Decentralized identity (DID): capabilities, benefits, and risks
Identification is an essential attribute of digital systems: it provides access to many online services used in everyday life.
However, the key problem with traditional centralized identification is that data is stored and controlled by a third party. This can lead to personal data leaks and other digital security issues for users.
For example, in 2024, 26 billion user records were made publicly available — an incident described as the "mother of all breaches." The total number of data breaches in the same year exceeded 9,000, with more than 90% of them caused by cyberattacks.
Decentralized identification is intended to solve the problems of personal data leaks and users' dependence on centralized data repositories.
What is decentralized identity (DID)?
Decentralized identification is a system in which users independently control access to their personal data. In other words, in decentralized identity (DID) systems, all personal data belongs to the users themselves rather than to a company or government.
Examples of crypto projects that have implemented decentralized identification systems include Ethereum Name Service (ENS) and Worldcoin. Ethereum Name Service is a distributed domain name system for .eth domains, which replace complex and lengthy wallet addresses and serve as decentralized identifiers.
Another project, Worldcoin, has implemented a decentralized identification system based on users' biometric data.
In the Worldcoin system, decentralized identity (DID) is created by scanning the iris using a dedicated hardware device called the Orb. In this way, the project ensures the uniqueness of user accounts and helps combat fraud. Worldcoin is also referred to as a "decentralized identity protocol (DID)."
How does decentralized identification work?
Decentralized identity (DID) is part of the blockchain industry and includes at least three key components:
- decentralized identifiers (DIDs);
- verifiable credentials (VCs);
- digital identity wallets.
A Decentralized Identifier (DID) represents a subject in a digital environment and is implemented as a unique string of characters. The subjects of a Decentralized Identifier (DID) may include both individual users and organizations.
A DID subject may also be a device, software agent, digital document, physical object, or abstract entity. For example, a company, server, vehicle, or industrial sensor may be assigned its own decentralized identifier.
Verifiable Credentials are cryptographically secured digital certificates. Such certificates represent individual attributes of a Decentralized Identifier (DID), such as a diploma or license.
Three parties are generally involved in the use of Verifiable Credentials: the issuer, the holder, and the verifier. For example, a university acts as the issuer and issues a digital diploma, the graduate stores it in their wallet, and an employer verifies the document's authenticity.
A Verifiable Credential may have an expiration date or may be revoked by the organization that issued it. For example, a professional license may cease to be valid after the specified period expires.
Digital identity wallets are software clients in which users store their unique Decentralized Identifier (DID). Only the owner of the Decentralized Identifier (DID) determines which data will be disclosed and to whom.
An identity wallet may store not only DIDs, but also digital diplomas, driving licenses, professional licenses, proof of age, professional qualification records, and other verifiable documents.
As a rule, a Decentralized Identifier (DID) uses a system based on public-key cryptographic methods. One of the most widespread technologies for implementing this approach is Zero-Knowledge Proof*, which makes it possible to verify a statement without disclosing confidential data.
* Zero-Knowledge Proof is a method that makes it possible to confirm a particular fact without revealing the underlying data on which the confirmation is based. For example, a user can prove that they are over 18 without disclosing their exact date of birth, or confirm that they have the required amount of money in their account without revealing their balance or transaction history. In decentralized identity systems, this technology helps users provide services with only the information that is genuinely required for verification.
What problems does decentralized identity (DID) solve, and what are its benefits?
The key problem with centralized systems is the lack of control over access to data. In practice, personal data belongs not to users, but to companies that profit from selling it to third parties.
Decentralized identification systems can provide user privacy while simultaneously meeting compliance requirements— measures intended to ensure that operations comply with applicable rules. Compliance involves meeting KYC* and AML* requirements.
* KYC (Know Your Customer) is a customer identity verification procedure. It usually includes collecting and verifying personal data, checking documents, establishing the source of funds, and assessing potential risks.
* AML (Anti-Money Laundering) is a set of measures aimed at detecting and preventing the laundering of criminal proceeds and the financing of illegal activities. It includes customer and transaction checks, monitoring suspicious transactions, and assessing the origin of funds.
A Decentralized Identifier (DID) makes users independent of third parties and reduces the risks of unauthorized access to personal data, effectively ensuring user autonomy.
Another advantage of decentralized identification is cross-platform usability — the ability to use it across different services — and interoperability, meaning compatibility between systems. A user only needs to verify their decentralized identity (DID) once, after which it can be used across multiple digital services. In this way, a Decentralized Identifier (DID) eliminates the need to register separately with every individual service.
However, this capability is only available if the services support compatible standards and trust the same issuers of digital credentials. The mere existence of a Decentralized Identifier (DID) does not automatically guarantee that every platform will recognize a person's identity.
However, decentralized identification also has its disadvantages. If attackers gain control of a user's decentralized identity (DID), they may effectively gain access to the services used by that person.
For this reason, decentralized identification (DID) requires users to have certain skills to protect their personal data from unauthorized access.
In addition, only a limited number of services have implemented decentralized identity (DID) systems so far, which restricts the technology's widespread adoption among users.
Prospects for decentralized identification
Decentralized identity (DID) mechanisms are already being introduced into government digital systems. For example, China has its own national decentralized identification system called China RealDID.
According to expert estimates, the digital decentralized identity (DID) market may reach almost $9 billion by 2028, while systems based on this technology are expected to be actively used at the government level, including for issuing digital diplomas and protecting intellectual property rights.