Bankless: Understanding Decentralized Identity in One Article

There are obvious problems with today’s digital identity systems: centralized entities control who and how we can access the world, we have password fatigue from tracking too many accounts, and the organizations that control this data are huge honeypots for cybercrime.

How did we get here?

It’s trendy to put the blame on the Web2 giants, but the truth is that Big Tech has greatly accelerated digital identity innovation by popularizing the federated identity model. 

By building on federated identity protocols like OAuth, SAML, and OpenID, Big Tech acts as an “identity provider” intermediary and dramatically reduces the number of logins that users must track. “Single Sign-On” improves the interoperability of digital movements between our online services.

It lets you access Gmail and YouTube without logging into multiple accounts, or logging into various e-commerce sites using Facebook or Twitter.

But while Web2 digital identities ameliorate many of the problems associated with centralized digital identities, problems remain . Web2 digital identity still operates within the same account-based structure as its centralized predecessor.

Accounts still belong to the big tech companies that issued them. therefore:

  1. The “ownership” of your digital identity does not belong to you.
  2. The operation of your digital identity depends on their server.
  3. We don’t understand our rich social relationships because these are proprietary data owned by private companies.

The good news is that thanks to advances in cryptography and decentralized blockchain networks, an alternative is on the horizon.

I call it the Decentralized Identity Revolution . This time, blockchain offers the opportunity to form our own self-sovereign identities in a bottom-up fashion, rather than the traditional way that requires us to skip centralized institutions.

Functionally, the key difference in the decentralized identity revolution is that ownership of your online identity is no longer account-based, but is “provided” for you by a middleman. Rather, it is a digitally shared connection that all parties to the relationship commit to maintain over time, reflecting the types of direct relationships we have in the real world.

That’s what this article is about. Broadly speaking, Web3 digital identities fall into three groups.

They are proof-of-personality projects, verifiable credentials, and most recently, soul-bound tokens.

Proof of Personhood

The Proof-of-Personality (PoP) protocol is probably the least ambitious of the decentralized identity projects. As the name suggests, these projects try to do one thing, and only one thing: prove the uniqueness of identity.

Popular projects include Proof of Humanity, BrightID and IDENA. 

PoP projects are primarily used to establish unique identities. This, in turn, solves problems when witch attacks are particularly problematic, such as universal basic income or secondary fundraising.

They do this by mixing traditional authentication methods such as photo and video submissions or sophisticated AI-generated captcha tests.

While PoP projects also establish identities through “web of trust” community mechanisms (such as requiring participants to sign each other’s digital certificates as a form of “guarantee”), they do so only to prove that the identity is unique.

In short, these items help build personality, but that personality is a black box. They are not suitable for mapping rich contextual identities and how people relate to each other on the social graph, as soul-bound tokens and verifiable credentials try to do.

Soulbound tokens

In May 2022, Glen Weyl, Puja Ohlhaver, and Vitalik Buterin published Decentralized Society, laying out the rationale for a “soul-bound token  (SBT).

SBT can simply be thought of as a permanent and non-transferable token on a public blockchain, like the popular World of Warcraft video game, the authors borrowed the “soul binding” metaphor. They can be issued in various forms—academic achievements, financial debt, employment contracts—by anyone, be it an individual, private company, university, community, or government.

Why do we want these aspects of our identity to be non-transferable and permanent?

When two people shake hands when they first meet, the relationship exists only in their fleeting memories. SBT is an attempt to formalize a handshake on a public blockchain that can be witnessed and verified by the rest of the world. In doing so, it allows us to embellish one’s identity with social context, opening up a world of coordination possibilities that were previously impossible without intermediaries.

Essentially, SBT codifies social capital (i.e. reputation) into formal property ownership. By “baring our souls,” individuals can publicly stake their reputations and prove the truth of what they say.

Below are some examples of the types of economic innovation that SBT can unlock.

Art: Struggling artists without professional certification but recognized by the grassroots community can demonstrate their “street cred” through SBT.

Education : Those who cannot afford an expensive college degree can demonstrate their educational credentials through SBTs obtained from informal study routes.

Banks : Loan applicants can demonstrate their credibility by not having a bad credit history, or demonstrate their good reputation through SBT collections, eliminating the need for capital-inefficient over-collateralization models commonly used in DeFi (after loan repayments, Another SBT can be used as proof of repayment).

Governance : DAOs can improve their collective decision-making system by guarding against whales (you can’t buy SBT  ). DAOs can also avoid the tyranny of majority consensus through a more inclusive voting system design by issuing SBT to trusted outsiders.

Records Management : SBT can reduce friction in existing relationships with an individual’s medical or insurance provider by easily transferring all medical records as SBT.

Business Operations: SBT can improve the efficiency of traditional business functions such as sales/HR by easily locating the type of SBT carried by prospects/employees.

The grand vision behind SBT is that one day, in society where Web3 has penetrated the mainstream, there will be an ecosystem of SBTs so pervasive that one’s wallet address can provide a reliable and comprehensive “digital identity” ” rather than the unreliable self-issued credentials we use to adorn our LinkedIn pages and job resumes.


“Microsoft Office Proficiency” will no longer be a meaningless placeholder, but an actual, market-tested certificate publicly visible on the blockchain that some business (maybe Microsoft itself) will issue you with Certificates serve as proof of your skill set.

Do we really want to bare our souls?

Soulbound tokens are not without their criticism.

The persistence of SBT is great when we want to prevent hiding negative behavior, such as someone’s bad credit or criminal history. But this resistance to censorship can backfire.

The permanence and publicity of SBT makes it easy for anyone to draw correlations and inferences about a person, and may prove too costly to lose privacy and incentivize some forms of negative discrimination.

For example, a racist employer might discount a potential employee because peeking at a job applicant’s wallet would reveal proof of participation in a Black Lives Matter event. 

To alleviate this problem, SBT critics like McMullen prefer the W3C-dominated “Verifiable Credential” (VC) format, sometimes confusingly referred to as attestation, badge, or claim.

Like SBT, VCs can be issued by anyone and can represent any information. However, the key difference is that it operates privately by applying zero-knowledge proof technology.

Here is a brief explanation of how VC works:

  1. I say I’m Batman, but you don’t believe me.
  2. To prove that I am indeed Gotham’s Dark Knight, I send you a crypto VC that exists off-chain. 
  3. The VC is issued and cryptographically signed by Gotham Police’s decentralized identifier (think of it as a wallet). The “signature” of each decentralized identifier represents a unique watermark, so you know this information hasn’t been tampered with.
  4. You know now that I’m Batman because the imposter can’t get that proof
  5. The whole verification process is private and I don’t need to reveal any information about myself to you.


In short, unlike SBT, verifiable credentials work on a “selective disclosure” basis. 

Many verifiable credentials protocols in the Web3 space already exist and are market tested. They build on official web standards recently established by the W3C framework in July and provide a decentralized way to establish privacy-sensitive digital identities that do not require a central issuing authority. 

Some prominent examples include Civic, whose on-chain VC product has supported over 295 NFT minting projects and helped block 1.2 million bot attempts. Another is Ontology, whose flagship identity solution has created over 1.5 million DIDs.

Finally, protocols like Disco allow you to create a decentralized identifier from your Ethereum address to sign VCs that live off-chain.


Workarounds and Tradeoffs

The co-authors of the SBT paper are not unaware of these claims. As they explicitly acknowledge in their paper, SBT could lead to “dystopian scenarios,” such as permissioned immigration systems, enhanced regulatory capture, or automatic redlining. 

But these criticisms are not necessarily a foregone conclusion.

To address privacy concerns, zero-knowledge proof techniques can be applied to SBTs to create separate access rights to read them, allowing SBT holders to decide how and when to disclose their SBTs. Second, changes in SBT can be used to mitigate its non-permanence. For example, having SBT become a transferable token after a period of time, or allowing issuers to withdraw SBT entirely.

The tension between soul-bound tokens and the verifiable credential paradigm can be thought of as the difference between choosing to be a public figure and keeping a private, low-key existence. One’s public reputation (the soul-bound token) has more weight and power because it’s effectively a “I have nothing to hide” microphone, but your enemies can also undermine it by discrediting you. 

On the other hand, private reputation (verifiable credentials) won’t earn the public’s trust due to its covert nature, but it’s less susceptible to unwanted manipulation and you have more control over what a few people think of you.

From this point of view, the biggest disadvantage of the soul-bound token is also its biggest advantage. Having your reputation open to scrutiny has its uses, but you better make sure there are no ulterior motives or it will quickly backfire.

The Decentralized Identity Revolution

The internet was built without an identity layer.

Efforts to build this layer for decades have relied on some form of centralized provider…until now.

Web3 Digital Identity – the Soulbound Token, Verifiable Credentials and Proof of Person project – represents a reliable alternative to developing digital identities in a decentralized, bottom-up manner.

Although their approaches differ, the goals of these builders are the same: to enable individuals to create a rich social layer without relying on a central issuer.

Different digital identity solutions exist for different purposes. Whatever the identity setup is will vary based on what it was built for. Deep personal information such as a person’s medical condition may not be stored as on-chain SBT, while it may be more appropriate for other circumstances, such as a person’s criminal history. 

Thanks to blockchain technology, these efforts culminated in the slow replacement of centralized identity systems (drivers licenses, passports, birth certificates), reducing reliance on rules that have power to determine human identity.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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