The Evolution of Decentralized Identity and its Global Impact
on January 5th,2021

Blockchain and its many useful applications have solved many problems over the years in the opaque systems controlled by a central party or middlemen. However, the disruption and structural fulfillment of all those systems relied on solving the fundamental questions of identity.

Which entities will be involved in the transactions? How will these entities be identified? How can either party know the credibility of the other? Blockchain solutions alone would not answer these questions. This is because blockchain doesn’t provide an identity layer to its solutions.

These questions called for a self-sovereign, decentralized digital Identity that truly represents the identity of the parties involved rather than one focussed on service access. Over the years, foundations, working groups, and consortiums have emerged to align identity standards across companies. This has helped a lot in the evolution of the decentralized identity.

In its early stages, the Ethereum developer community was the first to make efforts in aligning these standards. Today, the communities of major blockchains are coming and innovating together to accelerate global impact on underserved communities through decentralized identity.

Also Read: Stablecoin Development

What does Decentralized Identity mean?

Blockchain found its boom in 2017 and 2018 when innovators across the world started building decentralized solutions with smart contracts. These decentralized solutions disrupted many industries, especially in finance.  Solidity and Ethereum testnets were respectively used in coding and deploying lending, trading, derivatives, credit bureaus, and identities.

Some of these solutions have succeeded, some have blown over, and many have matured to form solutions with new applications. Although Decentralized Identity has matured significantly and diverged in different directions of the crypto space, it is one of the prime examples of an effort from the early days of Ethereum.

The vision behind the concept of Decentralized identity is a digital identity able to identify everyone, even where data is lacking. A decentralized identity is an all-inclusive approach to identity, unlike traditional identification systems which exclude hundreds of millions of people globally. These individuals who are excluded from traditional identification systems are seen as high risk, and expensive to onboard by institutions. The problems of financial exclusion become more severe with the heft of unique, localized dynamics for credit, and fraud.

Challenges of Digital Identity

These individuals should be the first ones to be onboarded into a self-sovereign and decentralized approach to identity. The problem is, smart contracts don’t solve any problems related to the digital identity of individuals. Having on-chain identities without getting solutions for these problems will be futile.

Below are the three main challenges that call for a decentralized identity:

Problem 1

How can individuals be uniquely identified without being registered with any central authority systems, or are in a market where, otherwise credible, government identifiers are frequently fiddled with?


A public-key infrastructure can be used to uniquely identify individuals.

Problem 2

How do we strengthen individual identities where data is lacking?


Traditional and alternative data sources, as well as environmental data, such as P2P relationships and everyday interactions, can be leveraged to source data. This data can further be associated with public keys associated with individuals.

Problem 3

How do we ensure Decentralized Identity complies with emerging legal frameworks for privacy & personal information?


We don’t store any identifiable information on-chain, even at the direct request of a user. Instead, we store it off-chain, in a way that only the user controls the access and sharing of their information.

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Putting individual identities on-chain solves none of the problems listed above. But blockchain technology can be used to solve these problems. Ethereum or Bitcoin keys are used by most of the decentralized identity approaches. The Ethereum wallets that are used in on-chain monetary transactions provide the base for identity wallets like the Trust Wallet.

Service-access Viewpoint of Decentralized Identity

Until recently, the idea of digital identity revolved around service-access. The decentralized identity will truly represent an entity’s identity. But there is another question that needs a lot of attention- How can services be accessed via a decentralized identity? Several possibilities have been proposed and implemented to enable service access via decentralized identity.

In one simplistic possibility, a pair of private and public keys in an identity wallet by the individual. The public key is used as the identifier, hashed, and stored irreversibly in an ITF. The user identity is then proven and certified by a trusted third party with its own private key. The ITF also stores all the certification records of the individuals.

When the user wants access to a service, they need to present their identifier in the form of a QR code or within a token. Their identity is verified by the service provider by comparing the hash values of identifiers with their corresponding hash records in the ITF. The user is granted service-access if the hash values of identifiers match with hash records in the ITF.

When the services are more advanced with different relationships, separate key pairs can be derived by the user from a master private key to generate separate identifiers for different relationships to enable privacy-friendly protocols.

Also Read: What does DeFi mean?

Decentralized Identity is Maturing

Concepts that started as smart contract account registries and attestations have steadily matured into identity standards. Many organizations are working towards building open standards for digital identity. Some of them are:

Decentralized Identity Foundation (DIF)

DIF innovates, develops, and manages all activities required to create and maintain an interoperable & open ecosystem for the decentralized identity stack. It is a tech-driven organization that has the capability of setting up IPR protected working groups, delivering specs and standards, and offering infrastructure for the community.


Hyperledger promotes collaboration among various industry stakeholders and builds implementations around DLTs/Blockchains for a variety of use cases.


Aries contributes by providing infrastructure for blockchain-agnostic, off-ledger, peer-to-peer interactions. It also provides decentralized key and secret management by consuming Ursa.


Ursa is a shared cryptographic library that enables people (and projects) to avoid duplicating other cryptographic work and increases security.


Indy provides tools and libraries for building digital identity blockchains. One of the most popular instances of Indy is Sovrin.

Also Read: Cryptocurrency Wallet Development Cost


To sum up, a truly self-sovereign, decentralized identity cannot be achieved without finding solutions to the three main challenges that digital identity faces. These problems cannot be dealt with through smart contracts as they do not have an identity layer. Only when the decentralized identity layer is mature enough, we’ll be able to enter the next phase of decentralized finance.