Web3 Digital Identity Explained

Generally speaking, a digital identity is online data that is used to authenticate and verify that users are who they say they are. Digital identities often take the form of email addresses, usernames and passwords, home addresses, social security numbers, and even browsing history as they are all valid ways for someone to prove who they say they are within the digital online space. 

What is a Web2 Digital Identity? 

In the Web2 system, user data storage primarily relies on a centralized identity management system (CIM). This system is when an organization like Meta or Google manages and stores all the data it owns in one centralized area. 

By relying on a CIM, users can utilize mechanisms like single sign-on (SSO) to access multiple applications and websites with only a single set of credentials. However, in exchange for increased user experience, CIMs ensure that major tech companies have complete authority over people’s data. Many online users have deemed this tradeoff unacceptable as many are uncomfortable with giving up their information or control.

Why Do We Need Web3 Digital Identity? 

Many online users have viewed Web3 digital identities as the potential solution for Web2’s issues and limitations. Web3 pushes digital identities to be more secure, decentralized, and fully controlled by individuals instead of centralized entities. 

Unlike Web2 digital identities, which are managed on centralized platforms like servers or the cloud, Web3 digital identities are built on decentralized technologies like blockchains. The key feature that blockchains bring to identity is ownership and control over the digital identity. A blockchain is a decentralized database that securely and transparently records all transactions made between multiple parties and users. Blockchain supported digital identities guarantees that users will no longer need to rely on third parties or centralized entities to manage their private information.

Benefits of Web3 Digital Identity

Web3 addresses many of the challenges that traditional Web2 digital identities and manage systems face. Benefits of Web3 digital identities include:

• Increased Privacy and User Control: Under traditional Web2 digital identity management systems, people must give up their personal information to third-party groups. This not only gives these entities control over people’s information but also leads to risks such as data breaches. Under blockchain digital identity solutions, which enable self-sovereign identity, control is returned to the people. Users will have total ownership over their data and decide what and to whom they wish to share this information.

• Increased Protection: People’s information in centralized databases often becomes the target of cyberattacks. These attacks lead to major data breaches that compromise much of that data and the owners become victims of fraud and identity theft. Blockchain digital identity solutions address this problem by distributing personal data across a network of nodes instead of one specific location and providing cryptographic keys to individual users. These defenses make data breaches much more difficult and significantly reduce the chances of large-scale identity theft. 
• Decentralization: When user information is stored in one central database, it becomes vulnerable to corruption or loss if something happens to the database or the entity that owns it (i.e. cyberattacks, system goes offline, system failures, etc.). Fortunately, because blockchain identity solutions spread personal data through a network of nodes, they ensure that users will still have access to their data even if one or two fail or become compromised.

How is Web3 Digital Identity Used?

Because ownership is a core principle of Web3, digital identity is used differently than Web2. On Web3, digital identity is tied to a digital wallet where digital assets, NFTs, cryptocurrency, personal data, and more are securely stored. Everything you do on Web3 relates back to your digital identity and digital wallet, and you have full control over which assets or information can be shared.

Decentralized finance (DeFi) is one of the more popular use cases for Web3 digital identity, where users can invest and exchange assets. In this case, your digital identity becomes your address. Digital assets can be sent to hello.locker, for example, instead of the standard complex digital wallet address. Human readable digital identities reduce the risk of errors.

Digital identities can also act as verifiable credentials for Web3 decentralized apps, which is similar to the concept of SSO but with more security and personal data control. Similarly, digital identities are used for Web3 gaming, where your gaming data is stored within your own digital wallet.

At the most basic level, digital identity is the foundation of Web3 activity. Without a digital identity that’s tied to a digital wallet, using Web3 is virtually impossible. And because Web3 is immutable by nature, your digital identity is used to cryptographically record all your activities on chain, permanently associating each transaction you make with your identity.