What decentralized identity brings to Web3.0?
Introduction
In our daily life, we frequently interact with different identities such as email addresses, social media accounts, passports, and more. This data is generally stored in centralized servers and controlled by third-party companies, so owners of identities have no control over this information. What’s worse, if the organization bans the owner from accessing its services or the organization ceases to exist, the data stored will be eliminated.
Nowadays, more people have started to pay attention to the privacy and security of their personal data. The Decentralized Identity, a.k.a DID, has developed rapidly in the past few years. The development of DID benefits from the emergence of blockchain technology and the impact of COVID-19 on offline authentications. As a report from KBV Research says, the global decentralized identity market size is expected to reach $8.9 billion by 2028, rising at a market growth of 78.5% compound annual growth rate during the forecast period. The commercial potential of DID products deserves more attention.
In the development of DID, there is still debate around its specific definition. Currently, the most accepted standard for DID is made by W3C.
The three core elements in this system are:
DID: The Decentralized Identifier, is defined as a URI composed of three parts: the scheme did, a method identifier, and a unique, method-specific identifier specified by the DID method. DID is resolvable to DID documents.
DID Document: DID documents contain information associated with DID. They typically express verification methods, such as cryptographic public keys, and services relevant to interactions with the DID subject.
Verifiable Data Registry: System that supports recording DID and returning data necessary to produce DID documents. Examples: Distributed ledgers, and peer-to-peer networks.
With this DID system, users will not reveal their identity when authenticating. In the creation of DID, a third-party agency writes the identity certificate into DID Docs according to information provided by the user. During authentication, the owner of DID only needs to give the authenticate permission to access a specific DID Doc without revealing a practical identity.
Why DID is important to Web3.0?
In current Web3.0, the identity certificates we talk about generally refer to the wallet address. However, since the creation of the wallet does not require any additional verification procedures, a large number of “fake” identities get created. In “Decentralized Society: Finding Web3’s Soul”, Vitalik also points out that the lack of native web3 social identity prevents Web3.0 applications from getting rid of the Web2.0 business model to develop their native products of Web3.0.
DeFi
This problem greatly impacts the development of DeFi projects, so they cannot even provide low-mortgage lending services like in traditional finance, which declines capital efficiency in the crypto market and goes against the idea of providing financial services to people that are ignored by traditional finance. Due to a lack of liquidity/capital efficiency, even the blue-chip DeFi projects are performing poorly during the bear market.
Reducing or canceling collateral will be the key to the next wave of DeFi booming, and a mature and effective DID system is the premise to achieve this goal.
DAO
DAO is also a concept that has gradually matured with the development of blockchain technology. DAOs typically use token-based governance systems and voting weights increase as token holdings rise. Such a system can work stably in isolated environments but are quite inefficient when they need to cooperate or build a larger ecosystem together.
By implementing contributions into DID identities, contributions become transferable between DAOs, allowing good contributors to develop different DAOs at the same time. In addition, Web3.0 projects can easily find excellent candidates through DID identity instead of using the less efficient Web2.0 recruitment method.
NFT
The booming of NFTs last year led to a new wave in the Crypto market, and brings $ETH hits new ATH in November 2021. NFT provides artists with a new monetization channel and enables them to build their community independently. However, without a unified DID system, plagiarism and fraud can cause a significant impact on the confidence of the NFT market. It also makes it difficult for artists to communicate effectively with their fans.
With DID infrastructures, creators can protect their rights as content creators. Buyers and sellers in the secondary market will also be able to verify the origin of their collections. Additionally, it can prevent speculations from the community, and provide exclusive content to fans.
Airdrops
Airdrop is always one of the most popular features in crypto. Projects use airdrops to accumulate their first user base and community engagements. Such a model naturally attracts the attention of speculators. Airdrop farmers start to grid airdrops by creating numerous wallets and interacting with the project. To avoid this malicious attack, projects keep raising the barrier to getting airdrops these days. But the overly complex quests also prevent new crypto players from joining the airdrop campaign.
With DID authentication, the project can ensure sufficient attention was received during airdrop events while reducing the barrier for users to participate in this event.
How DID integrates with the current Crypto market?
On-chain Credit protocol
The credit model is the cornerstone of traditional finance as it enables more borrowers to receive loans from banks or institutions without having to post collateral. There are some DeFi protocols started to establish credit systems within their ecosystem.
Goldfinch is a lending protocol that connects real-world businesses with the crypto market. The protocol is based on a principle called “trust through consensus”, that borrowers show creditworthiness based on the collective assessment of other participants rather than based on their crypto assets. Although this credit system is not fully on-chain, as it is combined with off-chain legal agreements, it still expands the boundaries for the application of the DID system in DeFi.
On-Chain Identity Aggregation
The demand for integrated on-chain identities is expected to increase as a large number of Dapps have been developed these years. The interoperability of personal identity data stored in different Dapps is fundamental when prompting the whole ecosystem to move forward. Besides interoperability, a unified data structure or identifier is also crucial for the multi-chain ecosystem in the future. With an identity aggregator, protocols can provide services to users by receiving identity data from a single identifier.
Litentry is a DID aggregator on Polkadot that enables linking user identities among multiple decentralized networks. It established an identity-based network to store user activity data and identity authentication. Protocols can access this data after receiving permission from owners.
Future of DID
Although Decentralized Identity has come a long way, its adoption in Web 3.0 is still in its early stages. Similar to KYC as the entrance of CEX, the DID infrastructures will become the entrance of Web3.0 in the future. This will inevitably lead them to compete directly with the current entrance, wallets, but DID itself can hardly capture value since the value of user identities is determined by the ecosystem. It is more likely that multi-chain wallets will integrate with DID system in the near future and become identity aggregators.
It is still difficult for us to determine how the DID system will explode now, but as an indispensable product for Web3.0 in the future, it will bring new possibilities to the crypto market.
Disclaimer: This research is for information purposes only. It does not constitute investment advice or a recommendation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision.
🐦 @SoxPt50
📅 10 October 2022
Link:
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4105763
[2] https://mirror.xyz/shreyjain.eth/TyBzMOegl3rMNxpAFoJ36MjE0pGfdLcrVCBgy-x3qS8
[3] https://www.nasdaq.com/articles/the-risks-and-benefits-of-on-chain-credit-protocols
