Holders create DIDs and get VCs from the issuer in their wallets.
• Blockchain/Ledger: This refers to the immutable, decentralized, digital, and distributed ledger serving as a bedrock for decentralized identity frameworks.

Let us look at a few decentralized identity examples to understand the topic better.

Example #1

Suppose David wants to rent an office space to commence his new business. The owner of the property requires him to submit all financial details. With the help of the decentralized identity concept, there won’t be any hassle for David as his bank can issue a VC, confirming that he is in a position to make rent payments on time every month. Once David and the bank digitally sign the VC using their public keys, the owner of the property can complete the authentication process.

Example #2

In October 2023, 8 companies collaborated to form a VC and digital identity co-creation consortium. Their purpose is to look for new use cases. Some of the firms are Anderson Mori and Tomotsune, TOPPAN Digital, and NTT Data. This consortium will pursue functionalities concerning self-sovereign identity to give users more control over their personal details. Note that this privately run project will likely have various use cases within the local economy, for example, streamlining the KYC processes in finance.

The use cases of decentralized identity solutions are as follows:

#1 - Universal Logins

This concept can help in replacing logins based on passwords with decentralized authentication. The service providers may issue attestations to the users, who can store them in their Ethereum wallet.

#2 - Online Communities And Voting

Social media and online voting are two applications of this approach. An online voting scheme is prone to manipulation, especially in case malicious people create fake identities to vote. Note that if persons present on-chain attestations, the voting process’s integrity can improve.

#3 - KYC Authentication

Utilizing different online services requires persons to give credentials and attestations, for example, a national passport or driving license. However, such an approach can be troublesome as private information related to users can get compromised. To avoid such cases, one can utilize a decentralized identity. It will enable them to skip traditional Know Your Customer (KYC) processes and authenticate users’ identities through VC. This minimizes the identity management cost and prevents the utilization of fake documentation.

#4 - Anti-Sybil Protection

Sybil attacks involve a single individual tricking any system into thinking that they are multiple persons for the purpose of increasing their influence. Using this digital identity management approach can prevent such attacks by increasing the burden on each person to prove they are real humans.

Let us look at the benefits and limitations of decentralized identity solutions:

• This concept enables organizations or businesses to verify information quickly.
• It prevents certificate fraud.
• The concept ensures improved data quality.
• It prevents the users’ data from cyber-attacks.
• This approach enhances the privacy of personally identifiable information.
• Another key benefit of decentralized identity is that it can help developers create applications that do not depend on insecure passwords for user verification.

The challenges of this approach are as follows:

• It is unclear how this concept fits into different regulatory compliance requirements for industry or government use cases.
• This concept is potentially more complicated for both organizations and users to execute compared to a conventional form of centralized identity.
• Systems using such an approach depend on governance models that are community-driven to manage changes and updates. This can lead to accountability and standardization challenges.
• Another noteworthy challenge is interoperability.

Decentralized and centralized identity are completely different concepts. However, many people new to such topics are unable to understand how they differ. To avoid confusion, one must look at their distinct features. Hence, let us look at this table highlighting the key differences.

This article has been a guide to what is Decentralized Identity. We explain its use cases, benefits, examples, components, and comparison with centralized identity. You may also find some useful articles here -

• Digital Identity Verification
• Decentralized Identifier
• Decentralized Applications