Logging in is no longer just logging in. After keying in a username and password, users are either prompted to input a sequence of numbers texted to their phone or “continue with” an account from an external platform — like Gmail or Facebook — that verifies their identity. While these multi-step authentication systems are designed to streamline the user experience and minimize the need for multiple passwords, they hand control of a user’s online identity over to third-party providers.
Decentralized identity wants to change all of that. Instead of relying on centralized systems that amass huge volumes of sensitive user information in large-scale databases, this Web3-inspired method of user authentication uses blockchain technology to return control and ownership of a digital identity back to the user.
Decentralized Identity Definition
Decentralized identity is a digital identification system that gives users full control over their personal information. Using unique keypairs and cryptographic hashes on the blockchain, users can securely manage their online data and selectively disclose verified information when necessary — without relying on central authorities.
What Is Decentralized Identity?
Decentralized identity is a type of digital identity management method that allows users to own their personal data without relying on central authorities. In this system, users create globally unique credentials known as “decentralized identifiers,” or DIDs, which represent an online entity of some sort — whether it be an individual, organization, government or even an IoT device — on a blockchain or distributed ledger.
Each DID contains a set of encrypted keys (private and public), verification methods and associated metadata — all of which is stored in a digital wallet. DIDs are used to cryptographically sign digital, tamper-proof documents, known as verifiable credentials, allowing users to share only essential information that can be independently verified.
Since personal data is not siloed into a central database, decentralized identity models pose less risk of exposing sensitive data, reducing the possibility of data breaches, hacks and misuse. The idea behind decentralized identity is to enable greater privacy, autonomy and trust in digital interactions by eliminating single points of failure and giving individuals full control over their own online identity.
How Do Decentralized Identities Work?
Decentralized identity systems involve three parties — holders, issuers and verifiers — all of which have their own respective decentralized identifiers, or DIDs.
- Holders are the owners of a personal document, known as a “verifiable credential,” which can be anything from a government-issued ID, university diploma, medical records to even a gym membership. These are stored in a holder’s digital wallet.
- Issuers are the organizations that authenticate documents issued to holders.
- Verifiers are the third parties that check the blockchain to verify a holder’s credentials.
Holders start by generating their own unique decentralized identifier, represented by a cryptographic hash that includes a set of linked public and private keys. So when a user signs a confidential document using a private key, only the randomized string of letters and numbers that corresponds with the public key is recorded on the blockchain. This keypair allows the user to securely sign documents, access accounts and prove ownership of their identity to verifiers.
Take, for example, this step-by-step scenario of how a decentralized identity model would work for a job applicant seeking a position as a driver for a ride-hailing company:
- The job applicant (holder) creates a decentralized identifier, and stores it in their digital wallet.
- They then receive a digital proof of their driver’s license in the form of a verifiable credential issued by the local licensing authority (issuer), which signs the credential using its private key. This cryptographic signature verifies the authenticity and validity of the driver’s license.
- The driver stores the license as a verifiable credential in their digital wallet as their own, much like a physical copy in a physical wallet.
- As part of the job application process, the holder is requested by the ride-hailing company (verifier) to provide proof of a valid driver’s license. The holder then shares their verifiable credential, which includes the document itself, a cryptographic signature proving the credential’s authenticity and DID, which is the alphanumeric public key sequence that links the credential to the holder.
- The company can now verify this information by cross-checking the blockchain with both the holder’s and issuer's DID, confirming the credential’s authenticity while also making sure the credential has not been revoked or tampered with in the time since originally issued.
Centralized vs. Decentralized Identity Management
Centralized identity management is the norm right now. In this system, single authorities — like a government, bank or tech company — store, authenticate and control user identities online. While its simplicity and ease of use have established centralized identity management as the standard, storing large volumes of data in one place makes them vulnerable to attack.
Alternatively, decentralized identity management allows individuals to own and control their digital credentials using blockchain or distributed ledgers. They use encryption techniques that enable secure, tamper-resistant authentication and selective data sharing independent of intermediaries. The idea is to reduce reliance on third parties and enable users to take back their online identities. However, decentralized identity is more complex, puts more responsibility on the user and is still in the early stages of adoption, as there are not very many interoperable platforms just yet.
Decentralized Identity Use Cases
Below are some examples of how decentralized identity can — and is — being applied in everyday activities.
- Voting: Decentralized identification allows voters to verify their identity securely and cast tamper-proof votes digitally without the concern of third-party interception.
- Fintech: In digital banking and DeFi, DIDs are primarily being used to streamline know your customer (KYC) processes — allowing users to verify their identity once and selectively share only necessary credentials with financial institutions — which reduces fraud and compliance costs.
- Money transfers: DIDs can be used to verify sender and receiver identities securely without relying on traditional banks or centralized verification systems. It also enables faster, more private cross-border transactions.
- Online purchases: Online shoppers use DIDs to prove who they are without the need to input their personal data at check out on each website they make a purchase.
- Age verification: Decentralized identity enables users to prove they meet age requirements without revealing personal details, like their full birthdate or home address. Some use cases include purchasing controlled products, like alcohol or medicine, as well as entering an age-restricted venue, like a bar or club.
- Medical records: Through DIDs, patients can securely store and control access to their own medical records. This way, they are able to share only essential information from their medical history with healthcare providers across different hospitals and clinics while minimizing the risk of unauthorized access or targeted cyber threats to their data.
- Airport check-in and border control: Travelers can use digital identities for seamless airport check-in, border control and visa clearance with verifiable credentials stored in a digital wallet.
- Employee background checks: DIDs allow job candidates to securely share verifiable credentials, such as employment history and certifications, while also allowing businesses to streamline the background check process.
- Supply chain verification: Businesses can cross check the identity of suppliers, manufacturers and vendors to prevent fraud in supply chains.
- IoT security: By giving each IoT device its own DID, users prevent unauthorized access from breaching smart homes, factories and other connected systems.
Advantages of Decentralized Identities
Below are several benefits to decentralized identity management systems.
Enhanced Privacy
Because users have control over their data, they are in charge of what information is shared and who it is shared with. When accessing a service provider, only necessary data — and nothing else — is disclosed.
For example, when a person shows their driver’s license at a bar or hotel check-in, the bartender or front-desk agent has immediate access to nonessential information, like the holder’s full legal name and home address. With selective disclosure, DIDs minimize access to personal information, reducing the risk of data breaches, unauthorized access and misuse.
Improved Security
Identity providers store vast amounts of sensitive user data — login credentials, home address, employment status and payment details — in one location, which make them common targets for hackers. This creates a single point of failure, meaning one successful breach can expose valuable data for millions of users. Notable examples include Yahoo’s notorious 2012 data breach and the 2018 attack on Aadhaar, India’s national ID database, which leaked the personal details of more than one billion user accounts and registered citizens, respectively.
Decentralized alternatives are specifically built with technology like tamper-proof, immutable ledgers, public-private key pairs and cryptographic verification to authenticate without the risk of exposing such information.
User Ownership
When you have autonomy over your digital identity, you get to control how your personal information is used, shared and protected. This keeps data collecting entities, like tech companies, government agencies and financial institutions at bay, preventing them from exploiting or monetizing your information without your consent.
Interoperability
Decentralized identity systems use open, standardized protocols to exchange identity data across multiple services and networks. These common standards ensure that DIDs can be resolved, verified and trusted from one compatible application to another, regardless of the underlying technology or service provider. With streamlined access, users can move seamlessly between digital ecosystems without having to make a new account on every site.
Disadvantages of Decentralized Identities
Still, there are some setbacks to changing how we verify ourselves online.
Increased User Responsibility
Users are responsible for managing their own cryptographic keys and credentials in a decentralized identity system, which can be complex and intimidating — especially for non-technical individuals. If users lose their private keys or recovery methods, they risk permanently losing access to their digital identity, with no central authority to help restore it. Greater online autonomy comes with more responsibility, which may not be worth the burden to some users.
Adoption Barriers
Building decentralized identity management systems requires a complete revamp of existing infrastructure. At this point in time, many organizations lack the technical expertise to implement such systems and have little incentive to invest in yet another costly, time-consuming digital transformation trend. Without universal standards and proper user education, it’s possible that the tech simply hasn’t come far enough along for widespread adoption just yet.
Lack of Universal Standards
While DIDs are based on open standards, there’s not really a platform-wide consensus on the best practices and protocols for operation. A lack of universal standards leads to fragmented systems, where identity management and service providers clash over incompatible formats and credentials — ultimately undermining the entire system. Much like how drivers licenses and passports are official documents recognized by statewide and international authorities, a similar concept is essential for DIDs to achieve interoperability and widespread adoption.
That said, leaders in this space are making moves to correct this, with groups like the Decentralized Identity Foundation and the Trust Over IP Foundation announcing support of the World Wide Web Consortium’s recommendation to accept decentralized identity as a standard in 2022.
Scalability
Managing and processing large volumes of decentralized identity data — especially on blockchain-based systems — can be resource-intensive and challenging as systems scale, potentially leading to slower performance or higher operational costs. This is why layer 2 protocols, which relieve the main blockchain network by processing transactions in batches off-chain, are gaining popularity.
Frequently Asked Questions
What is an example of a decentralized identifier?
A decentralized identifier is a generated, alphanumeric key made up of a unique string of characters. It’s registered on a blockchain or distributed ledger, where it enables individuals to own and control their digital identity. A DID on the Ethereum blockchain might look like: did:ethr:0x1234567890abcdef1234567890abcdef12345678
What is centralized vs. decentralized identity?
A centralized identity is controlled by a single, third-party entity, such as a government or service provider, which manages and stores user information in centralized databases, whereas a decentralized identity gives individuals control over their own personal data and who they share it with by way of blockchain technology.
