Digital Identity in Blockchain: What Is It About?

By Lipsa Das

Our lives have become increasingly digital. We can bank online, store personal documentation online, and even spend time in virtual worlds that also exist online.

As a result, we store much of our life digitally — and the lines are becoming blurred between real life and the virtual world.

Within that virtual world is a scattered array of your personal data — a collection of information that creates a unique digital fingerprint of you.

What Is Digital Identity? 

A Digital identity can be made up of multiple components, but essentially it’s all digital information that represents an individual. This information is generally non-transferable and thus reusable. Mainly, it’s used as identification proof for an individual online. This unique, verifiable representation of an individual allows users to interact and transact in the virtual world.

In web2, your digital identity comprises of those components that make up your online presence, such as your usernames, email addresses and purchase history. However, for web3, this works a little differently.

Since the blockchain is immutable, digital identity in crypto is forever. Thus, managing this unique and personal information is not so simple. For the most part, we entrust it to big centralized companies and hope for the best. While it may be convenient to do so, it is certainly not secure.

The Need for a Decentralized Digital Identity

Generally speaking, a third party, such as the government, an institution or a bank, is the guarantor of your most sensitive documents. For instance, electricity bills or bank statements are often used as address proofs — where the electricity board or the bank verifies your information.

But there are major problems with this setup. First, using a third party to sign off on your identity means that they have your data, typically on paper or in a centralized database somewhere.  This means that your data is at the mercy of these service providers or governments. 

Users have little digital sovereignty and virtually no say in how these services use their data. Additionally, centralized companies that store large amounts of personal data are a huge target for would-be hackers, leaving your data at risk. 

Hackers have to deal with just one attack surface or connected servers. While that interface must repel every attack, it only takes one successful hacker to breach an entire system. In short, although you trust these companies to keep your data safe – there is no guarantee it will be. 

What Are the Benefits of Using the Blockchain for Digital Identity?

Using the blockchain for digital identities enables a secure digital footprint by providing a host of benefits such as data ownership, immutability, and accessibility. 

Data Ownership, Digital Sovereignty

The blockchain adds a digital ownership infrastructure to the internet. It provides a network of digital “addresses” where individuals can store digital data, and enjoy sovereign control over it.

By using blockchain to manage your data, your identity will be stored within your sovereign blockchain address instead of on a server or in a database run by a third party. You yourself will enjoy control of that address via your private key, providing the ultimate identity management system that gives access exclusively to you.

The consequence of this goes even further: by using blockchain as a management system (together with smart contracts, which can also be programmed with sovereign conditions), you can also choose what, when, with whom, and for how long you want to share that data. 

Trustless Data Means Better Security

Blockchain means you control your own data and digital existence without trusting any third parties.

Hacking a blockchain network, on the other hand, requires controlling 51% of the network (in terms of either computing power, or staked coins), which is significantly harder – if not impossible – to execute. Once stored on the blockchain, data cannot be changed, hacked or tampered with – it is immutable. 

Therefore, all the information on your decentralized digital identity is safe forever, with few of the security issues faced by centralized organizations.

Accessibility & Interoperability

Another key benefit of a decentralized identity is that it can act as a passport to access multiple ecosystem applications. For example, your access to multiple different metaverses, platforms, and private member groups might rely on the same crypto wallet; and you may even be able to use the same assets across multiple platforms and services. 

In some ways, we’ve already achieved this with digital wallets like Metamask functioning as a decentralized login for blockchain-based applications. This is one nascent example of how digital identity might function in the future, attaching identity verification for your entire virtual world to your private key.

A good example of the practical implications is that DHS is exploring options to phase out your social security number using decentralized technologies.

Different Digital Identities in Blockchain

Your digital identity on the blockchain is characterised by the different tokens and transactions that distinguish you as in individual. For personal documents and certification, digital identity ususally comes in a type of non-fungible token called a soulbound token. This token is non-transferable, meaning you can’t send it to any other wallet. As each token is linked to an individual, you can use them as proof of identification.

You control and build your own digital identity based on the assets you own and the platforms you interact with. So, let’s take a look at the different digital identities in blockchain and how you can start building yours.

1. Avatars 

Avatars are a digital representation of yourself in the metaverse. Think of it as a virtual “you” that is customizable to look and act the way you want. 

In the emerging metaverse, avatars tend to exist as NFTs. NFT avatars are popular since they  hold value as a unique digital identity, investment, and “access card” for communities. Further, every NFT is uniquely verifiable through the blockchain — which means your identity is yours and yours alone, just like in the real world.

With these avatar-based NFTs, you can protect your identity, express yourselves freely and gain digital sovereignty. The popularity of metaverse games like The Sandbox and Wilder World, where users can own their identity, proves how valuable these benefits are. To give you an example of the perceived value of these avatars, a Cryptopunk NFT owner refused a $9.5 million offer simply because of the brand identity he built around his NFT.

Since most metaverses and NFTs are on the Ethereum blockchain, they can also be designed to be interoperable. That translates to you being able to use the same “avatar” or NFT across multiple metaverses and dApps, further cementing the brand value of your digital identity. 

2. Web3 Domains

One of the most popular types of digital identity includes web3 domains. Your web2 domain, such as a .com or .net domain allows people to find a specific business or project. Web3 domains are NFTs names which represent a blockchain address. These domains allow people and companies to use human-readable names such as ‘Ledger.eth’ to label their long and complicated blockchain addresses. For the Ethereum network, this service is provided by The Ethereum Name Service (ENS). Then for the Tezos network, you have Tezos Domains, which offers a similar service.

3. Community Memberships 

Not only do NFTs signal social “flex” similar to owning a luxury item, but they also represent a bigger cause — you get access to a community by holding the NFT in your Ledger wallet. 

These communities provide gated access and exclusive channels to holders of their NFTs. For instance, holding an NFT could give you access to courses or conferences. Similarly, there are groups where NFTs gate access to their NFT calls for trading calls. This is called token-gating.

In this case, NFTs act as a unique digital identity that unlocks access to the community. This concept also extends to decentralized social media, where NFTs can unlock monetization opportunities and much more.

4. Metaverse Property: Wearables, Land and More

Like an avatar, NFT-based properties or objects in the metaverse can also serve as pieces of your digital identity. These objects can be virtual land NFTs, accessories like clothing, weapons for avatars or even pets. You can learn more about these properties and objects in our Metaverse glossary.

How does Metaverse land contribute to your digital identity? 

NFTs are tokenized assets bearing unique data, and this data is an essential component of your unique identity within the metaverse, communicating with the underlying infrastructure of the platform who you are and what rights you have.

For instance, if you own a car in the metaverse, you might receive access to bespoke races or invitations to particular groups. Here, your car is your identifier — all your earnings would be tied to that specific NFT. 

Ownership of a given token would also allow you to create rental agreements or insurance policies for the object in question. Prime examples of this in action include Sandbox LAND or houses, aircrafts and cars within Wilder World.

In short, ownership of metaverse objects via the blockchain bridges the gap between real and virtual worlds. In short, it enables users to monetize their virtual objects, or build further agreements on those objects. All of this is thanks to your private key.

5. Sensitive Information: Protecting Your Medical Records, Drivers License & Degree

One of the best ways to streamline the ownership and distribution of personal data such as medical records, drivers licenses, or degrees is through digital identities.

For instance, say you must provide a clean bill of health for an insurance claim. In this situation, the hospital or doctor would provide the necessary information. This can be a long, cumbersome, and unnecessarily invasive process.

Using digital identities for healthcare records can solve that. If your store your healthcare data in an NFT’s metadata, a professional could verify your current health status without seeing other confidential information. This way, you can control the information you choose to share with the organization.

Similarly, your university could issue an NFT with your degree’s details. You could use this NFT to prove ownership of your degree wherever you need it, from job applications to residence permits. Associating degrees with a user’s digital identity ensures that it can’t be lost, tampered with, or faked.

How To Secure Your Digital Identity 

Your digital identity is a digital version of your “physical identity.” And just like your physical one, you should protect it from bad actors. 

The most secure way to manage your digital identity is via blockchain. Here, you’ll enjoy control and agency over your data via your private key. If your private key falls in the hands of a hacker, they could basically access your entire life, so the biggest challenge lies in securing your private key from physical and software attacks. 

Hardware wallets like Ledger devices are specifically designed to secure your private keys in an offline environment, away from digital threats deployed via your internet connection. Safeguarding your private keys, while making them easily accessible to you as you transact in the digital space, enables you to control your digital identity and be the master of your own data.

Owing your private keys equals owning your identity, and Ledger devices are here to make that as secure and easy as possible.

Knowledge is power