The advancement of technology in the digital space has had a significant impact on the way people interact with businesses. Several aspects of people’s everyday lives are now conducted digitally, from shopping to managing finances.

Therefore, it’s no surprise that digital identity has become a critical topic of discussion.

Identity management has been a major concern since the internet was invented. Billions of dollars have been spent on providing a private and secure space for digital transactions.

According to Statista, the global identity and access management market had risen to nearly $13.92 billion by 2021.

However, even with this level of investment, managing digital identities has been complicated, challenging, and expensive.

But what is digital identity, and how can organizations leverage it to scale their business? And where does blockchain come into the picture?

In this blog, our team of decentralized identity experts will answer all these questions (and some more). So let’s get started!

What Is Digital Identity?

The concept of digital identity might sound complicated, but it’s pretty easy to understand.

In a broad aspect, your digital identity is a combination of any personal information online that can be traced back to you — from the pictures on your social media to your online bank account.

By definition, a digital identity is an identity that is claimed or adopted by individuals, organizations, or electric devices in the digital space.

Digital identity can be regarded as an extension of physical identity documents like passports and driver’s license.

Digital identity is a powerful solution to overcome several obstacles related to remote onboarding.

Creating an account to access a service, entering personal information, and waiting for someone to manually authenticate our identity is taxing, especially if it’s to be done on a global level.

Deploying digital identity solutions effectively eradicated a lot of these time-consuming processes for individuals and businesses.

Let’s understand the importance of digital identity in a bit more detail.

Why Is Digital Identity Important?

Global Operation

MSMEs can tap into a global client base, and businesses in rural regions can take up distant business opportunities.

In the past, businesses simply hired employees who stayed within 10 miles of their office. The recruitment process of MSMEs heavily relied on reference checks and interviews. Companies built the association with clients and vendors via personal relationships.

Digital transformation has flipped this system on its head.

MSMEs now have access to a global pool of talent, and they can build professional relationships with clients and vendors based in international regions.

Digital identity verification is vital for businesses to function in this era of technology.

Operating globally meant companies had to have elaborate systems in place to ensure that no fraudulent activities were conducted.

Digital identity has made this system simpler and increased the security associated with onboarding international partners, employees, and even customers.

Companies can swiftly expand into new markets, improve the strength of their internal operations by hiring employees solely based on their skill, reducing the production cost, and gaining new customers.

Enhance User Experience

Digital identity and management is critical for growing and scaling micro, small, and medium enterprises (MSMEs).

Here’s the thing.

Identity management was primarily focused on internal business users like employees, partners, vendors, contractors, and others associated with the supply chain.

It was about ensuring that the right people had the right level of access to the information needed to get their job done.

That’s not the case anymore.

The power of leveraging digital identity is crucial for success in the digital era.

The primary purpose is to boost engagement rate, offer easy and secure sign-up and log-in services, provide personalized content, increase revenue, and enhance user experience.

Digital identity provides MSMEs with the ability to develop accurate customer personas and make better-informed decisions.

On the flip side, a strong digital identity system also allows customers to receive improved and more personalized services from their service providers.

Financial Inclusion

Digital identity empowers MSMEs to gain easier access to credit and effectively undertake digital transactions.

A study conducted by International Finance Corporation (IFC) and the SME Finance Forum has estimated that nearly 65 million firms, or 40% of formal MSMEs, in developing economies don’t have access to full credit. These MSMEs have an unmet financial need of about $5.6 trillion each year.

A robust digital identity management system can enhance financial inclusion and allow MSMEs to access cheaper credit to function more efficiently.

Third, MSMEs can tap into the global client base and businesses in rural regions can take up distant business opportunities.

Now that we have an understanding of digital identity and why it is important, let’s take a look at how digital identities can be verified to ensure they’re legit.

Verifiable Credentials

Verifiable credentials may sound like an overwhelming technical concept at first glance. However, it’s easier to understand than you think.

Let’s break it down.

The word credential typically refers to documents, certificates, cards, etc., that contain data about something. Driver’s licenses, insurance cards, passports, medical test results, college degrees, and employee badges are some examples of credentials we use every day.

One thing they have in common is that these credentials have a physical form.

There are several problems associated with paper-based credentials.

  • They can easily be lost or damaged.
  • Sharing them is a slow, complicated, and inefficient process.
  • They can be easily faked.
  • There is no concept of automation.
  • They’re not easy to update.
  • They’re not future-proof.

On the other hand, when you attach the term verifiable, it refers to credentials that can be authenticated in a digital setting.

Here’s the thing.

Businesses all over the world are ready to go global and shift their focus towards digital operations and services.

However, this shift comes with a fundamental need for individuals or organizations — like customers, vendors, employers, citizens, partners, and more — to be identified to interact digitally.  

Several attempts have been made to deliver digital identity solutions — creating centralized accounts, federated systems, CIAM solutions, etc.

However, these solutions make verification a very slow and tedious process.

Verification helps establish trust that the individual claiming the digital identity or credential is the same person.

It prevents people from carrying out transactions on someone’s behalf without their permission, creating false identities, buying fake diplomas/degrees, or committing fraudulent activities.

The digital solutions mentioned above are siloed.

In most cases a verifier needs to contact the issuer to request a verification and make sure the credential is authentic. This involves manual processes.

It involves calling previous employers, calling academic institutions, accrediting bodies, etc.

This is where verifiable credentials come into the picture.

To define the term, Verifiable Credential is a solution that allows people to issue digital credentials and sign them cryptographically. This digital signature can be verified with blockchain.

Using a digital ledger like blockchain makes the credential instantly verifiable.

No matter where the person stores it, no matter if the issuer keeps a copy of it, these credentials will be verifiable. A verifier will be able to know that the credential is authentic in seconds without the need to contact the issuer.

Verifiable Credentials are not limited to representing physical documents; they also reflect aspects that don’t have a physical equivalent, like NFT ownership.

There are three primary roles associated with verifiable credentials.

  1. Issuer. The issuer refers to an individual or an organization that creates or issues the verifiable credential.
  2. Holder. The holder is the individual or organization to whom the credential is issued to. The verifiable credential can be stored on a digital wallet - a mobile app on the holder's phone - or anywhere the holder wants to. A cloud drive, their computer, etc.
  3. Verifier. The verifier is the entity that verifies the claim about the specific subject. The information is shared with them and they check the authenticity of the data they’ve received.

Let’s understand these roles with a simple example.

Let’s say there is a hospital looking to verify the authenticity of a doctor’s degree.

Here, the institution that certifies that the doctor has completed his medical degree is the Issuer, the doctor is the Holder, and the hospital that checks the authenticity is the Verifier.

Verifiable Credentials make it easy to share information online in a secure and instantly verifiable way.

Here is how it works.

When the issuer creates a document, they digitally sign it and share it with the holder. The holder prepares a verifiable presentation and sends it to the verifier to be authenticated.

Note: A verifiable presentation is a collection of credentials or attributes that the holder wants to share with the verifier.

For example — if an employer requests information like university degree, date of birth, and drug test results, there are different entities who have issued these credentials. The owner can collect all these in his digital wallet and put them together to create a verifiable presentation and share it with the verifier (employer).

Now, back to the topic at hand.

After the holder shares the verifiable presentation, the verifier checks the cryptographic signature and the blockchain and assesses the credential against three factors.

  1. Competent authority:  Do I trust the organization who issued this credential?
  2. Validity: Is the credential valid?
  3. Tamper-proofing: Was the credential tampered with?

If these conditions are met, the credentials are declared verified.

For businesses, Verifiable Credentials have the potential to drastically improve and boost the customer and employee onboarding process, thereby reducing the cost and turnaround time associated with it.

Decentralized Identity

Verifiable Credentials and blockchain are two of the most important elements of decentralized identity technology.

Before we understand decentralized identities, we need to talk about centralized identity and access management systems (IAMs) and the issues that arise with centralized identities.

In a centralized identity management system, users' data/credentials are stored in centralized and siloed databases. A lot of users' data. A hacker can get to millions of people's credentials at the same time.

Platforms like Facebook come under centralized and federated identity systems. A federated system allows other networks to use their ID system (eg: Facebook login).

In centralized IAMs, a single entity (like Facebook) owns and controls the users’ digital identities and personal data.

How many times have we heard of Facebook data breaches where the privacy of millions of users was compromised?

Now you understand the risk associated with centralized, federated, and digital identity management systems.

But what is decentralized identity management and how does it help mitigate the issues raised by centralized digital management systems?

Decentralized identity systems allow users to gain control, store and manage their own identities and data.

This form of identity management lets users store and manage their own data. Users decide how and when they share their data and with whom. Instead of siloed in one place, data is decentralized to each user.

A well-implemented and verifiable decentralized identity eliminates a lot of threats that come with physical and digital documents. They offer entities more privacy and control over the data that is used and shared.

Let’s understand how decentralized identity allows users to store their data, how verifiable credentials are always available for authentication, and the role blockchain plays in it.

What Can Blockchain Do for Digital Identity?

In simple terms, a blockchain is a digital and immutable database of information. Everyone can see what is written on a public blockchain

It can act as a backbone for a decentralized identity system.

But how does it work?

Every issuer has a Public Decentralized Identifier (DID) stored on a blockchain. This Public DID is a globally unique identifier — example: did:dock:da8dasd...12 — containing a cryptographic key.

When the issuer creates a Verifiable Credential, they use their DID to put a cryptographic signature on the credential. This signature makes the credential become tamper-proof.

Whenever a verifier needs to check the authenticity of a credential, they just need to check the blockchain to confirm what was the Public DID that signed that credential and if they trust that organization.

The blockchain is like a phone book where everyone can check the Public DID of the issuer for different credentials.

Before this tech came along, the verifier had to get in touch with the issuer to verify the authenticity of a document.

Now, once an issuer signs a credential, they are always available for authentication without the verifier pinging the issuer each time. They can simply check the blockchain to see who has signed the credential. The decentralized and immutable nature of the blockchain ensures that Verifiable Credentials are always available for authentication.

Even if the issuer is offline or doesn’t exist anymore, the system isn’t affected.

How Blockchain Impacts Digital Identity Management

There are generally five pillars of Blockchain-based digital identity management solutions.

Trust.

The blockchain and cryptography enable trust between parties that are not connected between them and have never met.

The blockchain is immutable, so each party knows that the Public DID stored on the blockchain can never be deleted.

Each Verifiable Credential has a cryptographic signature that guarantees that the credential wasn't tampered with.

When a verifier needs to confirm that a credential is valid, they don't need to contact the issuing party. They just need to check the blockchain to see what was the DID that signed the credential and who that DID belongs to.

Security.

Another notable benefit of using blockchain for digital identity management is security. Since users can now store and manage their data, their sensitive personal information is not stored in "honey pots" with millions of other users' credentials. Making it harder for hackers to acquire large quantities of credentials at once.

This decentralized mechanism where multiple users store their own credentials effectively reduces the risk of data breaches.

Verifiable Credentials also use cryptographic digital signatures to ensure they are tamper-proof.

Simplicity.

Using a blockchain framework for digital identity management simplifies the process for everyone involved.

  • Digital identity issuers. The issuer simply has to sign the Verifiable Credential and send it to the user. They don’t need to store them or be involved in the verification process when the user shares the credential.
  • Digital identity verifiers. Blockchain identity management makes it simple and cost-effective to onboard and verify customer and user data.
  • Digital identity holders. Blockchain offers users an alternative to centralized data management and gives them complete control of their digital identity. This concept of identity is called Self-Sovereign Identity.

Integrity.

One key benefit of using blockchain-based identity systems is the ability to maintain the integrity of the issuer’s identity across different nodes within a network.

Since the issuer’s public DID is on the blockchain, it enables the user’s credentials to always be verifiable without the need to contact the issuer.

Furthermore, unlike a centralized system, blockchain technology lacks a single point of failure.

Therefore, it makes it extremely difficult for hackers to disrupt the integrity of a particular data set.

Privacy.

The final pillar of Blockchain-based digital identity management solutions is privacy. Regulators all over the world are demanding privacy for people’s sensitive and personal information.

Verifiable Credentials use Selective Disclosure and Zero-Knowledge Proofs. The first method allows a user to only share a specific part of a credential without disclosing the entire credential.

The second method enables users to prove something about themselves without even revealing the data that supports that proof. For example, a user can prove that they live in a specific city without showing their address.

Verifiable Credentials ensure privacy by design.

Final Thoughts

Verifiable Credentials and Decentralized Identity empowers businesses to swiftly and efficiently onboard global customers and employees with secure data exchange and digital transactions.

It breaks down the barriers associated with sharing information across company boundaries. It builds customer trust and aids businesses with adhering to data protection regulations and avoiding financial losses.

You can leverage Dock Certs today to create, issue, and share verifiable credentials and decentralized identities for your business without writing a single line of code!

Sign up to Dock Certs today.