Significance Of Decentralized Identity And Its Working

PersonOutlineIconUPYO.comCalendarTodayIcon April 20, 2023AccessTimeIcon 10 Mins Read
PersonOutlineIconUPYO.comCalendarTodayIcon April 20, 2023AccessTimeIcon Mins Read
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How secure are your identity credentials in this internet era? The answer is decentralized identity. Today, virtual identity is interrelated through various online applications and services, and your information is no longer private. Service providers and various other organizations control your digital personal information and have complete access to it without your interference.

Moreover, people nowadays grant permission to various apps to access their digital information, which makes it hard for them to manage their data. Additionally, this kind of centralized framework is prone to cyber-attacks too. Thus, to address all these issues, users must have control over their information to know where and how it is shared.

This can happen if a decentralized system comes into play. This article will look into the basics of decentralized identity blockchain and decentralized identity foundation.

decentralized identity foundation

Decentralized Identity: What exactly is it?

In short, this is a type of identity that is independent of any central entity or third parties. It is also known as a self-sovereign or self-owned identity that facilitates the trusted exchange of information. This is an identity management model that offers people complete governance over their information/data, and thus, it is also called an independent identity.

In a way, this is seen as an upcoming Web3 concept with a trusted structure/framework embodying a particular methodology used for identity and access. Thus, users can use this framework to create, handle, and govern their ‘Personally identifiable information (PII)’ on their own without any interference from a central authority (certification authority or registry).

SSI, or Self-sovereign identity, forms the core idea of this framework and pertains to distributed database usage to govern the private virtual credentials. This kind of identity management system comprises digital wallets which help users record and save their various ID information securely.

This concept is different from the traditional identity management framework, where a centralized entity manages and controls various sets of identities that are spread across numerous platforms.

SII has three major elements – blockchain, VC or verifiable credentials, and DID or decentralized identifiers.


A decentralized database (virtual) or, in other words, a digital ledger that records transactions. It is a distributed system that is spread across a network or a mesh of computers that record information or data in a secure way so that it is hard to change or hack it.

Verifiable credentials

These are nothing but authenticated credentials that are fraud-proof and secured cryptographically. It makes use of SSI to secure the information of individuals. These are usually information or, in other words, paper credentials like licenses, passports, bank accounts, and also digital credentials.

Decentralized identifiers

This is a brand new category of identifier that lets individuals have a cryptographically attestable, decentralized digital identity. These identifiers are usually created and owned by individuals without the inference of any organization. They can be related to an individual, organization, data models, abstract entities, and many more, as decided by the DID controller. 

Apart from these three elements, there are other components – holder, issuer, verifier, and wallets.

Differences between decentralized and centralized identity

Centralized identity

Personal information is under the control of a centralized organization or institution that owns and manages it.

Personal information can be shared, stored, and collected without the permission or knowledge of the users’.

There’s a heightened threat of leakage of data as the information gets stored in a centralized framework.

Decentralized identity

Personal information is completely under the control of users who also own them.

Personal information is shared with other sources with user permission.

Reduced risk of a vast data intrusion as the information is stored in digital wallets.

Significance of decentralized identity

decentralized identity blockchain

This type of identity matters a lot as it assists individuals and institutions in communicating with each other in a secure and apparent manner. In short, this type of identity gives users control over their personal credentials.

The decentralized, ciphered blockchain-based wallets are the foundation of this type of identity. In fact, the wallet along with special apps are used by the users to:

  • Generate decentralized identifiers
  • Save PII
  • Handle VCs

This framework eliminates the use of third parties, which happens when we use a centralized identity framework. Also, as discussed above, the wallets used in the decentralized framework are encrypted. The wallets can be accessed through non-phishable cryptographic keys instead of passwords. The cryptographic keys will include public and private keys, each serving a distinct purpose. The private key is stored in the wallet, and it is required for the authentication process.

The decentralized wallets secure users’ information and their communication in addition to performing a transparent authentication process.

Advantages of decentralized identity:

Better user control

Improves and lends control to users with respect to identifying information. A centralized authority or third parties is not required to verify decentralized identifiers and attestations.

Amplified security

The blockchain technology used in the decentralized identity framework enhances the security of the information and reduces the risk of identity thefts and data breaches.

Tamper-proof verification

This framework offers a seamless and trustworthy method to verify and handle user credentials, thereby helping prevent fraud or scams to a great extent.

Improved privacy

Users will get complete control over their credentials, and only they have the power to share their information with others. Furthermore, it decreases the risk of censorship and surveillance.


There is no need for the users to create multiple identities since decentralized identity supports interoperability. Users can access and share their information across various platforms or applications easily.

Use cases of decentralized identity

Decentralized identity has numerous use cases, such as:

KYC authentication

Usually, authentication or attestation is necessary for various services and applications, like driving licenses, passport, bank accounts, and so on. However, authentication for all these services is done through a centralized identity framework with a centralized service provider managing the information.

The problem with this system is that the information stored here can be compromised, and also the service providers cannot verify the authenticity of the attestation. This problem can be solved by decentralized identity as it bypasses the conventional KYC process and instead employs verifiable credentials for authentication. This helps save costs in identity management and reduces the use of fake documents.

Login help

Logins usually require passwords for authentication which does have its own share of flaws and weaknesses. However, a decentralized identity framework replaces passwords with decentralized authentication where the service providers provide attestations that can be stored in an Ethereum wallet.

Apart from these, decentralized identity has other use cases, such as Voting and online communities and Anti-Sybil protection.

How does decentralized identity work?

The decentralized identity consists of the following components:

Digital wallet: Helps create a decentralized identity and control their access to the service providers.

Owner: This is the individual who uses a wallet to create a decentralized identity and gets verifiable credentials in return.

Issuer: This is someone who issues attestable credentials (identity details) using their private key.

Verifier: This is someone who verifies the credentials and reads the public decentralized identity of the issuer on the blockchain.

Blockchain: One of the core components of a decentralized identity framework, it is a distributed ledger that helps in the framework’s functioning.

Service providers: This is an application that utilizes DID to accept authentication. It gets through the blockchain to check for the identity that was shared by the user. 

Decentralized identifier: This is a unique or distinct identifier that includes various information, such as service endpoints, verification details, and public keys.

The decentralized wallet based on blockchain technology forms the base for a decentralized identity framework. Users employ the wallets to generate their decentralized identifiers and get their unique/own digital identity, save PII, and govern VCs. This is the opposite of centralized systems, where intermediaries manage the identity information on various sites.

Once the identity is generated, cryptographic keys (public and private) with respect to the identity are also get created. Next, the wallet sends a registration payload to the blockchain along with a public key, upon which the blockchain creates a unique identifier for the wallet. Furthermore, the private key that got generated will remain with the user’s wallet and helps with the authentication.

The wallets function as a prime entity that assists users in providing and revoking access to identity details from a single source and makes the process easier and quicker. Moreover, the information in the wallet is validated by multiple trustworthy sources to ensure it is accurate.

For instance, issuers like government organizations, banks, universities, and other parties validate digital identities. Thus, users can use the virtual wallet to exhibit their identity proof to any third party.

Authentication steps using blockchain and decentralized identity

Eligibility for authentication

The verified identity information, such as name, age, address, employment information, or bank account information, is stored in the identity wallet to help in gaining trust and eligibility for the authentication process.

Key Publishing

The public key related to the private key is published on the blockchain with the help of a decentralized identity mechanism.

Decentralized identifier generation

Once the blockchain gets the public key, the identity wallet will receive DID (decentralized identifier).

Authentication initiation

The DID is shared with the service provider by the user for authentication.

Information matching

The service provider looks up the blockchain to locate the DID shared by the user. If there’s a match, the details associated with the DID are shared with the application.

Authentication completion

The user uses the private key to sign the respective transaction and complete the authentication process.

Authentication confirmation

Once the authentication process gets completed successfully, the service provider confirms the action and permits the user to perform the tasks.

The future of decentralized identity

Although decentralized identity is still in its nascent stage, it has the potential to revolutionize the identity management system for good. In fact, Web 3.0 can benefit from decentralized identity to a great extent as both have similar goals — to provide complete information privacy, improve security, and give control over self-information and other details.

The evolution of the internet is making people move towards decentralization; people want control over their personal information and other data. Thus, a decentralized identity is an excellent solution for everyone who wants to keep their information private without the worry of third parties trying to access it. Here are some of the ways in which decentralized identity can shape the future of Web 3.0:

  • Data ownership: Decentralized identity and blockchain technology can effectively remove the interference of third parties to modify or erase the information of the user. Furthermore, the ownership or control of digital identity will remain completely with the user. It must also be noted that blockchain will have a record of the information on its decentralized network, which can be accessed by the user and shared with other parties by them.
  • Universal Identity: In the case of a centralized system or framework, the issuers will usually have control over the users’ login credentials. Moreover, just one service is employed to get through various other information on the internet, which results in targeted advertisements that are of no interest to the user.

However, this is eliminated with decentralization, where users can handle their data or credentials without relying on external parties.

  • Resist bots: It is well-known that today bots are placed in numerous social networks to post automated content on behalf of organizations or individuals. This can be irritating most of the time and hamper the user experience. One simply cannot know whether one is interacting with a bot or a human easily. However, this issue can be tackled with the help of decentralized identity.

DID provides a sense of trust to the user that a specific post or individual that you are interacting with is a real human, and thus the content is from a human. Furthermore, DID also resists the bots from taking over the internet and lets real people interact and contribute to the internet.

Here are some industries that can benefit from decentralized identity and blockchain technology, such as

  • Insurance
  • Finance and Banking
  • Transport and Logistics
  • Retail
  • Healthcare
  • Marketing and Advertising


There is no doubt that decentralized identity will revolutionize the way identity information is stored and managed. Although it is still nascent, experts have opined that it will provide numerous benefits, as discussed in this article. One can easily conclude that the decentralized identity will help users get back their control over their identity information.

Moreover, users will not need any centralized entity or third party to validate their identity. Instead, users can authenticate their information without any interference.

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