What Is Decentralized Identity? A Comprehensive Guide

Key Takeaways:

• Decentralized identity, using blockchain and cryptography, enhances security and user control in digital identity management.
• It addresses vulnerabilities in centralized systems, like data breaches and lack of user control over personal information.
• Decentralized identity is more secure, interoperable, and cost-effective, offering privacy and user-centric control.
• It empowers individuals and organizations with secure, verifiable, and easily manageable digital identities.
• The adoption of decentralized identity aligns with the growing demand for digital privacy and security.

 

Protecting personally identifiable information (PII) is crucial in today’s digital landscape. In traditional systems, where data is centralized, cyber threats and privacy breaches are on the rise. For example, in 2023, 75% of security professionals observed an increase in cyberattacks over the previous year, as reported by Cobalt.io. 

This reality brings us to a pivotal solution: decentralized identity. By leveraging the strengths of blockchain and cryptography, decentralized identity introduces a new era of digital identity management. It’s not just about enhancing security; it’s about putting control back into the hands of users. As a result, this approach is reshaping how we think about privacy, providing a more secure, interoperable, and efficient way to manage our digital identities. The purpose of this guide is to explore decentralized identity, a technology that’s redefining the balance between security and user autonomy in our digitally driven world.

Understanding Digital Identity

Digital identity is a crucial concept in our online-centric world, encompassing the virtual representation of an individual’s identity. This includes personal details like name, age, and address, alongside digital footprints such as browsing history and social media activity. Managed across various platforms like social media, email, and online banking, digital identities are central to accessing a myriad of online services, from e-commerce and e-banking to digital education and remote work.

While digital identities offer expansive access to online services, streamlined user experiences, and a measure of defense against identity fraud, they also present vulnerabilities. Personal data linked to digital identities are susceptible to cyber threats, identity theft, and data breaches. These risks have significant implications, as highlighted by data suggesting that approximately 15 million Americans fall victim to identity theft annually.

The challenges in managing digital identities predominantly stem from centralized systems. As we increasingly rely on digital platforms for various aspects of our lives, there’s an escalating need for more secure and reliable identity management solutions. Here, decentralized identity systems emerge as a potential answer, offering enhanced security, user autonomy, and trustworthiness in handling digital identities.

What Is Decentralized Identity?

Decentralized identity is a digital identity model using blockchain and cryptography for secure, user-controlled identity management. This approach empowers individuals and organizations to take charge of their identities, offering protection against potential misuse.

In a decentralized identity system, individuals have the control to manage their personal data and decide who has access to it and why. This model stands in contrast to traditional identity systems, which often rely on central authorities such as governments, banks, or corporations for identity management.

Decentralized vs. Centralized Identity Systems

Decentralized identity systems distribute user identity information across a network, improving security against cyberattacks and increasing user control over their data. In these systems, breaching data security is more challenging, as attackers need to compromise multiple network nodes. Users have greater autonomy, as they can choose who accesses their identity information, offering enhanced privacy and control.

On the other hand, centralized identity systems store all user identity information in a single database controlled by a central authority, such as a government or a corporation. This centralization can pose privacy concerns, as the controlling authority has full access to and control over the user’s identity data. Examples include government-issued ID cards, passports, social security numbers, and organizational credentials. The centralization makes these systems more vulnerable to cyberattacks, as compromising the central database can expose all stored data.

Challenges of Centralized Identity Systems

In centralized identity systems, individuals must submit personal information to a central authority, which then verifies it and issues an identity credential. This credential, such as a username and password or an ID card, is necessary for accessing various services.

When seeking access to a service, individuals present their identity credentials to the service provider, who verifies them with the central authority. Upon validation, the central authority confirms the identity, granting access to the service.

However, centralized identity systems face several challenges:

1. Centralized data storage makes these systems prime targets for hackers and other security threats. A breach in the main database or server could compromise the personal details of millions.
2. Individuals often have limited control over their personal information in these systems. Large companies may use and manage this data in ways unknown to the owners.
3. Access to these identity systems can be revoked or restricted by the controlling companies at any time.
4. Centralized systems can be inefficient and costly, leading to delays in identity verification and information sharing across various entities.

Decentralized Identity: A Web3 Solution

In contrast, Decentralized Identity is a Web3 solution addressing the drawbacks of centralized systems. It utilizes distributed ledger technology (DLT), like blockchain, to establish a network of trust. In this network, identity-related information is securely stored, shared, and verified. Individuals create self-sovereign identities, giving them full control over their digital identities and the discretion to share specific information.

Decentralized identity systems operate independently of central authorities, enabling individuals to authenticate their identity, establish trust, and access online services directly. This approach facilitates identity management across multiple platforms, enhancing privacy, security, and user convenience.

How Does Decentralized Identity Work?

Decentralized identity operates in a series of steps:

1. Creating a decentralized identity
2. Receiving verified credentials
3. Storing your decentralized identity details
4. Checking your identity

1. Creating a Decentralized Identity

Platforms such as self-sovereign identity wallets, decentralized identity platforms, and blockchain-based identity systems provide a means for individuals to create and manage their own decentralized identity. Some popular platforms are include Metamask, sovrin, uPort, Microsoft’s ION, and using ERC-725 and ERC-735 standards.

On these platforms, each person gets a decentralized identifier (DID), which acts like a unique digital ID. Essentially, a DID is a long string of characters that points to your digital identity. No two DIDs are the same, ensuring individuality and distinctness.

Along with the DID, two cryptographic keys are made: a public and a private key. The public key functions as a unique ID number that can be shared with the public, while the private key remains confidential and serves as a password. These keys connect to the DID, ensuring only the user can access their identity. Safeguarding the private key is crucial to maintain the security of the decentralized identity.

2. Receiving Verified Credentials

A reputable organization, like a government, school, or workplace, checks your identity details and gives you a unique digital certificate. This certificate has info like your name, age, or qualifications. The organization signs these digitally, making them secure and verifiable with the organization’s public key.

In addition to the information they represent, these credentials often include metadata. This metadata provides supplementary information about the issuer, the date of issuance, and any expiration or revocation details. It serves to establish the credibility and validity of the credential. Notably, these verified credentials are associated with your public key and serve as proof of your identity.

3. Storing Your Decentralized Identity Details

Individuals can securely store their information in digital wallets. A digital wallet is a secure application that serves as a personal vault for storing and easily accessing digital credentials.

Additionally, developers often build these wallets on distributed ledger technologies like blockchain, which ensures immutability and resistance to tampering. Encryption techniques are utilized to provide an additional layer of protection for the contents stored in digital wallets. With digital wallets, individuals can effectively organize and manage their credentials.

4. Checking Your Identity 

When individuals need to prove their identity or share specific information, they have the ability to selectively disclose only the necessary information for a particular transaction or interaction. With decentralized identity, they decide which certificates to show, what details to give out, and how long the info is valid for. This control helps keep personal details private and reduces the risks that come with traditional identity systems.

Benefits of Decentralized Identity

Decentralized identity offers a number of benefits over traditional methods of managing digital identities, including:

• Privacy: Decentralized identity gives individuals more control over their personal information. They can decide who has access to their data, and they can revoke access at any time.
• Security: Decentralized identity is more secure than traditional methods of managing digital identities. This is because the data is not stored in a central location, making it less vulnerable to cyberattacks.
• Interoperability: Decentralized identity is interoperable, meaning that it can be used across different systems and applications. This makes it easier for individuals to use their digital identities to access services from different providers.
• Cost-effectiveness: Decentralized identity can be more cost-effective than traditional methods of managing digital identities. This is because there is no need for a central authority to manage the data.

How Does Decentralized Identity Benefit Individuals?

1. Ownership and Control: Individuals have full control and ownership of their identity data, boosting privacy and data management.
2. Safety From Identity Theft: With traceable and verifiable systems, it’s tough for scammers to fake or misuse identity details, lowering identity theft chances.
3. Better Privacy: Individuals can choose what information to share, reducing the risk of data leaks and ensuring more privacy.
4. Smooth User Experience: Users can have one identity across different platforms, making things simpler and removing the need for multiple accounts.
5. Inclusion and Accessibility: Everyone can set up their identity and get important services, promoting equal access and inclusion.

How Does Decentralized Identity Benefit Organizations?

1. User-Centric Approach: Decentralized identity systems focus on the user, enhancing digital offerings and user satisfaction.
2. Lower Fraud Risk: With easy-to-track and verify systems, businesses face less fraud and financial risks.
3. Cost Efficiency: By reducing reliance on third parties and streamlining identity management processes, organizations can save costs.
4. Regulatory Compliance: These systems follow data protection rules, helping businesses stay in line with laws like the General Data Protection Regulation (GDPR) and the California Privacy Right Act (CPRA).
5. Better Reputation: Adopting decentralized identity shows a company’s dedication to privacy, safety, and empowering users.

Core Concepts of Decentralized Identity

The core concepts of decentralized identity include: decentralization, self-sovereign identity, decentralized identifiers, verifiable credentials, interoperability, and blockchain technology.

1. Decentralization

Decentralization is the backbone of decentralized identity. It means there isn’t just one main authority or group in charge of the identity system. Instead, the system is spread out over many parts or participants. They all work together to keep the identities and credentials safe and accurate. As a result, this decentralization ensures that no single entity has complete control over an individual’s identity, making the system safer and more trustworthy.

2. Self-sovereign Identity (SSI)

Self-sovereign identity is a key concept in decentralized identity systems that give people full control over their digital selves.

With SSI, you can manage your identity details, decide what to share, and pick who to share it with. And you don’t need to depend on big organizations or middlemen. Want to dive deeper into SSI? Here’s a detailed article.

3. Decentralized Identifiers

Decentralized Identifiers, or DIDs, are unique identifiers at the core of decentralized identity systems. DIDs are designed to be globally unique, persistent, and resolvable across different networks and platforms. Check out this article for a more detailed explanation on DIDs.

4. Verifiable Credentials

These are a key part of decentralized identity systems. Verifiable credentials are like digital stamps of approval that have important identity info and come from trusted sources. Specifically, they can show all sorts of details, from personal info to qualifications. Check out this article for a more detailed explanation of verifiable credentials.

5. Interoperability 

Interoperability means that different decentralized identity systems can work together smoothly. It ensures that different decentralized identity systems and platforms can seamlessly interact, exchange information, and verify credentials. This interoperability is achieved through the use of standards and protocols, such as Decentralized Identifiers (DIDs), Verifiable Credentials (VCs), which are developed by organizations such as World Wide Web Consortium (W3C) and Decentralized Identity Foundation (DIF). 

6. Blockchain Technology

Decentralized identity is built on top of blockchain technology, a distributed ledger that records transactions across a network of computers. The blockchain provides a decentralized and immutable platform to securely store and manage decentralized identifiers, verified credentials, and related metadata.

By leveraging cryptographic techniques and consensus algorithms, the blockchain ensures the integrity, transparency, and tamper-proof nature of the identity system. Importantly, blockchain technology enables trust without the need for intermediaries. The consensus mechanisms employed in blockchain networks allow participants to agree on the validity of transactions and identity-related information, eliminating the reliance on central authorities. 

Decentralized Identity Use Cases

Decentralized identity systems are revolutionizing various sectors by providing secure and efficient identity verification and management. Here are some enhanced use cases demonstrating their practical applications:

1. Digital Identity Verification

By leveraging verified credentials, decentralized identity systems offer a secure and efficient way to verify individuals’ identities online. This can be used in areas such as:

• Know your customer (KYC) processes, helping financial institutions and service providers to maintain anti-money laundering (AML) compliance.
• Restricting access to age-restricted products and services
• Facilitating remote identity verification.

2. Voting Systems

Decentralized identity can make voting more secure and open. By using blockchain and decentralized identity, we can check voter IDs safely, making sure only eligible voters participate while keeping their votes private. This reduces the chance of fake votes and can even support voting online.

3. Identity Access Management

Decentralized identity systems can enhance identity access management and authentication processes, providing a secure and user-centric approach. Decentralized identity enables users to authenticate themselves across multiple platforms and services. It acts as a single sign-on (SSO) or combines with other Multi-Factor Authentication (MFA) techniques to add an extra layer of security when accessing sensitive information or performing critical operations.

4. Healthcare and Medical Records

Decentralized identity can enhance the management and sharing of healthcare-related information. Additionally, patients can control their medical records and grant access to healthcare providers when necessary. It ensures privacy, data integrity, and interoperability across different providers.

5. Supply Chain Management

Decentralized identity can change the way we manage supply chains. It allows for safe and clear tracking of items and checks if products are genuine. By giving products special IDs, decentralized identity systems make sure the supply chain is honest, fights fake products, and gives shoppers trustworthy info about where products come from and if they’re real.

By storing product details on a blockchain, decentralized identity gives a clear view of the whole supply chain. This helps spot fake items, ensures products are sourced the right way, and makes tracing products easier.

6. Education and Academic Credentials

Decentralized identity enables issuing and verifying digital certificates, eliminating the need for paper-based credentials. It facilitates the secure sharing and verification of educational achievements, skills, and certifications. Individuals can maintain lifelong learning records on a decentralized identity system, securely storing and sharing their credentials throughout their careers.

The Future of Decentralized Identity Systems

Decentralized identity is still a new idea, and not everyone uses it yet. But the future looks bright. As technology gets better, and as more people in the industry work together, we could see big changes in how we handle and control our online identities. We can expect more people to use self-sovereign identity, which means they’ll have full control over their digital identity. This will make using online services smoother, and different decentralized identity systems will work well together.

When decentralized identity starts working with AI, the Internet of Things (IoT), and blockchain, we’ll see even more ways to safely check identities, make sure devices are genuine, and keep personal data private. We’ll have a wide range of trusted groups that issue, check, and hold digital identities, making online interactions across different sectors safe and easy.

Conclusion

Decentralized identity marks a significant shift towards enhanced privacy, security, and user empowerment in digital identity management. It not only addresses the current vulnerabilities of centralized systems but also sets the foundation for a future where control over personal data is firmly in the hands of the individual. As we become more conscious of our digital footprints and the importance of privacy, the adoption of decentralized identity emerges as a key solution. It promises a more secure and user-centric digital ecosystem, where individuals can navigate with confidence and autonomy.

Identity.com

We firmly believe in blockchain technology and are one of the few blockchain-based identity management companies reshaping how users’ identities can be managed digitally. Identity.com is also a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.

Identity.com, as a future-oriented company, is an open-source ecosystem providing access to on-chain and secure identity verification for businesses, giving their customers a hassle-free experience. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable gateway passes. Please refer to our docs about how we can help you with identity verification and general KYC processes.