What Is Decentralised Identity, and How Does It Work?

Learn about decentralised identity, and how blockchain and verifiable credentials reshape digital privacy, security, and user control in Web3.

Introduction

The question of ‘how we prove who we are online’ is an intricate one to tackle. Traditional identity systems rely on centralised authorities like governments, corporations, or social platforms to manage and verify personal information. This often comes at the cost of user privacy and data security.

Decentralised identity offers a new model, one that puts control back into the hands of individuals. Using blockchain technology and cryptographic tools, decentralised identity systems allow users to manage their own digital identities securely and privately.

This article explores what decentralised identity is and how it works, plus includes real-world applications in the space and answers why decentralised identity may be a cornerstone of the Web3 future.

What Is Decentralised Identity?

In Simple Terms

Decentralised identity gives individuals full ownership over their personal data, as anyone can manage their own identities, which are secured by cryptography and stored in a decentralised system. 

This affords greater privacy, control, and portability for individuals instead of having their identities stored and controlled by third parties like Facebook, Google, or a government agency.

The Details

In today’s digital world, most netizens log into websites using credentials issued by corporations (Google, Facebook, etc.) or rely on documents managed by governments (passports, IDs). 

These credentials are typically stored in centralised databases, making them vulnerable to data breaches, susceptible to surveillance, and controlled by third-party entities.

Decentralised identity turns this model on its head. Instead of relying on a central issuer, individuals can create and manage their own identifiers. These identifiers are anchored on a blockchain or distributed ledger, eliminating the need for any single entity to grant access or store sensitive information.

How Does Decentralised Identity Work?

The heart of the decentralised identity system includes decentralised identifiers (DIDs), which are unique, cryptographically secure identifiers not tied to a central registry. Unlike an email address or a username, a DID is not issued by a service provider, but is generated by the individual, often using a wallet or identity management tool. 

These identifiers are paired with verifiable credentials (VCs), which are cryptographically issued digital records (like a diploma, ID card, or employment certificate) signed by trusted issuers. VCs can prove specific facts about an individual (e.g., age, nationality, qualifications) without exposing all personal information. 

The decentralised identity system involves three key roles: the holder, the issuer, and the verifier.

• Holder: Creates and controls their own identity. DIDs and associated credentials are stored in a secure digital wallet, often on mobile devices or computers.
  
• Issuer: An entity, such as a university, government agency, or employer, that issues verifiable credentials. For example, a university might issue a graduate their digital diploma cryptographically signed and linked to the graduate’s decentralised identity.
  
• Verifier: Any entity needing confirmation of someone’s identity or claim. For example, a potential employer could ask to verify a candidate’s academic qualifications, checking the cryptographic signature on the diploma using blockchain instead of contacting the university directly. If the credential is valid, the employer can trust the information without needing access to personal records.

This process works thanks to public key cryptography. The holder has a private key that proves ownership of a decentralised identity, while the verifier uses the corresponding public key to check the credential’s validity. No sensitive data needs to be stored or transmitted across insecure channels, and no central database needs to be accessed. 

Additionally, selective disclosure tools, like Zero-Knowledge (ZK) proofs, enable holders to reveal only data that’s necessary, such as proving they’re of legal age without showing their full birthdate, which enhances privacy.

What Are the Advantages of Decentralised Identity?

What makes decentralised identity powerful is that it operates on zero-trust principles and privacy-preserving technology, offering significant improvements over traditional, centralised models. These benefits extend beyond privacy and security, contributing to a more portable, interoperable, inclusive, and resilient digital identity framework.

Key Advantages:

• Privacy-Preserving Verification: Verifiers can confirm the authenticity of a credential without accessing or storing personal data, thanks to blockchain-backed signatures and ZK proofs.
  
• Elimination of Central Points of Failure: Decentralised identity systems remove the need for centralised databases, reducing the risk of large-scale data breaches and censorship.
  
• Increased Uptime and Efficiency: Decentralised verification removes bottlenecks and lowers friction by enabling real-time authentication without intermediaries.
  
• Cross-Platform Portability: DIDs are not locked into a single ecosystem. Credentials can be used across applications, services, and even national borders.
  
• Support for the Unbanked and Undocumented: Decentralised identity frameworks allow individuals without access to traditional IDs, such as refugees or the unbanked, to establish trusted digital identities and participate in the digital economy.
  
• User-Centric Control: Individuals manage their own credentials and determine what data to share, creating a self-sovereign identity model grounded in autonomy and consent.

Do Use Cases for Decentralised Identity Already Exist?

Real-world applications of decentralised identity systems are being explored, and some universities are issuing blockchain-based diplomas that students can directly share with employers. Banks are using decentralised identity systems to streamline Know Your Customer (KYC) processes without storing sensitive data. Additionally, some governments and healthcare systems are piloting decentralised ID solutions to improve security, reduce fraud, and empower citizens.

In essence, decentralised identity represents a shift towards self-sovereign identity, a model where people have greater control over who they are online, how they prove it, and who gets to see their data. It’s a critical piece of the Web3 vision, potentially offering a safer, more equitable foundation for digital life.

Real-World Decentralised Identity Projects

A number of major tech companies, blockchain platforms, and standards organisations are building decentralised identity frameworks. Below are a few examples.

Microsoft Entra Verified ID 

A decentralised identity solution based on open DID standards, enabling organisations to issue and verify credentials (e.g., digital signatures) stored on users’ devices. It supports privacy-preserving verification, such as proving qualifications without revealing sensitive details.

ION (Identity Overlay Network)

ION is a decentralised identity network developed by Microsoft and built on the Bitcoin blockchain. It uses a Layer-2 protocol to create and manage DIDs in a scalable and censorship-resistant way. ION is open-source, runs without needing tokens or consensus mechanisms, and is aligned with the W3C DID standard.

Polygon ID

Tailored for Web3 applications (e.g., decentralised autonomous organisations) and built on the Polygon blockchain, Polygon ID focuses on privacy-preserving identity using ZK proofs, enabling users to prove facts about themselves (e.g., nationality, age, or membership) without revealing personal data. It supports self-sovereign identity through a native wallet, software development kits (SDKs), and integration tools.

Worldcoin World ID

World ID is a privacy-focused, decentralised digital identity protocol designed to prove an individual’s humanness and uniqueness online without requiring personal data like names or emails. World ID is part of the Worldcoin project and offers a ‘proof of personhood’ system using biometric verification (iris scanning). 

While controversial, it aims to provide a global digital ID for individuals, particularly those without traditional forms of identification, in order to participate in digital economies.

Summary Table: Decentralised Identity Projects

Conclusion

As the digital world evolves, so too must the way we manage identity. Decentralised identity systems offer a compelling alternative to traditional, centralised systems by putting control back into the hands of individuals. By combining cryptographic security with privacy-preserving technologies, decentralised identity systems promise greater autonomy, inclusivity, and resilience against fraud and data breaches. 

While challenges around usability, regulation, and adoption remain, the growing momentum behind decentralised identity projects suggests that a more secure and self-sovereign future may already be underway. As we move deeper into the Web3 era, decentralised identity systems may become the cornerstone of trust in these increasingly digitalised times.

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