Decentralized Identity: What Does It Mean and How Is It Managed In Blockchain?

Using a decentralized identity, individuals gain control of their personal information and provide only the information required to be verified.

Decentralized Identity - What does it Mean and How is it Managed in Blockchain

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. Using online services, opening bank accounts, voting in elections, buying property, and securing employment; these are just a few of the important activities we engage in everyday that require proof of identity.

With the integration of the digital world into wider 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 cyber crime on a yearly basis, and businesses losing an average of $1 trillion annually, our digital identities are not exactly safe with centralized entities.

As it stands, there is no way for users to control identity-related information, or decide who has access to personally identifiable information (PII), or even how much access third parties gain. To prevent identity theft, many people subscribe to using multiple logins and passwords, 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 exactly 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 becomes viable. 

In this piece, we’ll take a 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.

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


In a decentralized framework, individuals are provided with credentials from important 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, who verifies their identity through a blockchain-based ledger that does not store any of the user’s data. 

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

By using a decentralized identity, individuals gain full 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 go about building 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: What does it Means and How is it Managed in Blockchain |

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

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, 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.

All information created in the identity wallet is signed and verified by multiple trusted parties 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. With the newly created decentralized identity wallet, users are enabled to provide proof of identity to any third party, anywhere in the world.

The Benefits of Decentralized Identity

1. Security: One of the major 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. In this way, device and data tracking from browsing websites can be fully 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 give developers the opportunity to build user-centric apps that eliminate the need for passwords and inefficient authentication processes, and thereby enhance the user experience. Users can then safely request data directly from other users while maintaining their own privacy.

4. Privacy: Decentralized identity systems leveraging blockchains via pseudo-anonymous identifiers (decentralized identifier) can help mitigate privacy concerns. Each user fully 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, highly reducing the risk of credential tracking, hacks, and unauthorized access breaches that would otherwise lead to the theft or monetization of people’s data. 

On the Flipside

1. There is resistance from businesses and governments who wholeheartedly prefer, and often benefit from the current system, and may therefore not be in favor of end-users controlling their identities. This could become an impediment to the implementation of decentralized identity.

2. The truth is that, although decentralized identity runs on the blockchain, which is nigh impossible to hack, there are still weaknesses from outside the blockchain that can often lead to the risk of identity theft. Failure to store personal credentials such as seed phrases in safe, secure locations is one such avenue for hackers to gain access to identity wallets. 

3. Lack of trust and acceptance by less-technologically-inclined users. Although decentralized identity offers many benefits, people who currently lack basic documents for ID, or lack technical know-how may have difficulty accepting and adapting to this new reality in which all of their personal details reside in the digital world.

Centralized Identity Management Vs Decentralized Identity Management

Decentralized Identity: What does it Means and How is it Managed in Blockchain |

The major difference between centralized identity management (CIM) and decentralized identity management (DIM) lies in the manner in which data is stored and shared with other entities—an process that is otherwise described as identity access management (IAM).

In CIM, IAM typically takes place in one environment, while the same is spread out across different environments in DIM. To explain further, IAM in CIM can be compared to a workplace in which employees sign into a Slack channel in order to access information from across multiple different departments. On the other hand, in DIM, employees would have to sign into multiple channels to gain access to information from different departments, making them more secure.

Although CIM offers one-step access to information, which is beneficial in some cases, there is an increased risk of data breaches. However in DIM, data is decentralized and stored by users in their personal wallets, which eradicates any risk of a data breach.

Furthermore, data in CIM may be collected, stored, and shared with other parties without the knowledge of the original owner, whereas in DIM, data is only shared with those given explicit authorization by the owner.

Finally, data is owned and controlled by organizations, apps, and services in CIM, while in DIM, data is completely owned and controlled by the users themselves, thereby putting them in a more advantageous position in the data-sharing business.

Why You Should Care

Given the visible changes spurred on by the growth of blockchain, decentralized identity is well on the path to becoming the future of identity access management. 

Decentralization stands to make significant improvements, especially in terms of ownership and control over personal identity and associated data. Decentralized identity has the potential to solve a wide range of other problems stemming from the centralized identity management experienced today, including widespread certificate fraud, slow and expensive verification processes, and data breaches.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Tunbosun Oyinloye

Bosun is a crypto writer and public relations specialist with nearly a decade of experience. He delved into the crypto world in 2016, the same year he purchased his first crypto asset. He has since made it his mission to continually hone his crypto knowledge and writing skills. In recent years, he has collaborated with a number of reputable crypto brands and firms such as: Coin Rivet, Market Across, Esteem Finance, and Koettum. At DailyCoin, Bosun covers educational content and listicles. When he isn’t working, you will likely find him streaming a law or crime series on Netflix.