Messari: Exploring the importance, cases and prospects of distributed digital identity DID


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Distributed digital identity DID can enhance trust in Web3 while maintaining personal privacy.

Original title: “Decentralized Identity”
Written by: Karim Halabi, Messari Analyst Compilation: Block unicorn

Decentralized identity is to identify the meaning of cryptocurrency to money: full ownership.

Mutual recognition of identities is essential for almost all human interactions. It represents authenticity and is a prerequisite for trust. Most interactions that do occur within a given community are based on the ability of participants to identify themselves to some degree.

In fact, the early human communes relied on the ability of members to recognize each other to operate. What has changed now is that we live in gatherings with more than Dunbar’s population, which means that it is impossible for us to identify and connect with all the people who live with us.

Dunbar number explanation: Rule of 150, the famous “Dunbar number”, was proposed in the 1990s by Robin Dunbar, an anthropologist at the University of Oxford in the United Kingdom. This law infers from the intelligence and social network of apes: the number of people who will allow humans to have a stable social network is 148, rounded up to about 150.

Semi-formal identification methods are one of the key reasons why our species is the only vertebrate that can live in a larger society.

The rise of geographically agnostic digital networks has led to the emergence of new types of identifiers. Today, the most commonly used identifiers for most people are emails and passwords, which enable us to create accounts in websites and applications to establish relationships. This creates a digital identity that we use to interact in the virtual world.

The problem with our digital identity and accompanying data is that it is organized: brought together to create our own fairly accurate digital representation. This is not a problem in itself. The problem is that there is little transparency in how the trusted intermediary manages them. Unfortunately, events such as the Cambridge Analytica scandal have shown that these data are sometimes used for not so good purposes: to weaken our confidence in these intermediaries.

This means that our personally identifiable information (PII) does not need to be trusted by potentially negligent/malicious third parties, and our identity can be managed by ourselves; granting us the ability to manage and use our reputation and identity to access services in a trustless manner, For example, getting a MakerDAO or Compound loan with insufficient collateral.

What is a decentralized identity (DID)?

On-chain identity is the identity that attaches the blockchain public key to the real world. This can belong to a person, an object, or even something more abstract, such as a data model.

When done on a public, decentralized blockchain, this gives the owner guardianship and complete sovereignty over their digital identity and how it is used-just as having your private key allows you to fully own your Same as cryptocurrency. This was subsequently called Decentralized Identity (DID).

DID can also contain different personal information and identifiers stored in the same location, just like a wallet can hold cryptocurrency tokens of different standards.

Instead of having multiple digital identities managed by multiple centralized providers (for example, a driver’s license managed by a DMV, a Google account managed by Google, a bank managed Bank accounts, etc.) through them themselves. Since there is no need to trust a third party for custody, these identities cannot be used for any purpose without the explicit consent of the owner.

Having a decentralized on-chain identity has many meanings, among them are:

  • Prove the validity of information and identity
  • Prevent fraud and identity theft
  • Build reputation on the chain (ie credit, events, actions)

The importance of DID

DID may selectively approve third-party services (online accounts, financial services, etc.) to access information. For example, when integrating the Google Sheets plug-in, the following permissions are required to add applications.

Its role is only to connect and import data from the API into the worksheet. The ability to grant Google’s API to edit or delete all spreadsheets and run them when they don’t exist seems unnecessary and even intrusive. Not all of these permissions are relevant, but they are all required, and a certain degree of control over our digital selves and property must be relinquished in order to use add-ons.

As mentioned earlier, a sovereign, decentralized identity allows owners to freely share only what they need.

This is because we can have multiple independent digital identities when appropriate; there is no need to share aggregated identities that may contain information that is not strictly related and that we may not want to share. This enables individuals to limit and control the information that can learn about them through their interactions with society, institutions, and government services (for example, you can log in to a social media account and retain full ownership of your PII).

Do not confuse DID with single sign-on (SSO), which allows entities to log in to different websites and applications using a set of credentials. Among these SSO solutions, there is OAuth, but Google and Facebook are also working hard to promote these standards.

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: Tripadvior Login

The fundamental difference between SSO and decentralized identity is that the third party still retains the guardianship of the identity, and it is not true sovereignty.

Using a DiD solution means storing information about important documents/identities without the need to physically keep the documents/identities themselves. DID is to identity what cryptocurrency such as Bitcoin is to currency: full ownership.

An identity solution for everyone?

One billion people worldwide cannot claim ownership of their identities, which prevents them from owning property, voting, applying for some kind of social security, or finding formal jobs under the laws that protect workers.

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: World Bank

Due to the lack of official (government) services and the infrastructure for identity registration, hundreds of millions of individuals cannot obtain such ownership. For many others, it is impossible to afford birth certificates and registrations. Finally, for those who claim their identities, this information is stored in central libraries, which are sometimes lost in natural and political disasters and then cannot be replaced.

DID enables those who do not have legal identities to control their identities and represent themselves in a verifiable manner. In addition, facial recognition or iris scanning can be used with public and private keys to create and declare an irrefutable decentralized identity that is not controlled by any third party.

Although official institutions in the off-chain world may not recognize this, the immutable history on the chain can create reputation, allow owners to participate in the crypto economy, and grant access privileges only to people with a specific history.

Using some form of identification allows us to participate in formal and informal networks, as well as social structures such as markets. Using a decentralized form of identification allows us to do so without sacrificing a certain degree of privacy or security-this sacrifice will not come at the expense of our counterparties.

The future of digital identity

There are currently several different DID or on-chain identity solutions in use, which operate in different ways and are optimized for various use cases.


Application-based solutions where users can store different identifiers and credentials. It provides an easy way for entities to manage how different identities and permissions use them. Civic stores information on the Ethereum blockchain to avoid the risk of storing in a central database.

The roadmap outlines the “citizen compliance” released in the third quarter of 2021, which aims to improve compliance between users and on-chain identities and DeFi protocols.

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: Citizen Compliance


The Identity Overlay Network (ION) was developed by Microsoft and built on top of the Bitcoin blockchain using the Sidetree protocol. ION has been used by healthcare workers in a pilot by the National Health Service in the UK to effectively share professional certification with healthcare providers, thereby reducing the time spent on verification.

Self key

Selfkey enables users to create self-sovereign identities on the blockchain. The project aims to create a local market where personal DIDs can be used to directly access services, such as opening bank accounts, opening cryptocurrency trading accounts according to Know Your Customer (KYC) rules, and even applying for passports.

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: SelfKey


Litentry acts as an identity aggregator, allowing users to manage their cross-chain identities. Therefore, users can use quantifiable past activities (reputation) from different chains as evidence when interacting with DApps on another chain.

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: Literature Blog

LTO network

A blockchain-as-a-service (BaaS) model that organizations can integrate into their existing systems to gain the advantages of blockchain architecture. This also provides an infrastructure for sharing and verifying digital identities for nodes and participants on these networks.

DID (identity public address) on the LTO blockchain

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: LTO Identity Document

In addition, LTO uses Chainlink oracles to create cross-chain decentralized identities. Therefore, identities on other chains can also be represented on the LTO network.

LTO DID address based on Ethereum public key

Messari: Exploring the importance, cases and prospects of distributed digital identity DID Source: LTO Identity Document

Similar to Litentry, LTO aims to promote the interoperability of DID and smart contracts. Despite the different approaches, in the end, all of these solutions (and many others) help individual entities claim ownership of their identities and how they are used—as described at the beginning of this report. The Identity Foundation is a leader in helping to create sovereign identities stored on the blockchain.

Another very important aspect of DIDs is that they not only grant us sovereignty over our identity, but they also grant us sovereignty over the data we generate. Our data is often used to advance a goal, whether it is affecting our consumption habits or a more evil political goal. Our lack of control over information can lead to polarization because we cannot choose how and whether to use our data. DID grants us control over this-entities can choose to monetize their data if they wish. They can only start using this option when they control the data first.

DID in DeFi

Through DID, dapps can provide different levels of services to different users. For example, entities with a good history of debt repayment can obtain loans from lending platforms with less collateral, or new DeFi projects may prevent robots from taking advantage of their airdrops to human users. In addition, there are many other use cases that are not limited to the new decentralized Internet.

The reason DeFi is so attractive to so many people is that it requires no permission at all—it does not discriminate. Open agreements governing these financial products and services do not consider a person’s race, social status, creed, political views/environment, and net worth.

Although DeFi is trustless and anyone can use the new financial system, its trustlessness also has disadvantages. Loans using agreements such as Maker, Compound, or Aave need to be over-collateralized because the risk cannot be measured on an individual basis. Although powerful, it limits the use of DeFi protocols to obtain mortgages or large commercial loans. The paradox is that more trust must be established in the trustless network.

DeFi will eventually introduce global compliance regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML). Loan agreements like Compound and Aave are ahead of this curve, creating separate pools of funds like Compound Treasury or Aave Arc for institutional investors who can comply with the US regulatory system.

Rather than relying on traditional trust-based identification methods, which have failed people in the past (see: Cambridge Analytica’s large-scale data operations, data leaks, such as Equifax leaks), decentralized identities can be used instead.

Final thoughts on DID

DID is an important part of the puzzle. It can enhance trust in Web3 while maintaining personal privacy. Decentralized identity has always been one of the most challenging applications of Web3, and the exact form of DID is still uncertain. Various attempts to comply with regulatory and fully sovereign on-chain identities will continue.

Ultimately, unleashing the benefits of permissionless blockchain and decentralized finance will require a source of reputation, and DID has the potential to build trust in such a trustless system.

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