What Is Decentralized Identity?

The ethos of Web3 is about creating a more decentralized digital future that encourages users to take ownership of their own data. In order to navigate this emerging landscape, our personhood is being translated into digital identities that store information about us like our usernames, passwords, search history and past transactions.

Across Web3 decentralized identity systems have cropped up to help users determine how much information is shared and with whom that information is shared. The goal of this technical movement is to remove society’s reliance on the handful of entities to control our digital personas and allow our digital selves to follow us wherever we go.

See Also: What Is 'Web5' and How Is it Different From Web3?

The road to decentralized digital identities

Broadly speaking, digital identities have been around since the advent of the internet. One of the most primitive digital identities still comprises the cornerstone of the web today: the email address. You are represented by a chosen username (“robert”) that precedes a domain name – the organization to which that string is assigned (“coindesk”) – that comes before a final identifier (“.com”). In this case, the email address would be robert@coindesk.com, which provides some information to recipients about the sender's identity and the organization that person is affiliated with.

This structure also reflects a hierarchy of centralized entities. At the bottom of the pile lies Robert, then CoinDesk and then the registrar from whom it ultimately rents the @coindesk domain. And a registrar can only grant access to top-level domains, such as .com, that have been accredited by the Internet Corporation for Assigned Names and Numbers, or ICANN.

As our digital identities have evolved over the years, new dynamics have formed between users and the platforms they frequent. Internet forums have long provided pseudonymous cover for trolls, tinkerers and digital beatniks to discuss topics of interest, provided that these users sign up for an account managed by the forum. In turn, that user must follow the rules outlined by the forum's creator, or else they risk being removed from the platform.

In the 2000s and beyond, social media sites including Facebook and Twitter provided even more advanced digital identities. These sprawling social networks fuzzed around reality, permeating our lives by blurring fact and digitally enhanced fiction. Those that created these platforms have amassed wealth and power by utilizing user information to show personalized ads.

The practices of these social media platforms, the bedrock of what is now known as Web2, at first seemed like a fair bargain to their customers and remain immensely popular. But a series of scandals undermined public trust in these companies and their ability to steward billions of online personas.

Web3’s alternative to a digital identity

While traditional identity tools use centralized methods to store and control user data, decentralized identities integrate blockchain concepts to remove the reliance on third parties.

Decentralized identities are not hosted on centralized servers by big entities such as Google or Meta Platforms (the former Facebook). Instead, they are often hosted on decentralized file-sharing platforms, such as the InterPlanetary File System (IPFS). These open-source protocols store data on decentralized networks that are difficult to shut down and give users ownership over their online data.

In addition, decentralized identities only share information with other parties when and if they choose. This means that, unlike centralized identities, personal data cannot be stored or shared without the user's knowledge or consent.

According to the Ethereum Foundation, decentralized identities can be used for many things, such as a universal login to reduce the need for separate usernames passwords, as a way to bypass know-your-customer (KYC) measures and to create online communities that are free of bots and fake accounts.

Types of decentralized identity solutions

The growth of decentralized finance (DeFi) in recent years has created a need for digital identity systems that can interact with Web3 services and convey credentials without having to provide sensitive personal information.

• Non-custodial crypto wallets allow users to transact without the need for an institution. Users control their private keys, which are used to verify transactions and prove ownership of a blockchain address.
• Digital identities have evolved since the release of Ethereum in 2015, thanks to smart contracts that can automatically execute tasks when certain conditions are met. Newer systems include the Ethereum Name Service, which allows users to create ".eth" domains that would replace the long alphanumeric string that marked their wallet’s public address.
• Unstoppable Domains is another decentralized identifier that allows users to buy and mint Web3 domain names that are theirs to keep forever.
• Soulbound tokens are a type of non-fungible token (NFT) that is not transferable and can help represent a person's identity and achievements in Web3.
• Proof of Humanity is a decentralized social identity verification system built on the Ethereum blockchain that allows users to create profiles and vouch for other humans they know.

There is a wealth of future possibilities for decentralized identities, as our self-expression continues to evolve online. NFTs, for example, have recently been used as visual identifiers of someone's identity online, while metaverse platforms and tools have allowed users to create full-body avatars to represent their digital selves.