Six Critical Benefits of Decentralized Identity Managed in Encrypted Wallets with Blockchain Technology and Digital Transformation.

4 min read

Identity serves as the foundation of every layer of our lives today. Everything we do, both on and offline, relies upon some aspect of our identities to work. 

Online services, opening bank accounts, voting in elections, buying property, and securing employment; are just a few of the critical activities we engage in daily that require proof of identity.

With the integration of the digital world into broader aspects of our lives, digital identity has become crucial. As consumers and denizens of the internet, these keys are plentiful. 

However, in the hands of centralized intermediaries who issue, hold, and control our information, the concept of digital identity raises numerous concerns, the most relevant of which are data privacy and security. With 71.1 million people falling victim to cybercrime every year and businesses losing an average of $1 trillion annually, our digital identities are not precisely safe with centralized entities.

There is no way for users to control identity-related information, decide who has access to personally identifiable information (PII), or even how much access third parties gain. Many people subscribe to using multiple logins and passwords to prevent identity theft, but this does not solve the problem. 

The truth is, most people wish they could have one simple but secure confirmation process for all of their logins; well, that’s precisely what decentralized identity is all about. Blockchain, as a technology, is ideal for applying a decentralized identity model with which secure registration, access, and privacy of personal information all become viable. 

In this piece, we’ll look at what decentralized identity means in today’s world, why it matters, how it is managed on blockchains, and what it offers for users.

What Is Decentralized Identity?

Decentralized identity, often used interchangeably with self-sovereign identity (SSI), primarily gives individuals the power to control their digital identity without relying on a service provider.

In a decentralized framework, individuals are provided credentials from significant issuers, such as the government, educational institutions, and employers, which are then stored in a digital wallet. Individuals can then present those credentials to the relevant issuing authority, which verifies their identity through a blockchain-based ledger that does not store any of the user’s data. 

A digital identity is a body of information about an individual, organization, or electronic device. That contains their usernames and passwords, search history, social security number, address, biometrics, citizenship, employment, credit card accounts, and more.

By using a decentralized identity, individuals gain complete control of their personal information and the ability to provide only the information required for verification. Decentralized identity management supports an identity trust framework through which users, organizations, and things interact with each other transparently and securely.

Why Does Decentralized Identity Matter in Today’s World?

Many people today aren’t pleased with how personal identity is handled or how businesses build it.

Organizations need to collect sensitive personal data from users to authenticate their identities. However, as long as businesses continue to suffer data breaches and mishandle information, the existing identity system may not necessarily be in the customers’ best interests, further suggesting that the safety of individual digital identities is not guaranteed.

In 2017, Equifax fell victim to one of the worst data breaches in corporate history, as the personal information of more than 147 million people, including Social Security numbers, dates of birth, home addresses, driver’s license numbers, and credit card numbers, was exposed.

Decentralized identity, on the other hand, promises to improve user independence, enhance privacy, and inspire digital transformation across organizations, even in its development stage.

How Is Decentralized Identity Managed in Blockchain?

Decentralized identity is set up on the blockchain according to critical elements. For example, a decentralized, encrypted, blockchain-based wallet is used for decentralized identity management.

These decentralized, encrypted wallets are unique applications (also known as identity wallets) that enable users to create their own decentralized identity. Upon the development of an identity, two cryptographic keys are generated—one public and one private.

The identity wallet submits a registration payload with a public key to the blockchain, which subsequently generates a unique identifier linked to the wallet. The private key, however, remains on the user’s device/identity wallet and is used during authentication processes.

With the newly created decentralized identity wallet, users are enabled to provide proof of identity to any third party anywhere in the world. Multiple trusted parties sign and verified all information created in the identity wallet to ensure factual accuracy. This means that issuers and verifiers, such as governments, universities, and finance institutes, confirm the information in question and add the data to the digital identity in a process similar to issuing a certificate.

The Benefits of Decentralized Identity

1. Security: One of the significant reasons for leveraging the blockchain in decentralized identity systems is to ensure sturdy security. The blockchain caters to digital signatures, consensus algorithms, and cryptographic hash functions to protect user identities from breaches and theft. This way, device and data tracking from browsing websites can be entirely prevented, safeguarding users against the spread of data without their knowledge.

2. Trustworthiness: Blockchain technology utilizes a consensus approach to prove data authenticity through various nodes and acts as a source of trust for verifying user identities. Along with this data, each block also contains a hash that changes if anything is tampered with. These blocks represent a highly-encrypted list of transactions and entries shared across all the nodes distributed throughout the network.

3. User-Centric Apps: Decentralized identity allows developers to build user-centric apps that eliminate the need for passwords and inefficient authentication processes, thereby enhancing the user experience. Users can then safely request data directly from other users while maintaining their privacy.

4. Privacy: Decentralized identity systems leveraging blockchains via pseudo-anonymous identifiers (decentralized identifiers) can help mitigate privacy concerns. Each user owns their data and can choose with whom to share relevant information and how much.

5. Data Integrity: The blockchain-based data storage mechanism is immutable and permanent, eliminating the possibility of modification or removal. Decentralized identity can use this mechanism to ensure that data contained within cannot be modified or tampered with by external entities.

6. Simplicity: Identity issuers can leverage the seamless process of issuing digital identities. Identity verifiers can efficiently onboard new users and conduct the information verification process. Identity owners can effortlessly store and manage their identities within a decentralized identity wallet. This approach conceals data, reducing the risk of credential tracking, hacks, and unauthorized access breaches that would otherwise lead to the theft or monetization of people’s data.


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