Tired of handing over your data to every platform you use? 

Traditional methods of managing our identity data don’t do enough to keep us safe from security breaches, identity theft, and privacy invasions. Moreover, centralized identity and access management systems (IAM)  offer users little control over our data.

Thankfully, decentralized identity puts you back in charge of your online identity.

Built with distributed ledger technology (DLT) like blockchain, decentralized identity solutions form the cornerstones of Web3, the next evolution of the internet.

Keep reading to learn more about decentralized identity and why experts have faith that it’s the future of digital identity management.

Why is decentralized identity important?

Our personal information lives scattered across different platforms where we become “users.”

“Our digital bodies exist in fragmentation. I’m not an individual online; I’m a user.” ”

Frank Cardello
Executive Advisor, Decentralized Identity, Ping Identity.

As Frank Cardello of Ping Identity aptly states, “ When I manage an identity, it means I can show up and provide who I am in a millisecond. We can’t do that today. We have to re-establish trust in every interaction we embark on.” This creates a frustrating and insecure online experience.

Decentralized digital identity delivers a way to reclaim control and improve user experience.  It minimizes the chance of data exposure in a world facing data breaches that affect over 353 million people a year.  

Brandon-Summer Millers, Senior Market Research Analyst at G2, highlights the decentralized identity’s cryptographic nature and the use of unique chain of blocks that are tamper-proof.

“(These) principles behind a decentralized digital identity make this technology incredibly secure.”

Brandon-Summer Millers
Senior Market Research Analyst, Cybersecurity, G2.

How decentralized identity works

As you’ve experienced many times, you visit a site, and you’re asked to come up with a username and password. It’s the same for Facebook, TikTok, your bank, your job, or your aunt’s weekly newsletter for some reason. Often, you share personal details with accounts like these.

Sometimes, you have to provide personal documents to verify you are who you say you are. And then the site might have to use a third party to verify whether the ID you shared belongs to you.

All of these companies store your personal data in their systems. And herein lies one source of problems. The data you give becomes vulnerable to hacking, theft, or general abuse.

A decentralized identity system calls for a certified issuer, such as a government or organization, to issue digital certificates that verify your identity and other attributes like age, date of birth, educational qualifications, and licenses. Individuals like you, and I then store the credentials in a digital wallet.

When a service provider asks to verify your identity, you present the required information via a distributed ledger. With a decentralized ID, neither the issuer nor the verifier retains your information. You – and only you – have the power to allow access to it.

Three main components make decentralized identity possible: 

1. Decentralized identifiers (DIDs)
2. Verifiable credentials
3. Blockchain

1. Decentralized identifiers

A decentralized identifier is a unique reference code that serves as your online address. It leads to your DID document, which contains details about the public key encryption used to secure your personal credentials in a digital wallet. If you give someone access to your wallet’s public key, they can verify it.

Creating and storing your DID doc on the blockchain or any other DLT is called the DID method. 

Because different blockchain technologies have different ways of storing data and transactions, developers have created and use several DID methods. The specific DID method is included within the decentralized identifier syntax itself.

You can share digital credentials from your wallet and prove your identity anywhere you go online. And remember, it doesn’t reveal any personal details about you.

2. Verifiable credentials

The digital certificates you store in your wallet are verifiable credentials. Issued by trusted entities like universities and governments, the certificates come with digital signatures secured by public key encryption and prove specific things about you, like your age or education. They protect your privacy.

You control which credentials you share when websites or apps request them.

3. Blockchain

DIDs are stored on a blockchain. Think of blockchain like a giant public record where everyone can see what’s written, but no one can make changes.  It makes everything super secure because

• It’s unchangeable. Once something is in the record book, it can’t be erased or modified. This ensures your DID’s reliability.
• It’s transparent. Anyone with the correct public key can see the information on the blockchain.
• There are no gatekeepers. No central authority necessary exists to manage your DID or verify credentials.

Since the decentralized identity solution has only recently emerged, developers employ different approaches with regard to how they are designed, created, and implemented. The World Wide Web Consortium (W3C) and the Decentralized Identity Foundation are the foremost organizations working on standardizing DID specifications to achieve effective interoperability.

Decentralized digital identity can also be used to verify the identity of an entity like an organization, computer application, or smart device.

Decentralized identity: example in action

Imagine you collect and store VCs of your driver’s license, birth certificate, college diplomas and professional certificates from certified issuers in a secure identity wallet. This wallet is linked to a unique identifier, recorded on a secure blockchain.

Let’s say you’re applying for a new job and the business asks for your educational certificates. With DID, you present the link to a credential verifying your degree to the verifier aka the employer.

The company verifies the authenticity of your credentials by checking the issuer’s digital signature against their public key on blockchain. Once you’re selected, the employer can use the same DID for onboarding. This allows for a faster and more secure onboarding process, eliminating the need for manual verification and reducing paperwork.

Benefits of decentralized identity for individuals and businesses

 Decentralized identity benefits both organizations and individuals by: 

• Enhancing security and privacy. Decentralized identity employs strong cryptography, which significantly reduces the risk of data breaches and unauthorized access. It also eliminates the risk of a single point of failure in the system since blockchain removes the vulnerability of central data storage. 
• Improving efficiency. The ability to share credentials from digital wallets allows for faster, more efficient interactions for both organizations and individuals compared to manual verification. 
• Reducing fraud. DID makes creating fake identities and committing fraud more difficult with its verifiable credentials and blockchain. This leads to fewer financial losses for organizations and a safer online environment for everyone. 

Decentralized vs. centralized identity management

As mentioned earlier, the key difference between centralized and decentralized identity management lies in who controls your data and how it’s stored. Here’s a breakdown of the difference between the two systems.

For more analysis, read our in-depth guide on centralized vs decentralized identity management.

Decentralized identity vs. self-sovereign identity vs. federated identity

People often confuse decentralized identity. self-sovereign identity (SSI), and federated identity. While all three deal with digital identity management, they  distinguish themselves like so:

• Decentralized identity broadly encompasses the concept of identity systems that don’t engage a single central authority to manage user data.
• Self-sovereign identity (SSI) is sometimes  – incorrectly – equated with decentralized identity, but it’s a specific type of decentralized identity. SSI users issue their own credentials and store them on their devices instead of on an external network.
• Federated identity is an existing IAM system in which multiple organizations or service providers rely on a central authority to verify user identities. It uses existing protocols like OpenID Connect or security assertion markup language (SAML) to enable login across different platforms. Logging in to various websites with your Google or Facebook credentials is a form of federated authentication.

Use cases of decentralized identity

A decentralized identity finds application anywhere a secure digital ID is needed. Here are some examples across different sectors:

Financial Services

Trust is everything in finance and decentralized identity gets used for numerous areas in this field, from opening bank accounts to recording credit scores. DID provides a secure, verifiable way to conduct know-your-customer (KYC) and anti-money laundering (AML) checks. This is crucial for traditional finance and even more so for emerging decentralized finance (DeFi) as part of the ongoing fintech movement.

Education and training

DID can securely store your academic certificates and anyone who needs to can instantly verify authenticity without contacting the issuing institution. This comes in handy if, for instance, you  move abroad for higher studies or a job, or even if your institution closes.

Blockcerts, started by MIT Media Lab, is an example of a blockchain-based certificate that can be shared, viewed, and verified.

Government services

DID can simplify access to essential services for citizens, immigrants and refugees. For example, the European Union is working on creating a digital identity for their citizens to access public and private services, both on and offline. Bhutan already rolled out a national identity system built on blockchain to all its citizens in 2023.

Healthcare

When the COVID-19 pandemic was raging in 2020, the World Health Organization, various governments, and identity providers worked on making “immunity passports,” or verifiable credentials about an individual’s vaccination status.

Today, the idea has expanded to use DID to store a person’s healthcare records, vaccination status, and other medical information. This can improve access to healthcare services and expedite insurance claims.

Supply chain transparency

DID can track a product’s journey through the supply chain, ensuring authenticity and ethical sourcing. Everledger, for example, uses digital ID on blockchain to track diamonds.

Online interactions

DID allows you to log in to websites and applications without revealing all your personal information. It eliminates the need for multiple usernames and passwords or reliance on third parties like Google or Facebook for logins.

Challenges to decentralized identity

As technology advances, decentralized identity will undoubtedly play a bigger role in identity and access management. However, significant challenges remain on the road to a truly decentralized ecosystem.

• Standardization and interoperability: Creating a universally compatible DID system across countries, platforms, and services also creates difficulty. W3C and DID are working on standards, but the variety of methods, documents, and identifiers complicates the process. This diversity fosters innovation but also causes confusion and hinders widespread adoption.
• Scalability: Supporting billions of DIDs requires robust technology and infrastructure. Current blockchain solutions often used for DID might need help with the sheer volume of identities and transactions.
• Cost: A large-scale DID system on blockchain raises concerns similar to cryptocurrencies, currently being held to account for their slow transaction time, high energy consumption, and environmental harm. However, alternative distributed ledger technologies are emerging to address this.
• Governance: Establishing responsibility for fraud or errors becomes complex without a central body. Clear rules and procedures for managing DIDs require governments and tech leaders to collaborate.
• Adoption: Few technologies or standards have ever truly become universal. DID faces the same challenge. Organizations and individuals will be concerned about switching from the traditional IAM system to a new one. 

The future of decentralized identity

Despite the challenges, experts believe decentralized identity solutions will take center stage in the coming years.

“Traditional centralized ID systems remain the default identity approach…However, DID and SSI solutions will soon mature, proliferate, and become the standard identity framework.”

Mark Campbell
Chief Innovation Officer, Evotek.

Scott Perry, the founder of the Digital Governance Institute, notes that any technology that requires global adoption follows a pattern. “You have to prove the tech. You have to promote the tech. You have to get the relying parties or players involved to accept the tech.”

And the stakeholders are currently warming up. “We’ve gotten to a point where governments are accepting the technology, and standards are being built as we speak. We have organizations jockeying for position because there’s profit to be made. So all things are well positioned now for roll-out.”

When we finally reach critical mass for user adoption, DID will change how we interact in physical and digital spaces.

Decentralized identity market overview

G2 shows 105 listings under our decentralized identity solutions category, with a mix of well-established technology companies like Microsoft and IBM, and startups like V-ID.

While G2 data suggests adoption across various industries, decentralized identity companies gain the most momentum in information technology and services, software, and network security. The financial services, accounting, and banking sectors follow closely.

With this in mind, let’s explore the top 5 decentralized identity solutions in the market. These solutions offer innovative approaches to identity management.

 

Your data, your rules

The idea behind decentralized identity couldn’t be more simple: you control your identity data. Blockchain, cryptographic encryption, and new standards for SSI have given life to this concept. Governments and the private sector are showing clear interest in propelling this technology to widespread adoption. Decentralized identity isn’t just the future; it’s an opportunity to unlock a more secure and empowered online experience – right now!

Learn how identity governance makes your digital assets more secure.