It’s not an overstatement to say that Decentralized Identity is revolutionizing the way identities are managed. And the revolution is gaining momentum. Gone are the days when businesses need to store honeypot silos of sensitive personal data. With the increasing cost and challenges associated with data privacy, mounting regulation, and compliance requirements, plus the ever more sophisticated scams and rampant fraud and false positives diminishing the bottom line, organizations around the world are looking to Decentralized Identity solutions to offer their customers a better user experience while simultaneously bolstering their privacy and security and preventing fraud.
Before we delve into the numerous benefits of Decentralized Identity, let’s take a quick look at how we got here…
Centralized vs Federated vs Decentralized
In the beginning, there were centralized identities. Emerging around the same time as the early computing systems, centralized identity management is the traditional method for managing digital identities. With one central authority controlling all aspects of an identity, this model is used by large enterprises and governments but has its limitations, particularly in terms of interoperability and having a single point of failure.
Federated identities evolved in the late 1990s to address some of the interoperability and scalability challenges encountered with the centralized model. With consumers beginning to use more and more services online, the federated system removed the need to have individual login credentials for every account and allowed people to access various services via one set of credentials. Whilst the single sign-on feature associated with federated identities definitely enhanced the end-user experience in terms of convenience, it did little to improve privacy and security - and in certain instances, it led to misuse and abuse of customer data. If one of the identity providers in a federated system suffered a security breach, it impacted the whole federation, and the security concerns remained.
If centralized to federated could be described as an evolution, then centralized to decentralized should be described as a revolution. Flipping the old model on its head, decentralized identity removes the need for a centralized authority altogether and places that control in the hands of the user. It’s the individuals who own and control their own identities, and there’s no reliance on a centralized third party, massively reducing the attack surface as there’s no single point of failure. Evolving over the last ten years, it was the emergence of new technologies - such as blockchain - that helped make this decentralized model possible.
One helpful way to remember the differences between these three models is to think about them in terms of who holds the private keys and who has access to the data. In a centralized system, a single business entity stores and manages the private keys and has access to the data, like a bank. In a federated system, the private keys are also held by the business or service providers and the data can be used and abused by that business or service, often these services are provided free in return for data tracking and use, like Facebook does. In a decentralized system, the private keys are held by each individual participant in the network - i.e. the end users themselves and the businesses or merchants within the network.
At this point, it should be stated that whilst each model has its own unique set of characteristics, it doesn’t simply have to be a case of ‘either-or’. One misconception is that businesses have to employ one type of model and stick with it. That’s not the case though, and in fact, adding decentralized components to centralized systems can enhance and improve the privacy and security of existing systems.
Most enterprises have spent considerable time and money on their identity systems and the idea of ripping that out wholesale and replacing it with a new decentralized system can be both worrying and concerning. A better way to think about it is introducing a decentralized layer to your stack that interacts with your existing identity systems, adding benefits and improvements to the areas of the identity lifecycle where decentralization excels (e.g. Identity Verification, Credential Management, Authentication and Data Management).
Key Concepts and Terms
Now that we’ve established the drawbacks of centralized and federated systems and why decentralized identity emerged, let’s look at some of the common phrases and components you’ll encounter when exploring this topic in more detail.
Self-Sovereign Identity (SSI)
As mentioned above, decentralized identity gives users ownership and control over their data. This is often referred to as self-sovereign identity. It’s the individual - and the individual alone - who decides when and with whom they share their data. No trusted third party, corporation, or central authority can access that data unless the user grants them access. It should be noted that decentralization and SSI aren’t mutually exclusive, and there are self-sovereign solutions that aren’t decentralized - but we’ll save that topic for another day!
Decentralized Identifiers (DIDs)
This self-sovereignty is made possible, in part, by Decentralized Identifiers, commonly known as DIDs. One of the core building blocks of decentralized identity, DIDs are globally unique identifiers that enable people or organizations to identify themselves without relying on a centralized authority.
Verifiable Credentials (VCs)
In their simplest form, Verifiable Credentials can be viewed as digital counterparts to your existing physical identity documents. Stored in a digital wallet and leveraging cryptography to make them both secure and tamper-proof, VCs offer many benefits over their physical counterparts, particularly ‘selective disclosure’. For example, in the past, if you had to prove your age for a certain transaction (e.g. buying alcohol), you would have to show your driving license, which, along with your date of birth, contains your photo, full name, address, and other pieces of sensitive data which are irrelevant for this transaction. With selective disclosure capable Verifiable Credentials, you can share just the piece of data that is required for the transaction - e.g. your full name, whilst keeping all of the other pieces of sensitive data private.
Interoperability
A decentralized identity can be carried across different platforms and devices, unlocking the potential for seamless interoperability between different services. Users own and control their data, along with their verifiable credentials, which can then be used as part of their transactions. With centralized silos of data becoming redundant, users can experience a much more frictionless, seamless, and convenient journey as they move from service to service, reusing their self-sovereign identity across all services.
What the Future Holds
As with any emerging technology, there are challenges - e.g. regulation and standardization - but we’re already seeing positive advancements in all of these areas to help keep pace with the tech and enable decentralized identity to reach its full potential.
We know firsthand from our work with The Bank of England and the European Commission that major organizations and networks around the world are looking at decentralized identity when it comes to building unparalleled private, secure, frictionless, user-centric systems for the future.
In Gartner’s Hype Cycle for Digital Identity, 2023, Decentralized Identity and Verifiable Credentials were given the ‘Transformational’ benefit rating, which they define as enabling, “new ways of doing business across industries that will result in major shifts in industry dynamics”. Additionally, Identity Wallets were given a benefit rating of ‘High’, defined as, enabling, “new ways of performing horizontal or vertical processes that will result in significantly increased revenue or cost savings for an enterprise”.
This transformational technology truly has the means to unlock new opportunities for businesses in all sectors. We’d love to understand how you think decentralized identity can empower your enterprise and how it can help you build a more private, secure, resilient and inclusive digital future.
Nuggets is a Decentralized Self-Sovereign Identity and payment platform that guarantees trusted transactions, verifiable credentials, uncompromised compliance, and the elimination of fraud - all with a seamless user experience and increased enterprise efficiencies.
We’re building a future where digital identity is private, secure, user-centric, and empowering.
We’d love to hear from you if you want to enhance your data privacy and security offering.
You can learn more about our solutions here or get in touch with us here.