Digital Asset Ownership and Identity on a Public Blockchain
A Digital Identity within a blockchain environment is very important to network participants. In order for a network participant to hold, retain and own valuable digital assets, they must have a Digital Identity. This also enables their ability to accumulate digital assets over time.
In the context of this article, blockchain-based digital assets are defined to include cryptocurrencies, utility tokens, security tokens, stable coins, digital stocks, and digital collectables (including NFTs).
With regard to Digital Identity, we are not referring to electronic versions of driver’s licences, birth certificates, or passports. What we are referring to is more akin to a wallet address as per Bitcoin, Ethereum, and other cryptocurrencies. These identities are anonymous on public blockchains and are called Decentralised Identifiers (DID).
In order to own a digital asset on a blockchain, we need to securely and accurately establish asset ownership. This also relates to digital royalties, revenue streams, voting rights, and payment rights. A Digital Identity enables and preserves digital asset ownership through limited access to consent and access rights via unique private keys and encrypted digital signatures.
Taking this a step further, Decentralized Identifiers (DIDs) are a new type of identifier that enables verifiable, decentralized digital identity. A Decentralised Identifier (DID) refers to any subject (a person, organization, thing, data model, or abstract entity) as determined by the owner/controller of the DID.
Identity on a Public Blockchain
On a public blockchain, network participants are anonymous. The only unique identifiers are wallet addresses. Yet, digital assets are linked to or associated with these wallet addresses. How do you ensure that your wallet address is yours to manage and control?
We need a new form and definition of Digital Identity in order to achieve secure and persistent digital asset ownership.
How do we establish digital asset ownership?
On a public blockchain, the wallet address is a pseudonym for a Digital Identity (I am referring to the public wallet address). This wallet address will have a set of private keys associated with it, enabling the transfer of digital assets to occur only with the owner’s explicit permission in the form of an encrypted digital signature. If you have the private keys, you also have and retain ownership of the digital asset.
Let’s consider why it is important for each of us to ensure that we have secure and persistent ownership of our digital assets. Firstly, some behavioural insights are pivotal for understanding when we experience the loss of something important to us.
Why are losses, in their many forms so painful?
In the context of this article, a loss in digital asset terms is defined as no longer having access to or control of the private keys or encrypted digital signature relating to the digital assets themselves. This may include theft of the private keys (or encrypted digital signature), misplacing them, or losing them altogether.
Prospect Theory & Loss Aversion
Loss aversion is an important concept associated with Prospect Theory and is best described by the expression “losses loom larger than gains”. It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining the equivalent amount. Further, these gains and losses are measured relative to a personal and subjective value reference point.
Prospect theory suggests that individuals value gains and losses differently because losses have a far greater psychological and emotional impact. This is especially true for items with symbolic, experiential, or emotional significance and can lead to endowment effects that are best explained by psychological factors related to loss-aversion.
Thus, having identified the high emotional impact of Prospect Theory (loss aversion) and endowment effects, most individuals will do whatever they can to avoid experiencing the painful emotions associated with loss.
Knowing that we wish to avoid digital asset losses (as defined above), we now turn our attention to another important aspect of digital asset ownership.
Self-Sovereign Identity (SSI)
Self-Sovereign Identity (SSI) is a unique decentralised approach to Digital Identity that provides individuals with complete control over their Digital Identity and credentials.
“Self-sovereign” means the individual identity holder controls their credentials, using them whenever and however they please, without being forced to request permission of an intermediary.
SSI is a two-party relationship model, with no third party coming between you and the organisation, now considered your peer.
SSI begins with a digital wallet that contains digital credentials. These are digitally signed (encrypted) verifiable credentials.
To exchange digital credentials securely and privately, one peer can establish a direct, encrypted connection with another peer. You can control what you share with others, whether an entire credential or part of a credential.
SSI is fast becoming standardised and interoperable and it is portable, with no vendor lock-in. With everyone having a wallet full of cryptographically verifiable credentials, simply having someone’s personal information will no longer be sufficient to impersonate them.
SSI addresses many of the blockchain network participant issues:
· blockchain-based backbone (immutable record)
· portability of digital identity for individuals, organisations, digital assets, IoT devices, autonomous agents, and non-person entities
· individual control of digital identity (personal privacy)
· zero-knowledge proofs (security)
· eliminate fake digital identities
· preserves and enables authentic digital asset ownership through SSI consent and access rights to digital assets
· fast, accurate and secure payment of digital royalties, revenue streams, voting rights and payment rights
Decentralised Identifiers (DIDs)
Decentralised Identifiers (DIDs) are identifiable endpoints belonging to a Self-Sovereign Identity (SSI) and can be shared publicly. For example: documents, wallets, smart contracts, or programmable agents.
A DID makes it possible to own and control IoT devices, non-person entities (NPEs), digital agents such as Autonomous Economic Agents (AEAs), and Decentralised Autonomous Organisations (DAOs), which in turn may own digital assets.
Hyperledger Indy & Sovrin
The Sovrin Foundation is a member of Hyperledger, a Linux Foundation Project. The Sovrin Foundation uses Hyperledger Indy as the codebase for the Sovrin Network and contributed the initial Indy code for the project.
The Sovrin Foundation remains a leading contributor to Hyperledger Indy, Aries, and Ursa projects under the Hyperledger umbrella.
Hyperledger Indy provides the tools, libraries, and reusable components for providing digital identities rooted in blockchains or other distributed ledgers so that they are interoperable across administrative domains, applications, and any other silo. The Sovrin network is a deployment of Hyperledger Indy that is compatible with any Hyperledger Aries identity agent.
Internet of Things (IoT)
In the world of the Internet of Things (IoT), what happens when devices and autonomous agents hold digital assets on our behalf?
There needs to be a mechanism and process for accurately and securely identifying digital asset ownership so that valuable digital assets, digital royalties, revenue streams, voting rights, and payment rights may be allocated to the correct owner.
Things become more interesting when we introduce the possibility of Autonomous Economic Agents (AEAs) and Decentralised Autonomous Organisations (DAOs).
Autonomous Economic Agent (AEA)
An AEA is an intelligent agent operating on an owner’s behalf with limited or no interference from the owner. An AEA is self-governing. Its goal is to generate economic value for its owner.
AEAs can be considered to be a specific type of agent, with a focus on generating economic and financial value for its owner. It may also hold and own digital assets.
Decentralised Autonomous Organisation (DAO)
A DAO can be described as a business or organisation whose decisions are automated through computer code or through the vote of its members. It is a system of hard coded rules that define which actions the organisation will take.
A DAO is a network that runs autonomously. The network is structured and incentivised to operate without centralised oversight. A DAO could run completely autonomously if the platform is provided with sufficient rules and flexibility.
“DAOs do not have a hierarchical structure, except for the code. Once deployed, this entity is independent of its creator. A DAO can be formalized by a smart contract.”
The governance and operation of a DAO will most often be operated in accordance with the voting rights of its members (part of the DAOs decentralised decision-making process) which will be closely tied to a Digital Identity.
Now it is possible to see how important accurate and secure Digital Identities are becoming and their importance to each of us.
With the global adoption of cryptocurrencies, NFTs, and other digital assets accelerating at an ever-increasing pace, it is of primary importance that each of us understands how to secure these valuable assets, their associated payment, and income streams via our Digital Identity. By doing this, we will be able to minimise the potential psychological, emotional, and financial impacts associated with digital asset loss or theft.
SSI and DIDs are becoming increasingly important when it comes to protecting our digital assets. In addition, they will have an important role to play when Autonomous Economic Agents (AEAs), and Decentralised Autonomous Organisations (DAOs), and non-person entities (NPEs) become more widely adopted.
Fortunately, there already exists products such as Hyperledger Indy, Aries, and Ursa which are supported by organisations such as the Linux Foundation and Sovrin that can enable and ensure safe and secure digital asset ownership via authentic Digital Identities.
Nathan van den Bosch is a Behavioural Economist and Blockchain Strategist, with more than 30 years of experience in emerging and disruptive technologies.