What is Decentralized ID?
Coinbase Institute: Insights Series
Decentralized ID is a groundbreaking innovation that uses blockchain technology to bring more privacy, security, and control to our identities. DiD lets users manage their own personal information and how it is shared. It can also improve and streamline areas like licensing, education, and health care, making online processes much faster and more private by bringing them onchain.
How it Works
Traditionally, proof of identification has relied on paper documents and centralized systems— governments or corporations that store and manage sensitive data. This model leaves many people without an easy, secure way to prove their identity, or can potentially expose them to data breaches. It also requires them to share their personal information every time they open a bank account, vote, rent an apartment, or buy a beer. DiD eliminates the need for endless paperwork and multiple online data repositories by leveraging blockchain technology, a distributed, secure, and tamper-proof ledger.
To establish verified credentials, a trusted entity like a government agency, university, or employer issues a digital credential, such as proof of birth date or a certificate. For example, a university might issue a graduate her diploma. Individuals store these identifiers and credentials in a secure digital wallet. When users need to prove their identity or share specific information—such as applying for a loan or renting an apartment—they share a pointer from their digital wallet to the verifiable credential stored on the blockchain. The verifier checks the credential on the blockchain to confirm its authenticity.
Cryptographic technology like zero knowledge proofs can allow users to selectively share and prove specific facts without needing to expose additional data. For instance, someone seeking to rent an apartment can generate proof that they are employed and have sufficient income to pay rent, without revealing further details like their precise salary and bank account number.
Use Cases and Significance
DiD’s potential applications span numerous areas and situations in everyday life, including:
Improving financial compliance programs at banks and virtual asset service providers. Once a customer undergoes a “know your customer,” or KYC, evaluation at one financial institution, the institution can issue an attestation token that lets other banks or service providers rely on that same verification.
Using blockchain technology and machine intelligence to build individual profiles, called “LifeGraphs,” that let individuals and healthcare providers securely share data such as medical records, employment history, and other personal information while complying with privacy and data-sharing laws.
Humanitarian uses, including the use of digital credentials to prevent human trafficking, specifically by eliminating the forgeability of Power of Attorney documentation and identity documents that typically enable illegal border crossings.
In the “identity of things” domain, building a trusted vehicle data source to confirm the accuracy of used car data, and using the blockchain to track parts on the supply chain and record information on vehicles over time, including repairs, mileage, and ownership.
Current projects that are implementing DiD technologies include:
The California DMV is partnering with Spruce ID, leveraging the company’s open-source toolkit for decentralized ID to produce a “privacy-first mobile driver’s license.” The license will not only allow residents to drive a car, but will help them access health care and verify their age online without disclosing other information like their home address.
Rhode Island is developing a “future-ready approach” by integrating records from various agencies into a unified blockchain-based system. The new process will let citizens verify their information once and then use it whenever interacting with a government agency. For example, accountants will be able to renew their state licenses using their digital wallet, “[r]educing a multi-week policy to 30 minutes.”
Conclusion
DiD can transform how we manage and protect personal information, and regulatory clarity can help accelerate its adoption. Policymakers should promote frameworks that balance innovation with consumer protection by addressing issues like legal recognition, privacy, fraud prevention, and interoperability. To address these issues, we encourage policymakers to collaborate with industry stakeholders, technical experts, and international organizations. Promoting public-private partnerships can help identify potential risks and solutions. By prioritizing thoughtful regulation, governments can unlock the full potential of DiD, making it a cornerstone of a more secure, inclusive, and efficient digital society.