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Decentralized Identity

Decentralized Identity & Its Role in Web3

Learn how decentralized identity works, its role in the Web3 ecosystem, and what’s next for the protocol.

Data privacy is quickly evolving from a regulatory requirement to a customer demand. While Europe’s GDPR and California’s CCPA aim to change corporate behaviors, the success of DuckDuckGo, Brave, and other privacy-focused projects suggest that consumers are increasingly taking matters into their own hands.

Decentralized identity aims to further support privacy by giving consumers control over their identities. In essence, the technology would enable you to prove your identity without disclosing any information or creating an entirely new account. At the same time, it could become a central part of the next-generation Web3 ecosystem.

Let’s take a closer look at decentralized identity, its role in the Web3 ecosystem, and what’s next for the movement.

Decentralized identity gives consumers control over their personal information and represents a key component of the Web3 ecosystem.

What is Decentralized Identity?

Our identity plays a central role in day-to-day life. For example, you need to prove income when applying for a mortgage, prove identity to fly on a plane, and prove you’re a user when signing on to a website. As a result, our personal information is littered across hundreds of different websites. That means a higher risk that our data will be stolen or compromised.

Decentralized identity gives consumers control over their identifying information by collecting and verifying information with a wallet. In practice, users can provide their identity to a company, and a company can confirm that the proofs are accurate using a blockchain ledger. And in the process, they don’t have to divulge any personal information.

Decentralized Identity
Decentralized identity vs. centralized and federated identities. Source: Iotex

A typical process might work as follows:

  1. A user creates a pair of public and private keys in a wallet.
  2. The public key is hashed and stored on a blockchain.
  3. A trusted third party proves the user’s identity and certifies it by signing it with its own private key. A certification record is also stored in a blockchain for verification purposes.
  4. Users can access third-party services using a token that’s easily verified by comparing the hash values of the identification record with the hash values of the certification record.

In addition, users could create separate key pairs from a master private key to generate distinct identifiers for different relationships. A typical example would be verifying that someone meets a minimum income threshold without accessing their actual income via tax records. As a result, it’s easier to preserve the user’s privacy while still verifying facts.

Its Role in the Web3 Ecosystem

Web 2.0 is built on a lack of privacy. For example, Facebook and other social media platforms rely on data mining and tracking technologies to target advertisements. And, of course, data breaches have become depressingly familiar. For instance, Cambridge Analytica exposed the personal data of millions of Facebook users.

Web3 aims to bring the web back to its decentralized roots by harnessing the power of the blockchain. For example, IPFS provides decentralized hosting, and Unstoppable Domains lets anyone mint domain names. Meanwhile, cryptocurrencies offer a trustless medium of exchange to facilitate transactions between users and organizations.

Decentralized identity fills a critical void in the Web3 ecosystem by providing a way for users to authenticate and prove their identity to other users, organizations, or applications. Using the same blockchain technology underlying other Web3 solutions, users can complete authentication without disclosing personal information.

Decentralized Identity Projects & Wallets

Decentralized identity remains in the early stages, but many projects bring solutions to the market. While some of these projects focus on niche areas, such as credit, others develop full-scale solutions capable of addressing the entire decentralized identity management spectrum—from government IDs to the metaverse.

Some of the most popular projects include:

  • Civic – Civic provides a multi-sig, non-custodial wallet for Bitcoin. In addition, its blockchain-powered identity verification makes it easy for users to share personal information without giving data to third parties during transactions. These capabilities support age verification, identity verification, and multi-factor authentication.
  • SelfKey – SelfKey provides sovereign identity management for the metaverse and Web3 ecosystems. The platform lets users store and manage their digital identity, KYC documents, and other digital assets, including non-fungible tokens (NFTs). You can even start incorporating a business through its marketplace.
  • Magic – Magic, formerly Fortmatic, is an identity authentication service for Ethereum-based apps that includes multi-factor authentication. The platform makes it easy for developers to integrate Web3 authentication into existing apps in minutes.
  • Bloom – Bloom provides on-demand, secure, and global access to credit services, including identity management and ownership. The platform gives users control over their financial information, including credit-specific details and decentralizes the sharing of that information to prevent identity theft.

What’s Next for Decentralized Identity?

Decentralized identity remains in the early stages of development, but there are organizations building consensus and technical specifications. For instance, the Decentralized Identity Foundation (DIF) aims to develop foundational elements for the ecosystem to ensure interoperability with members like Microsoft, Accenture, Auth0, RSA, and HyperLedger.

While social media companies may be hesitant to decentralize identities, many large tech companies could drive the adoption of these protocols, such as Microsoft or IBM. These companies don’t monetize personal data to the extent of social media or search giants, and therefore, their businesses wouldn’t be adversely impacted by enhanced privacy.

Of course, many crypto experts and enthusiasts hope to adopt a completely open standard free from corporate or government interference. For example, OAuth, the most popular standard for access delegation, was developed by an independent organization and has since become the standard used by every major tech company.

The Bottom Line

Decentralized identity is a core concept of the Web3 ecosystem, enabling consumers to take control over their personal data. Using blockchain technology, next-generation authentication protocols will allow anyone to prove their identity to a third party without divulging any personal information, benefiting everyone involved in the transaction.

In the future, decentralized identity could play a critical role in everything from decentralized finance (DeFi) to metaverse interactions. The protocol could also become the primary way in which people authenticate in Web3 applications using wallets rather than passwords—eliminating any possibility of a data breach.

If you buy, sell, or exchange cryptocurrencies, ZenLedger can help you keep everything organized at tax time. Sign up for free today!

Justin Kuepper

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