What Are Decentralised Identifiers? A Guide to Web3 Identity
In today's digital world, our online identities are fractured and fragile. We rely heavily on centralised authorities—like Google, Facebook, or government databases—to manage our login credentials and personal data.
While convenient, this model leaves users vulnerable to massive data breaches and results in a disjointed user experience where we constantly rent our identity from big tech companies. The scale of the problem is immense; approximately 850 million people worldwide lack an official identity, leading to severe digital disenfranchisement. Web3 offers a powerful alternative through decentralisation, shifting the paradigm from renting identity to truly owning it.
This article explores how Web3 digital identity works using decentralised identifiers (DIDs) and verifiable credentials (VCs). We'll take a look at how these tools give individuals control over their online identities without relying on centralised platforms. You'll also learn how DIDs and VCs improve privacy, security, and data ownership while enabling trusted, tamper-proof verification across the internet.
Ready? Let's dive in, then!
What Does Web3 Digital Identity Mean and Why Does it Matter?
The transition from Web2 to Web3 represents a fundamental shift in how we manage who we are online. In the Web2 model, large companies act as the custodians of user data, controlling everything from usernames and emails to sensitive personal information. This centralised control often prioritises corporate interests over user privacy.
In contrast, Web3 digital identity embraces a user-centric model often referred to as self-sovereign identity (SSI). In this framework, individuals act as the sole custodians of their own information, deciding exactly what to share and with whom.
The demand for this technology is growing rapidly. The global market for decentralised identity is projected to reach $77 billion by 2032, rising from just under $21 billion in 2023. This growth is driven by the clear benefits of decentralisation, which removes reliance on central authorities, and interoperability, which allows one identity to be used across many platforms. Corporations are taking notice as well; According to a 2023 study, 62% of US companies plan to incorporate a decentralised identity solution, with 74% likely to do so within a year.
What are Decentralised Identifiers (DIDs)?
At the core of this new system are decentralised identifiers. A DID is a globally unique identifier that functions like a digital passport, but with a crucial difference: it does not require a centralised registry, such as an email provider or a government agency, to create or manage it. Instead, a decentralised ID allows you to prove who you are across the internet without handing over your personal information to dozens of different websites.
Key features of a DID are that it is user-owned, globally unique, persistent, and cryptographically verifiable. Unlike an email address, which is essentially rented from a provider like Google or Microsoft and can be revoked at any time, a DID is owned entirely by you. Technically, DIDs utilise public key cryptography.
DIDs are generated with a pair of keys: a private key, which the user keeps secret to sign and approve actions, and a public key, which others use to verify the user's identity. This ensures that you remain in control of your digital presence at all times.
What Are W3C Decentralised Identifiers?
To ensure that a decentralised ID created on one platform can be recognised and verified by another, standardisation is essential. This is where the World Wide Web Consortium (W3C) comes in. The W3C is the international standards organisation for the World Wide Web, and they have established clear standards for DIDs to prevent identity silos.
In July 2022, the W3C approved the DID 1.0 specification as a formal recommendation. This standardisation allows for true interoperability, ensuring that the decentralised identity ecosystem remains open and accessible across different blockchains and technologies.
What are Verifiable Credentials (VCs)?
If a DID is the container or the digital wallet, verifiable credentials (VCs) are the valuable documents stored inside it. A VC is a tamper-proof digital file containing verified information about the user, such as a university degree, a driver's licence, or employment history.
VCs are cryptographically signed by the issuer, making them impossible to forge. One of the most powerful features of VCs is selective disclosure. This allows a user to prove a specific fact about themselves—for example, proving they are over 18 years old—without revealing their exact birthdate or other unnecessary personal details. This capability significantly enhances privacy by minimising data exposure.
How DIDs and VCs Work Together
The interaction between DIDs and VCs operates within a trust triangle ecosystem, which ensures secure and private verification.
The Issuer: This is the entity, such as a university or government body, that signs and issues the credential to the user's DID.
The Holder: This is the user who receives the credential and stores it securely in their digital wallet.
The Verifier: This is the party, such as an employer or service provider, who requests proof. They can check the cryptographic signature on the blockchain to verify the credential's authenticity without needing to contact the issuer directly.
It is important to note that actual personal data is not stored on the blockchain. Only the DIDs, public keys, and schemas are stored on-chain or in a registry. The sensitive private data remains securely in the user's wallet, ensuring that the user maintains full control over their information.
Benefits of Decentralised Identity
The shift to a decentralised model offers tangible advantages for both individuals and businesses. These may include:
Users maintain control over their data through selective disclosure and zero-knowledge proofs, sharing only what is necessary
By eliminating centralised databases, decentralised identity removes the honeypots of data that attract hackers, ensuring there is no single point of failure
Users can transport their identity seamlessly from one platform to another without the need to re-register
Businesses can reduce verification costs significantly, enabling processes like instant background checks
Real-World Use Cases
The technology behind decentralised identifiers is already being applied to solve complex problems across various industries.
Finance/KYC: Reusable KYC credentials are transforming banking. Users can onboard at a new bank in seconds using a verified credential, eliminating the need to repeatedly upload passport scans.
Education: Universities are issuing fraud-proof digital diplomas via VCs. Employers can instantly verify these credentials, streamlining the hiring process.
Supply Chain: DIDs are used to verify the credentials of suppliers or the origin of goods, adding transparency to global trade.
Login: A decentralised identifier example in daily life is using a DID to log into websites without a password. This passwordless authentication reduces security risks and improves user experience.
The Future of Identity is User-Controlled
Decentralised identity is far more than a technological buzzword; it is a critical solution to the growing problems of privacy, security, and digital exclusion. As regulatory pressure regarding data protection increases—such as compliance with GDPR—user-controlled identity solutions offer a path toward better compliance and consumer trust.
By moving away from centralised control, we are building a more secure, private, and efficient internet where individuals truly own their digital lives.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate. VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
Frequently Asked Questions (FAQ)
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A DID (decentralised identifier) is the unique ID or address for the user. A VC (verifiable credential) is the verified data or document (like a diploma) attached to that ID. The DID is the container; the VC is the content.
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In the context of Web3 and finance, DID stands for decentralised identifier. It allows banks to verify customer identity (KYC) securely and efficiently without relying on centralised databases that are prone to breaches.
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A DID in blockchain is a unique alphanumeric string (identifier) stored on a distributed ledger. It is associated with cryptographic keys that allow the owner to prove control over the identity without a central authority.
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A DID value is the specific string of characters that makes up the identifier, typically following a format like did:method:unique-string. It resolves to a DID document containing the public keys needed for verification.
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Decentralised identity is an identity management framework where individuals own and control their personal data. It removes reliance on centralised intermediaries (like tech giants) and uses blockchain technology to secure data ownership.
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DIDs work using public-key cryptography. The user holds a private key to sign data and prove ownership. A public key is published on the blockchain (via the DID document), allowing any third party to verify the user's identity or credentials instantly.