Decentralized Identity in the Crypto Market
Introducing the main players, the foundational technology and what to consider from the perspective of a founder, investor and user.
Author’s note
The metaverse, Web3, integration of crypto alike have overturned our digital experience. Unlike our interactions with its predecessors, namely Web1 and 2 in which users were limited to simply “reading and writing”, users can now fully “own” and contribute to the ecosystem they support. User profiles represent their entire presence on the web including and not limited to, their interactions (personal social graph), transactions(fiat and crypto), personalized private data (credentials), and communications central to their identity and reputation. With new DeFi and DeSo experiments succeeding and communities (#squadvibes) ever-growing — the rise of decentralized identities (DID) is only natural to accommodate the changing paradigm. So, going beyond the technicalities of verifiable credentials, wallet variations, and such that you can ask ChatGPT let’s delve into the timely yet timeless value of decentralized identities.
Disclaimer: DID applies beyond crypto-native areas of interest. This piece will not cover non-web3 product use cases.
Key Insights
- Crypto investors are spotlighting Decentralized Identity(DID) for 2023
- DID is a natural product of the technical innovation surrounding data interoperability, composability and portability.
- There will be three areas of concern that need to be answered before the space meets mass adoption
Decentralized Identity — The Excitement
The global decentralized identity market size was valued at $156.8 million in 2021, and is projected to reach $77.8 billion by 2031, growing at a CAGR of 87.9% from 2022 to 2031 (Allied Market Research).
Almost every major crypto VC has a DID project in their portfolio, and trend reading reports have not failed to highlight the sector.
Not to mention, the countless KOLs that have expressed their excitement.
I’m excited to see the various web3 applications . . . with decentralized identifiers and verifiable credentials.
— Michael Blau, a16z investing partner, crypto team @blauyourmind
Web3 digital identity allows users to connect based on interests and provide unique, interoperable identity based features. Decentralized social networks are a growing trend with potential for innovation and new business opportunities.
— Simon Kim, CEO of Hashed @seojoonkim
The hype for the space is irrefutable but none of this goes without understanding the technological innovation that is catalyzing this immense growth potential and business ideas — Data Interoperability.
Data Interoperability
Data interoperability refers to the ability of different systems, devices or applications to exchange and utilize data effectively and efficiently, regardless of the format or technology used by each system.
- Ser ChatGPT
With seamless flow of data between dApps and platforms, collaboration happens on a fundamental layer (data under the hood), innovation accelerates without cold-start issues, all the while barriers to entry are reduced and user experience ever improves with robust experimentation.
The Web3 ecosystem is already seeing this immense potential through projects like Ceramic by 3BoxLabs. The dataverse Ceramic introduces is unlocking product innovation on the front-end and introducing non-skeuomorphic Web3-only concepts such as composable communities, and new economic models on the backs of reputation-based identities.
If you’re not getting how big this is, just look at who else is bullish. Even just 3Boxlabs alone is backed by Multicoin Capital, Union Square Ventures (USV), Coinbase Ventures, Metacartel, Reciprocal, and Digital Currency Group.
The technology is here and infrastructures are coming together but the space still faces limitations. Of these areas of concern, if you are a founder or investor looking to invest in a DID project for long-term success these are a few questions that must be considered.
Fundamental Criterion
The market needs of DID are clear but need to be distinct hence targeting a specific data set will be imperative. Check the product is doing the necessary actions aligned with its target data set.
First, is the product a high-assurance use case or a low-assurance use case?
- High assurance use case: anything that involves KYC, KYB i.e. drivers license
- Low assurance use case: implementations found in daily life (services that require log-in i.e. Social media)
From this differentiation, the areas that need verification should be clear — if they want a. the product should mainly be a fintech business with a side of crypto — anything too crypto native may be too early. In the case of b. the product must be extremely accessible, interoperable, contain viral loops and hype-worthy partnerships.
If the product seeks to do both, the product team is essentially guaranteeing they have a large enough network to cover meaningful partnerships with countless services and bodies of authority, and issuing entities, and users (backed by a strong community). Follow their track record, the backgrounds of founders, their lead investment companies/partnerships, and examine the legitimacy of their promises.
Second, Is the product targeting a niche market?
The industry is collectively still at an infrastructure phase. Some just further down the road than others. Without a specific go-to-market strategy or target audience, DID is an extremely difficult sector to bootstrap users and onboard businesses. Note there will be mainly,
3 types of Users
a. Web2 users
Most Web2 users will not pay for privacy. Most don’t understand the extent their behavior is tracked, whether they don’t own anything that should be theirs or whether democracy is under threat. Ownership, self-sovereign identity, privacy, data portability are not concepts familiar nor will these keywords be enough for users to overcome DID’s current hurdles.
Solution: To target these masses, projects must focus on a B2B schema. Embrace a Web2.5 playbook and focus on building seamless infrastructure for users to be able to interact with the front-end intuitively. Save the novelty for Web3 users.
b. Web3 users (early adopters)
Web3 natives understand the shifting paradigm to decentralization a little more. For these users, abstract ideas(worldviews) and Web3 community vibes must be perfectly in line with the product goal. From the product name to docs and UI/UX, goals and services can be non-skeuomorphic and novel. A robust developer community alongside active degen-taste partnerships will drive the web3 adoption of a strong product. As small as this pool of users are, they are invested in the ecosystem and hard to please. Interoperability within the Web3 space will be your sword.
c. Web3 Projects
For Web3 services/businesses, sybil resistance and proof-of-personhood will become a pivotal matter of interest as products need to ensure that each user has a unique and verified identity. Especially in DeFi, NFT, and DeSoc businesses where financial transactions and ownership of digital assets are involved, DID is the one solution to address the following pain points;
- prevention of malicious actors with multiple identities seeking to manipulate or disrupt a system (detect a sybil and they will change their game and raise the cost of sybil attacks, the most common method of defence is PoW Bitcoin but has shown limitations)
- arduous, privacy-violating, opaque methods of identity verification (adopted from Web2)
- monopolies (esp. for usage-based governance systems as opposed to token-based governance, one-human-one-vote must be guaranteed)
A representative example of a protocol that relies on sybil resistance is Gitcoin. Gitcoin uses quadatric funding to determine how much of the matching pool should be awarded to grantees, thus rewarding projects that attract the most supporters rather than the most dollars. This makes sybil attacks destructive to their ecosystem, and thus in order to defend their grant system against bad actors or bots that can manipulate allocation, the Gitcoin community recently released their Gitcoin Passport, powered by Ceramic Network.
In Closing…
All in all, decentralized identities are inevitably a critical infrastructure to be rapidly adopted with the maturity of the web3 and crypto space. But as deep and wide as its use cases go, I predict that in the long-term the key to widely adopted DID products will not be driven by an emphasis on self-sovereignty or ownership, and rather as infrastructures become stronger, the focus will gradually shift to seamless verification and data protection interoperability as more ecosystems are built on blockchain.
About nonce Classic
nonce Classic is a web3 native accelerator on a mission to democratize decentralized technology by investing and accelerating early-stage crypto projects to amplify their vision in the market.
Are you a founder or interested in sharing your project with us?
Contact us at contact@nonceclassic.org
- Our Website: https://nonceclassic.org/main
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References
- https://medium.com/amber-group/decentralized-identity-passport-to-web3-d3373479268a
- https://messari.io/report/usage-based-governance-with-sybil-resistance
- https://www.youtube.com/watch?v=Kb8Af0KBNZ0
- https://medium.com/1kxnetwork/towards-digital-self-sovereignty-the-web3-identity-stack-874d5e015bae
- https://mirror.xyz/andrguardia.eth/3z8h_TqLQH8eg0qjJ_SAQUMzsfxccDLXrTQPRTaI4vI
- https://www.youtube.com/watch?v=vSwLb-lVuvs
(Beyond Finance: Identity, Reputation, and Web3 — Hosted by Lit Protocol)
Disclaimer: For general information purposes only and may not be used for commercial purposes without written consent. Should not be considered legal or investment advice and any use of it is at the user’s own risk. nonce Classic shall not be liable for any loss or damage arising from the use of this information. Copyright 2022. nonce Classic. All Rights Reserved.
