How anonymous are we while interacting with web services? Well, we’re not only quite the opposite of incognito, but we also accept it and share our data without a deeper reflection.

And on the one hand, thanks to this approach, we benefit from free and seamless online experiences. On the other hand, we risk becoming the victims of a data leak or identity theft.

Then, can solutions such as blockchain-based identity systems help us retain all the pros of digital IDs while eliminating all the concerns? We’ll try to examine it in the following paragraphs!


The rise of the digital identity

It’s justified to say that we create and change our digital identity on a daily basis. Basically, every little thing we do while surfing the web, interacting with social media, or visiting ecommerce shops impacts our “virtual character” and updates multiple databases with information about us. Such data is collected and used across various apps or devices and is usually stored and managed by centralized systems.

Then, why do we decide to share our digital identity with other entities? Well, we more or less have to do that. Data about us serve as the currency – we use it to pay for free online services, apps, or various types of content. We prefer to dispose of part of our privacy in exchange for user-friendly and accessible online experiences.


Digital identity – problems and concerns

The aforementioned trade-off between privacy/security and a pleasurable web experience is not a perfect solution. The current state of digital identity leads to multiple risks and raises more and more concerns.

The main issue is related to centralized identity systems. Many databases are centralized, meaning they rely on a single server, organization, or government to manage personal information. This approach creates a single point of failure, making it easier for hackers to access and exploit personal information.

Such centralization (along with, for example, weak passwords and not enough awareness about online fraud) often leads to identity theft. Losing our login credentials or other sensitive data can cause disastrous consequences, such as financial loss or inappropriate use of our social profiles. And it happens more and more often ­– for example, in 2020, the US Department of Justice indicted several individuals for using fraudulent identities to obtain COVID-19 relief funds.

In addition, current digital identity systems are rarely interoperable, forcing us to provide the same information every time we try to access a different service or app. On the one hand, it raises security as the data is stored in multiple databases. On the other, if the hacker gets access to one server (due to its lower security), they can basically steal our identity from the rest of them. Obviously, we can prevent that by creating different passwords every time we sign up for a particular service. However, let’s be honest – who follows this principle in every case?

Moreover, the lack of interoperability of digital identity systems significantly reduces the user-friendliness of this solution. Imagine how fantastic it would be to use one secured virtual identity to access every possible web service – without the need to create multiple accounts!


Blockchain-based identity – a trend or necessity?

This vision leads us directly to the so-called blockchain-based identity. The ability to store our digital identity on a decentralized ledger and allow access only via a unique private key makes it possible to mitigate most of the aforementioned risks.

Moreover, blockchain-based identity is not only about enhanced security. It can improve the digital privacy area as well. In a system like this, it’s only the identity owner that decides whom they want to share data with.

In addition, such privacy can be monetized – this time, with the user being fully aware of the process. Projects like Ocean Protocol have already dived deep into blockchain-based data trading, allowing consumers and companies to trade information, treating it the same way as a commodity.


Blockchain identity verification – how does it work?

There are many approaches to blockchain-based identity, but generally, they rely on four simple steps:

  1. At first, the user (or a company – depending on the need) creates a blockchain-based identity. Usually, it’s a pair of public and private keys that allow them to sign transactions.
  2. Then the identity is verified – the user needs to provide some real-world information. Depending on the type of identity (you can create your complete digital ID as well as, for example, register a domain that’ll serve as your virtual portfolio stored on blockchain), they are required to give such data as full name, address, or government-issued ID. Obviously, the information is encrypted and stored on the blockchain, making it tamper-proof.
  3. After verification, the digital identity needs to be validated. Such a process usually relies on signing a basic transaction (while accessing a particular service where a digital identity is required). To do that, the user must have the aforementioned cryptographic private key, making it nearly impossible to hack by anyone external. Don’t worry if “having the private key” sounds confusing to you. Such a key is usually stored automatically in the web3 wallet you use – you don’t have to remember it and type every time you want to use your digital ID.
  4. The last part of the process relates to general blockchain primitives. The user’s transaction (e.g., signing the document using blockchain-based identity) is being verified the same way as in the case of crypto transfers. A complex cryptographic consensus mechanism takes care of ensuring the security and accuracy of the operation.


Blockchain-based identity systems – an overview

There is no “one size fits all” approach to blockchain-based identity. The entire concept is still in an emerging state, with many companies, governments, and services not ready to implement it.

That is why one of the most preferred types of such a system is Federated Identity. It allows users to access multiple apps and services using a single digital ID. However, their identity is still managed by a central authority, with blockchain used primarily to enhance its security (due to the decentralization network of identity providers).

A more radical approach, called Self-Sovereign Identity (SSI), allows individuals to have complete control over their digital identities. In such systems, users can create and manage their identities using decentralized blockchain-based networks without a central authority. A good example is Sovrin Network which acts not as a “manager” but rather as a “governance authority” that monitors the web of decentralized nodes (provided by Hyperledger Indy).

There is also a flexible type of blockchain-based identity system – Attribute-Based Identity. It relies mainly on one dominant principle: it’s the user who decides with whom to share the data. In this case, blockchain isn’t used to store all the information related to the digital ID. Instead, it helps create secure and tamper-proof records of identity attributes and enables efficient and selective disclosure of them.


The future of blockchain-based identity

Which of these systems has the greatest chance of becoming the dominant one in the future? We don’t have a crystal ball, but if it’s the decentralization and security that serves as the most crucial principle of such solutions, then we’d pick Self-Sovereign Identity. The lack of central authority makes SSI the safest option, with decentralization enabling trustless interactions between the user and the entity.

Obviously, there are some concerns related to SSI – especially in the area of its user-friendliness (it requires individuals to be active and responsible in managing their identity) and interoperability (such systems provide the most value when they are connected with each other). However, as the adoption of blockchain-based ID systems grows (along with their technological maturity), the outlook for Self-Sovereign Identity is getting more and more positive.