Digital identity has been one of the hottest buzzwords in 2020. What’s more, even governments around the world are starting to wake up to the notion of a verified digital identity, and digital identity solutions are already a reality for a growing number of people. Decentralized digital identities can very well hold the keys to everything from personal data ownership to boosting access to financial services. Blockchain-based or not, digital identity appears to be here to stay. Nevertheless, blockchain technology suits itself remarkably well for constructing resilient digital identity solutions. However, what is digital identity, and why do we need it?

Identity management has been an issue as long as the Internet has been around. This issue has only been exacerbated by the advent of social media platforms and wide-scale data collection. The World Economic Forum states there is an “urgent need” for digital identity for consumers,

In fact, having a “global identity for all by 2030” is one of the United Nations’ Sustainable Development Goals. However, it has previously seemed hard to come to a suitable solution for how to implement digital identities securely. Now, it seems blockchain technology could potentially solve several of the issues related to digital identities in one fell swoop.

The advent of blockchain technology, DeFi, and the cryptocurrency sector has accelerated the need for digital identity. In fact, the industry is even solving some legacy problems with a digital ID, through providing digital identity blockchain solutions. Although the following article focuses on decentralized digital ID, it can be a good idea to brush up on your blockchain terminology. Ivan on Tech Academy already has over 30,000 enrolled students and features world-class blockchain and cryptocurrency courses. Join the community and get access to dozens of courses!

What is Digital Identity?

Let’s start with answering the question “what is digital identity”. As the name suggests, digital identity is a digital representation of an entity (usually a person). Although there is no single answer to “what is digital identity”, an easily-understood analog can be that of someone’s real-life identity. Most of those living in the Western world have some sort of passport or identity card. At its very core, a digital identity could be a digital equivalent to this sort of documentation. However, a digital identity could also go beyond traditional ID cards. For example, a digital identity could allow people to take ownership of their information and personal data.

Consequently, a digital identity can include information such as someone’s name, birthday, personal preferences like someone’s favorite food, or even someone’s reputation. Although this opens up a lot of exciting possibilities, it is also inherently risky. The critically acclaimed Black Mirror episode Nosedive highlights this and depicts a world where people can rate each others’ digital identities from one to five stars based on their everyday interactions. Although Black Mirror is satire, it does bring up some real concerns related to digital identity. Nevertheless, blockchain technology potentially promises to bring transparency to digital identity solutions without compromising privacy protection.

As the world becomes increasingly digitized, and we spend more of our time online, reliable, and resilient digital identities will soon become necessary. Blockchain technology arguably offers some of the most convincing features for actually bringing the notion of global digital IDs to fruition. Let’s look at some of the ways digital identity blockchain solutions can do this.

Verifiable Credentials

Those familiar with blockchain technology might already have come across the notion of verifiable credentials. Put simply, verifiable credentials allows one party to validate information regarding another. An “issuer”, for example a school, creates a verifiable credential for a “subject”, or a student. Let’s say the student receives the verifiable credential, with relevant attributes – such as what courses the student has taken, his or her GPA, what year they graduated, etc. The student then becomes a “holder” of the verifiable credential.

After receiving the verifiable credential, the student is free to store it in a digital wallet. Whenever applying for a job, a prospective employer can request access to the student’s grades or the holder’s verifiable credential. In doing so, the employer will act as a “verifier” of the student’s information and can confirm that the reported grades are accurate. 

Verifiable credentials are based on the World Wide Web Consortium (W3C) open standard known as just that, Verifiable Credentials. Seeing as verifiable credentials follow these clear standards, the decentralized verifiable credentials become “portable” and easily transferable across organizations. What’s more, the general idea is that a verifiable credential will be able to be verified by, for example, employers or banks.

According to the W3C, a physical credential represents information regarding the subject. For example, this can relate to someone’s name, photo, identification number, nationality, date of birth, which vehicles someone is entitled to drive, and so on. A verifiable credential can represent the same type of information as a physical credential. Nevertheless, a verifiable credential is digital, and uses technology such as digital signatures. This means verifiable credentials become more trustworthy and tamper-proof than traditional physical credentials. Consequently, it’s easy to see verifiable credentials value for digital identity.

How does Blockchain Create Digital Identity?

Building digital identities using blockchain is more important than it might initially appear. According to the Director-General of the not-for-profit charity Consumers International, Amanda Long, “individuals have the most to lose if things go wrong with digital ID”. Specifically, she suggests consumers need to have control over their digital identity and how it is used, and it needs to be protected with top-notch data security.

As such, blockchain technology seems given to underpin digital identity. This is echoed by other high-profile individuals, such as Microsoft’s Executive Vice-President of Business Development, Peggy Johnson. “We believe that technologies like blockchain can play a powerful role in creating a secure, portable, personal solution for those living without identity, but technology alone is not enough”. 

Peggy Johnson

This ties into the notion that shared standards need to be developed, and blockchain needs to become increasingly adopted before we can use blockchain to create digital identity solutions on a broad scale. With that being said, however, blockchain technology is not yet uniformly accepted as the technology on which a global digital identity system should be built.

There are many different competing standards, and we are likely still years away from when leading governments will begin accepting a common blockchain-based digital identity solution. Nonetheless, the technical advantages presented by digital identity blockchain solutions means this is likely just a question of time.

Why Are Digital Identity Blockchain Solutions Needed?

So, after learning what digital identity is and how blockchain technology can be used to create a digital identity, let’s also look at why digital identity blockchain solutions are needed. As you may know, hundreds of millions of people are currently underbanked. This is something we’ve previously covered, as well as the possibility of banking the unbanked with decentralized finance (DeFi). 

Nevertheless, one of the major reasons so many people are unbanked is that they lack access to traditional financial infrastructure. Countries with poor economic and social infrastructure also tend to lack easy access to a financial identity. According to estimates from the World Bank, over one billion people lack proof of identity, and half of the women in low-income countries don’t have any ID. 

Currently, having a physical ID is essential to using governmental services, applying for a passport, enrolling in schools, getting jobs, and much more. However, as a consequence of digitalization, most of the world’s roughly 2.7 billion unbanked already own smartphones. Consequently, it is conceivable to introduce a digital blockchain-based identity solution, giving those without proof of identity access to verifiable credentials right in their phone. 

However, digital identities’ usefulness doesn’t stop here. Decentralized digital identities arguably hold the keys to things such as safe crypto custody, and it can also more clearly show identity ownership. For example, people all around the world routinely accept various End User License Agreements (EULAs), or give out their private information to social media companies, or even genealogical data to companies like Ancestry and 23andMe. Having a digital identity in the mold of verifiable credentials could both boost transparency, as well as keep ownership of personal information private. Looking to learn more about blockchain? Visit Ivan on Tech Academy, one of the premier blockchain education platforms.

Digital Identities and DeFi

Blockchain-based digital identity solutions can, therefore, be hugely advantageous when it comes to decentralized finance (DeFi). If you’ve missed out on the recent DeFi boom, DeFi services are essentially digital financial services built using public blockchains, open protocols, and decentralized applications (dApps).

According to the report “The Sudden Rise of DeFi: Opportunities and Risks for Financial Services”, jointly authored by Boston Consulting Group, DeFi has what it takes to “bridge the gap and disrupt traditional finance by making money, payments and other financial services universally accessible”. With that said, however, the potential of the DeFi sector is arguably constricted by its connections to legacy processes and a lack of decentralized identity or credit history.

Instead, some argue that a decentralized digital identity blockchain solution could unlock the DeFi sector’s full potential. If people around the world had access to privacy-centric, decentralized digital identity solutions, they could truly “own” their personal data. Additionally, this could remove the need for cumbersome and sometimes invasive know-your-customer (KYC) surveys. 

Outside of the previously discussed advantages presented by a digital blockchain-based identity, it could also give other benefits. For example, a digital identity could make a credit score easier to share, which has obvious DeFi lending applications. What’s more, there is a veritable plethora of digital identity projects in the works all around the blockchain industry. Just to name a few, IOTA has taken steps towards deploying what it refers to as a “Unified Identity Protocol” built on the Tangle, Nexus claims to provide a “foundation for the next generation of identity”,

The ID2020 Alliance

In addition to the previously mentioned governmental digital ID schemes, the advent of digital identities is seeing a lot of interest from private sector ventures too. One of these is that of ID2020. The ID2020 Alliance is a public-private partnership with high-profile partners such as Microsoft, Hyperledger, and Accenture, aiming to use blockchain technology to create digital identity solutions.

In fact, the ID2020 Alliance has also managed to enlist various other well-known partners in the ID2020 initiative, such as Mastercard, Kiva, UC Berkeley, the Rockefeller Foundation and others. Its aim is to create a new global model for designing and implementing digital ID solutions. What’s more, it seeks to create a solution for a portable, user-managed and privacy-centric digital identity.

If ID2020 is successful in closing the existing identity gap, this would be a massive breakthrough. Decentralized identities can be seen as key to democratizing finance, and providing people with ownership of both their identity data and privacy. Considering some of the previous facts we’ve gone through, it doesn’t come as much of a surprise that ID2020 is looking to blockchain technology in order to realize its digital identity solutions. 

Blockchain and Digital Identity Breakdown

The issue of digital identities has never been hotter than today, and all signs point towards digital identities being in our future. The interest is there, and both private and public sector ventures are looking into developing resilient digital identity solutions. Most signs point towards that the winning alternatives will ultimately be decentralized digital identities. However, national regulations will play into how quickly digital identity solutions are adopted.

No matter what, the discussion regarding digital identity solutions and verified credentials only highlights the various use cases for blockchain technology. Avid readers of this blog will likely already be familiar with the numerous blockchain use cases, but it is nonetheless worth reiterating. Are you interested in joining the blockchain revolution or learning how to develop your own blockchain solution? Ivan on Tech Academy offers top-notch, in-depth courses that allow you to go from a complete beginner to a blockchain developer hero. Best of all, you can get 20% right now if you enroll using the exclusive promo code BLOG20.