Decentralized Identity: Empowering User Control and Privacy

For almost every web3 project, proof of identity is essential for everything from cashing out crypto to recovering lost accounts. However, identity verification can be surprisingly complex. Many methods of identification rely on a centralized source of data, so they come with potential risks. To enjoy the full benefits of blockchain technology, a decentralized identity verification method is necessary. If you're interested in finding out how decentralized identity works and why it's so important, check out this helpful guide.



Key Takeaways:



• Decentralized identity is a method of verifying users' identities in web3 projects. 

• When managing user identities in a decentralized fashion, organizations focus on making sure that no single, central party is in charge of issuing, storing and confirming user identities.

• Digital identities are essential for interacting with almost every part of the web3 world. While old-school blockchain transactions might only need a wallet address and a private key, modern ones usually involve working through websites, apps and programs.

What Is Decentralized Identity?

Decentralized identity is a method of verifying users' identities in web3 projects. When managing user identities in a decentralized fashion, organizations can ensure that no single, central party is in charge of issuing, storing and confirming user identities.



How Does Decentralized Identity Work?

To understand how decentralized identity works, it's useful first to take a look at centralized identity verification. The typical identity verification method requires a user to provide their legal name, birth date or social security number. 



Since this information is issued by a government, it relies upon a single, central authority. Any identity verification method that involves obtaining information from an organization controlled by just a few people is a centralized identity provider.



Meanwhile, a decentralized identity relies on the classic principles of decentralization. In a truly decentralized environment, no single organization is in control of anything. Instead, multiple parties work together to create a trustless network where things can keep running, even if one or more parties are malicious actors. In order to create an identity verification method that’s decentralized, it needs to fulfill one or more of the following features:

• Operational resources are owned and operated by multiple network members

• Every network member can see the same copy of identity information

• Group consensus is needed to verify an identity

• No single person or organization is in charge of identification data

• Identity can still be verified if a point in the network fails

Why Is Decentralized Identity Important?

Decentralized identity might seem like a minor component of blockchain development. However, it has a huge impact on the entire crypto space. Digital identities are essential for interacting with almost every part of the web3 world. While old-school blockchain transactions might only require a wallet address and a private key, modern ones usually involve working through websites, apps and programs. To do things like provide liquidity for a leveraged lending project or mine NFTs in a game, identity information is required. 



This makes decentralized identity one of the most critical parts of a user's experience. There’s been a paradigm shift in the past five years or so, and people are no longer happy to turn over their own data to every website that asks for it. Widespread adoption of privacy standards means that the modern user is well-informed of the risk of identity theft and privacy invasion, and they demand a better solution. 



Ultimately, decentralized identity solutions provide many of the key benefits that modern web3 users desire. Decentralized identity provides them with more privacy and security. They can be more confident that their information isn't stolen in data breaches, or that a mix-up with a centralized identity provider isn't going to lock them out of their account. At the same time, decentralized identity can also provide the regulatory compliance that financial businesses require. When properly set up, a decentralized identity system can provide the appropriate level of identity verification needed to safely handle vast amounts of money and private information. 



Types of Decentralized Identity Solutions

Due to its decentralized nature, there is no single, foolproof design for decentralized identity. Here are some of the many ways web3 projects have used decentralized identity to reduce the risk of identity theft and provide users with more privacy and security.



Noncustodial Crypto Wallets

A noncustodial wallet is one of the most popular options for those who prefer a decentralized identity. With a noncustodial crypto wallet, no third-party organization has custody of the user's crypto. Instead, a noncustodial wallet is like a digital safe. Only the owner has the keys to access its contents, and they can transfer assets without needing to provide any further details of their digital identity. 



Distributed Name Services

Distributed name services are a helpful option for organizations that require each user to have a name. They consist of a decentralized hub capable of looking up and authenticating names. This allows users to submit an accurate name, without needing to mention their legal name or rely on governmental departments. Distributed name services can be helpful for promoting decentralized identity, but they do necessitate some reliance on a third party. The name service is only decentralized if its organization is thoroughly decentralized, so it's important to research these services before trusting them with your personal data.



Unstoppable Domains

An unstoppable domain is a new way of managing domain names for sites without requiring users to go through a central registration authority. It functions as an NFT that’s linked to a specific crypto wallet. Users essentially turn their desired web domain into an NFT, and then their information is secured through a decentralized blockchain.



Soulbound Tokens

Soulbound tokens take the concept of decentralized identity and put it directly onto a blockchain. With this type of technology, users and organizations can self-issue tokens that store their identities’ data on the chain. These tokens are nontransferable, so once they’re linked to a specific user they can’t be moved to another one. This allows projects to attach functions and assets to a single user without needing any details on that user's legal identity.



Proof of Humanity

Proof of humanity is a type of decentralized identity system that relies on social verification. It typically entails submitting a video and then verifying that the entity in it is a human. Some proof of humanity sites also involve browsing participants' social media to check for signs of reasonable behavior. 



Proof of humanity sites can require people to share some of their own data, so widespread adoption isn't guaranteed. However, it can be a useful way of confirming users are authorized to participate in bot-free environments, without asking for users' legal identities.



Benefits of Having a Decentralized Identity

Decentralized identity comes with many benefits for both users and crypto companies. The biggest advantage is security. Cryptographic techniques used for decentralized identity management are a great way to reduce the risk of data breaches and identity theft. No single entity is responsible for security, so customers' private information won’t get stolen because one person made a mistake. Decentralized identity systems have multiple safeguards that maken them much more difficult to access.



This extra security also leads to extra accuracy. With decentralization, it's much harder to damage identity records. For instance, a single server going down due to a power outage won't make it impossible to retrieve data. This results in a user-centric approach that prioritizes customers' convenience and safety. Users can be confident that their verifiable credentials are always accurate, and can be accessed by the desired people at the right time. 



Decentralization does more than just provide practical benefits like privacy and security: its other huge benefit is that it's more accessible. When identity management services are left in the hands of centralized authorities, everyone has to rely upon a single organization. If that organization doesn't provide the services you need, you're out of luck. In the field of identity and access management, this is often seen in cases where a person struggles to get the right ID card because they don't have a strictly regulated list of documents with specific addresses and photos attached. 



With decentralized identity systems, users have more options. There’s no single gatekeeper for identification, so if a user falls afoul of ineffective rules they can choose an identity management service with more reasonable regulations. 



Risks of Having a Decentralized Identity

The risks of decentralized identity are primarily related to technological issues. Although the decentralized identity approach works well in theory, in reality it can be hard to implement. Distributed ledger technology often struggles to scale, and a system managing hundreds of thousands of identities might take longer to locate and present information. Compared to centralized systems, a decentralized system can take more hardware to run, since it has so many instances operating. This can make it cost-prohibitive to effectively handle customers' identity needs.



Decentralized identity can also be challenging because it requires a little more effort. There are more options for identification verification, but not all of them are equally valid. The community can even include some scams masquerading as legitimate decentralized identity management systems. Therefore, users need to be able to research and understand some basic technical concepts if they want the best data protection and identity security possible. 



The other major downside of decentralized identity is simply its novelty and lack of adoption. Most people are used to centralized identity systems, and switching the way things have always been done takes time. Some forms of decentralized identity might not be compliant with current regulatory standards, and may not have earned the trust of the general population. It may take time for public opinion and financial regulations to catch up with decentralized identity concepts. 



Decentralized Identity vs. Centralized Identity vs. Self-Sovereign Identity

Keep in mind that a lot of discussions around decentralized identity also bring up secondary concepts such as self-sovereign identity. To discuss the subject thoroughly, it's helpful to take a quick look at what distinguishes these three identity types. 



The following are their respective key characteristics:

• Decentralized identity: This type of identity is controlled and managed by a group of network members. Unlike within a centralized identity system, no single organization can validate or distribute identities.

• Centralized identity: A single organization is in charge of a type of identity, and keeps track of all data associated with it. One example of centralized identity would be the current method of distributing drivers’ licenses.

• Self-sovereign identity: In this type of system, users maintain control over their own identities. It may still use decentralized identifiers, and not have any centralized databases. However, this method is about empowering users to make their own choices and keep track of their own identities.

Use Cases for Decentralized Identities

Decentralized identities are currently showing up in many surprising locations. The following are some of the ways that many systems are starting to shift to decentralized identity management:

• User identity verification: Of course, the most common use of decentralized identity is for creating and verifying user identities. This type of decentralized identity is employed for user accounts in games, or know-your-customer verification during financial trades. 

• Fraud-proof certifications: Decentralized identity can help to provide reliable proof of certification for things like software training or financial qualifications.

• Access control: Through decentralized identity, projects can determine which users are allowed access to which parts of the site. This can also ensure that only mods or admins are allowed to make changes.

• Employee IDs: With decentralized identity, it's possible to grant employees a simple identification method that can be used to protect proprietary information or confirm a user's credentials.

• Supply chain: Remember that identities can also be assigned to products. This allows companies to trace supply chains, and prevent consumer fraud or employee embezzling.

Should You Have a Decentralized Identity?

Exploring decentralized identity is certainly worthwhile. While centralized systems still have their place in the modern world, decentralized identity systems have their own perks. If you're interested in maintaining your privacy and security, you can use things like digital signatures to verify transactions. This type of identity isn't yet acceptable in all situations, but for sites that allow it, it's a great way to protect data and avoid the pitfalls of centralization. 



For the modern web3 enthusiast, a decentralized identity also comes with some additional perks: users who have decentralized identities can access parts of the web not available through traditional identities. A decentralized identity also gives you the chance to explore cutting-edge features that may eventually become a mainstay of modern life. 



The Bottom Line

Decentralized identity concepts are an intriguing application of blockchain technology. By attaching identification to decentralized networks, it's possible to avoid a lot of the pitfalls of centralized identity providers. Though it may take some time for this concept to achieve full acceptance, it has the potential to provide unparalleled levels of privacy and security.



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