Nowadays, data is a more valuable asset than oil. Your personal data is controlled and managed by centralized entities that use it to sell targeted advertising space to businesses. Companies like Meta make over $100 billion in revenue annually from advertising, and they use your data to sell the ads and decide which ones you see.
In a decentralized identity system, users manage their data and send only what they are comfortable sharing to centralized websites. Advocates of this system suggest it is more secure than centralized data management.
This article will discuss decentralized identity systems, their applications, and the challenges the decentralized identity space faces.
How decentralized identity works
Decentralized identity solutions let users store their personally identifiable information (PII) in a decentralized identity wallet. Like cryptocurrency wallets, these apps have cryptographic keys that secure their contents.
These digital wallets use distributed ledger technology maintained by peer-to-peer networks. When a user authenticates their identity, they use their private key to sign a message, which is validated by the distributed ledger. Users can choose which information they want to share with websites and businesses. This method eliminates the need for these businesses to store users’ addresses, phone numbers, and credit card information.
Decentralized identity technology solves many of the problems associated with our current centralized system. For example, e-commerce behemoths like Amazon have millions of PII data points. Users' information can be hacked through data breaches and sold on the dark web. Decentralized identity protocols typically have features that allow users to revoke data access. That means you can remove your data from a site if you believe it's being mishandled.
Decentralized identity history
The concept of decentralized identity emerged as a response to the limitations of centralized identity systems. In 2005, the OpenID Foundation was established to create an open and decentralized authentication protocol. However, the protocol was not entirely decentralized, as it relied on centralized servers to store user data. In 2015, the World Wide Web Consortium (W3C) launched the Web Authentication (WebAuthn) standard, which uses public-key cryptography to authenticate users. WebAuthn was a significant step toward decentralized identity, because it eliminated the need for centralized authentication servers.
Benefits of decentralized identity
Decentralized identity management can be as beneficial for organizations as it is for individuals. These systems let businesses verify identity information in seconds rather than weeks. Centralized identity management systems often require organizations to communicate back and forth with individuals when collecting their PII. But with decentralized identities, these organizations could scan a QR code and verify a user's digital credentials instantly.
Decentralized identifiers also allow organizations to outsource elements of their data protection strategy. Digital wallet technologies secure verified identity details, meaning organizations need not spend exorbitant amounts of money on protecting user data.
Additionally, when businesses aren't storing vast amounts of identity data, they lessen the likelihood of being targeted by cyber-attacks. Hackers are more likely to target entities with valuable data than those using a decentralized digital identity system.
Individuals can rest easy knowing their information is secured with cryptographic technology. Companies can't monetize user data they don't have, so individuals are safe from their data being sold to advertisers without their knowledge. Decentralized identity can also reduce identity fraud, because user data stored on a distributed ledger is harder to steal.
Decentralized identity examples
Guardian is an open-source platform that enables the creation of ESG assets. It is run by Envision blockchain and is used by many Hedera applications. Guardian uses W3C Decentralized Identifiers (DIDs), enabling verifiable, decentralized digital identities.
IBM has a decentralized identifier system as well. According to IBM, its digital identity system can be used for vaccine records, learning credentials, and other PII. This system lets users prove eligibility for educational courses, book hotel rooms, and more.
Challenges and limitations of decentralized identity
Although decentralized identity systems are more secure and streamlined than centralized systems, there are problems that prevent widespread adoption.
For decentralized identity systems to scale, decentralized identity providers must work toward interoperability. If each decentralized system is siloed to a specific blockchain, those blockchains must be able to communicate with each other. Otherwise, users and organizations may rely on different technologies to share verifiable credentials.
Interoperability issues can lead to individuals being unable to access essential services with their digital identity wallets. Organizations such as the Decentralized Identity Foundation work to make sure that digital identity systems can mesh with each other.
Legal and regulatory challenges
Legal and regulatory challenges include issues surrounding identity management, data privacy, and compliance with data protection regulations. Different countries have different data protection regulations, making it difficult to create a standardized decentralized identity system for global use.
Privacy and security concerns
Although decentralized identity systems are more secure, they aren't without faults. Some individuals don't like the idea of their credit card accounts and other personal information existing in one digital wallet. Those unfamiliar with the blockchain may even worry that their public key could be used to access their data.
For decentralized identity systems to gain widespread adoption, those who create them must educate potential users on their benefits.
Future of decentralized identity
Despite the challenges and limitations, decentralized identity is gaining momentum as more organizations and individuals adopt the technology. The Decentralized Identity Foundation has more than 80 companies on board, including Microsoft, Blockstack, Hedera, and Civic. In the future, we'll likely see decentralized identities used to reduce workplace data breaches and verify the authenticity of social media accounts, reducing the spread of false information.
Hedera is a proud member of the Decentralized Identity Foundation. By collaborating with other organizations in the foundation, Hedera is helping to create a standardized, global decentralized identity system. Hedera's public Hashgraph ledger provides an easy-to-use platform for creating decentralized identity solutions. Hedera's Guardian, for example, enables organizations to store and verify their ESG data.