🤔 How Decentralized Identity Can Take Crypto to the Next Level

Hello Defiers!

Get ready for DID — it’s a term you’re going to be hearing a lot more about. In this special edition of our Monday newsletter, Humpty Calderon, the head of community at Ontology, takes a deep look at an element in DeFi that’s long been overlooked — identity. Humpty posits that blockchain technology provides us with a way to essentially watermark our online selves and ensure that we control the digital activities that affect our lives. It’s an idea that drives to the heart of the DeFi proposition. Check it out.

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DeFi Essay

🤔 How Decentralized Identity Can Take Crypto to the Next Level

Over the past year, there has been a notable increase of awareness and interest towards decentralized identity solutions. Decentralized identity solutions help users, amongst other things, to control their digital identity without the input of intermediaries. As well as the individual user benefits, decentralized identity solutions have the potential to create seamless, accessible, and verifiable ecosystems. Decentralized identity holds the potential to solve many issues across the DeFi sphere and more.

What is decentralized identity?

To begin with, it is important to define what we mean by decentralized identity or DID. A DID can be provided to anyone or anything, be it a person, organization, or device. In contrast to typical identifiers such as drivers licenses or passports, DIDs have been designed so that they do not rely on centralized registries, identity providers, or certificate authorities. 

For example, key pairs used for creating digital wallets are siloed to the blockchain where they are created. DIDs on the other hand can operate across a variety of platforms including different blockchains. Together with verifiable credentials (VCs), people can create a more robust version of their identity, linking real-world credentials like your college degrees and certifications, social media accounts, and government-issued documents such as a driver’s license or passport under one secure ID.  

While identity issuers and verifiers may interact to discover information related to a DID, the design enables the DID holder to have complete control over their identity and data, choosing what information, if any, they wish to share with any other party. What this looks like in reality is that users who make use of decentralized identity protocols, can securely manage their digital identity by storing it on a phone or cloud service with a private key that grants access to the verified user only.

What are some of the challenges that DID seeks to solve?

Right now crypto mainly revolves around monetary use cases. Exemplifying these are decentralized apps (dApps), which favors capital over membership or contributions made to ecosystems. Plutocratic (one-token-one-vote) systems reinforce an unfortunate cycle that makes most dApps speculative and only beneficial for those with capital.  

A more desirable and egalitarian model would be to create an ecosystem that offers one-human-one-vote use cases. DID can play a role in this, by seeking to provide humans active within the crypto ecosystem with the ability to verify their identity and use their on-chain reputation to create more accessible, secure, and rewarding experiences. 

Rather than creating crypto whales, integrating DID into crypto protocols can ensure that participation is open to all and money can be more evenly distributed around ecosystems. As well as this, one-human-one-vote protocols, backed up by DID can help to more accurately quantify participation in governance, unshrouding the makeup of certain protocols that give members votes based on capital.

DeFi

When it comes to DeFi, DID can help fix some of the issues associated with airdrops. If projects only airdropped to users verified using DID protocols, they would ensure the fair distribution of tokens across participant pools. Members would have to be authenticated, reducing the potential for bots to drain airdrop contracts, which is a pressing issue for some in the DeFi space.  

DID protocols allow for credit evaluation systems to verify users scores and background based on data stored on blockchain. This means that users can access credit-based lending, whilst still maintaining control of their identity. Through DID, all parties are able to access decentralized financial systems, not just whales. 

Reputation systems that measure on-chain behavior can help to split out responsible borrowers from degens, essentially making the whole system more robust and reliable. DID can facilitate giving users a self-sovereign credit score that they can use to access credit, borrow, and invest.

NFT

There are exponential benefits wrought from implementing DID solutions in the realm of NFTs. NFTs, which have experienced an unparalleled surge of interest in recent months have many potential use cases, but have been mainly popularized by their usage in digital art. By deploying DID solutions with NFTs, buyers and sellers will be able to verify the creator or any given digital artwork, as well as the collector. 

This ensures that representative value will be transferred to the creator or seller. DID could also be implemented to help keep NFTs in the hands of the communities that support them, instead of scalpers who mint tokens for speculation, raising the price of tokens, making it near impossible for those without capital to access them.

DAO

DAOs are groups of people working towards a common goal with a shared bank account. Without tools to measure community needs and member contribution, they can fail to assess the needs of their members or fairly incentivize good contributors. 

DAOs using token-based governance prioritize the views and needs of large token holders who may not be active contributors, leaving out groups of people that may be active contributors but not hold large amounts of tokens. DID can enable governance mechanisms that more accurately measure community opinion. 

It is crucial that DAOs recognize members ntives to be used to reward and retain good people. 

Furthermore, as DAO members become proficient in their roles, DIDs can allow them to create verifiable resumes to present their contributions to other DAOs who may then assess their value up front and incentivize them accordingly. 

What are some projects developing DID protocols?

Ontology brings trust, privacy, and security to Web 3.0 through decentralized identity and data solutions. They’ve developed a comprehensive identity infrastructure including an identity wallet that allows you to easily create digital identities, a composable, cross-chain reputation protocol, and a DeFi protocol that leverages your decentralized identity and self-sovereign reputation to enable undercollateralized loans. Learn more about Ontology.

 Bright ID is a social identity network that allows you to prove that you’re only using one account. Creating your digital identity is as simple as installing an app and verifying your identity by joining a connection party. You can enjoy the benefit of your unique identity straight from the app. Learn more about BrightID .

 Idena is the first proof-of-person blockchain based on democratic principles. Every user has a crypto identity – one single person with equal voting power and mining income. Every unique human that operates an Idena validator node can start mining Idena. To verify you are a unique human, you do not need to disclose any personal data (no KYC). You join a validation ceremony and solve a series of flip-tests (human-made CAPTCHAs). Learn more about Idena.

Serto is a decentralized identity platform making it easy for everyone to exchange data in a trusted, private and scalable way. Easily verify the issuer of any piece of data. Turn free-form data into verifiable credentials, issue them to partners and customers, and integrate data from other parties into your processes – all in a trusted way. Learn more about Serto.

 Gitcoin connects the community developing digital public goods, creating financial freedom, and defining the future of the open web. They’ve developed the Proof of Personhood Passport, a transportable proof of personhood identity for the web3 space that allows you to earn rewards by proving your personhood on any integrated dApp, leveraging the same identity you already use on Gitcoin Grants. Learn more about Gitcoin. 

What does the future hold for DID?

The prominence of decentralized identity solutions within and outside the blockchain and crypto industry is likely to grow exponentially in the coming years. The more the lines are blurred between digital and physical life, the more our online identities will grow and evolve in complexity. If these identities are stored among multiple centralized systems, they will become harder to manage. Decentralization solves these problems, and the impact it will have on the future will likely be significant.

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