For decades, the humble password has stood guard at the gates of digital access. But in an age of sophisticated cyber threats, data breaches, and user fatigue, the once-mighty password has begun to crack under pressure. As web applications evolve to become more secure, intelligent, and user-centric, identity verification is undergoing a significant transformation — and blockchain is at the forefront.
Decentralized Identity (DID), powered by blockchain technology, is poised to replace traditional methods of identity verification, offering enhanced privacy, security, and user control. This blog explores the journey from passwords to blockchain-based identity systems and how this shift is shaping the future of web applications.
The Problems with Traditional Password-Based Systems
1. Security Issues
Passwords are extremely weak. This is because users often reuse passwords, create weak passwords, and store them in weak ways. According to Verizon Data Breach Investigations Report, more than 80% of breaches from hacking are related to compromised passwords.
2. Usability Problems
It is hard to remember dozens of passwords. Password managers have made remembering passwords easier and two-factor authentication (2FA) has added some protection; however, both fall short of being a comprehensive solution.
3. Central data exposure
Traditional logins all store passwords in a central database, which makes them a prime target for hackers. If hacked, the hacker has the potential to exploit all the millions of records. The hacks of several renowned organization's databases have proved that a single hacker can cause significant damage to millions of users.
4. No Communication Control
Users have no control over their digital identities. Once a user provides their data to a platform, it is stored and managed by the platform with little transparency and no accountability.
What Is Decentralised Identity?: The Role of Standards in Decentralised Identity
Interoperability is crucial to the successful usage of decentralised identity systems. Organisations such as the World Wide Web Consortium (W3C) and the Decentralised Identity Foundation (DIF) are leading efforts to create standards to help facilitate compatibility between interoperable systems and components. Standards are important for several reasons, as they can help ensure that users can share, exchange, and verify their credentials across different systems within a comprehensive ecosystem, allowing them to manage their digital identity healthily.
Decentralised Identity (DID) is an exciting new alternative for managing digital identities where the individual is in control of their credentials. Instead of trusting a central party, like Google or Facebook, identity data is stored in a cryptographically secure wallet, which is validated through a decentralised peer-to-peer blockchain network.
In simple words, DID allows users to "own" their identity, alleviating the risk of handing multiple services their sensitive data.
Advantages of Decentralised Identity
Decentralised identity systems allow users to have control over their data. Users can determine who has access to their data, what data is shared and when they can revoke access to their data. Reducing the amount of sensitive personal data that organisations store reduces exposure to data leaks and potential liability.
Improved Security and Privacy
The design of decentralised identity allows for greater security because data is not centrally stored. If a service provider is breached, this does not compromise the identities of all users. Users can only present the information necessary for a particular interaction, such as proving they are old enough for an age-related event, without giving the full date of birth.
Decentralised Identifiers (DIDs)
Decentralised Identifiers (DIDs) form the backbone of decentralised identity. A DID is a unique identifier that a user can create and control without a central trusted authority. Additionally, numbers are typically recorded on a blockchain, providing security and immutability.
Moreover, they do not contain any personal data; instead, they point to decentralised documents that define the subject and provide a method of authentication.
Creation and Management of DIDs
Users can create different DIDs for each of their relationships and purposes, giving them a lot of flexibility and control. Management of these identifiers is typically handled through a digital ID wallet, which enables credentials to be presented securely across various platforms and systems.
How Blockchain Enables Decentralised Identity
Blockchain technology makes trustless identity systems possible by providing a secure and user-controlled identity ecosystem. Blockchain achieves this in several ways:
- Immutability:
Information written on the blockchain is immutable. Once identity credentials or proofs of verification are written, they cannot be changed, so we can confidently rely on them as authentic. - Transparency:
While the individual’s information will be visible only to relevant parties, all transactions and credential issuances can be tracked. Not only does this make the issuer and verifier accountable, but it also creates a method of trust without requiring the user to share their information. - Decentralization:
There is no central authority that is managing or holding identity data. It is distributed across a blockchain network, thereby preventing any single entity from exerting control over an individual’s identity. This reduces the likelihood of data monopolies, systemic failures, and cyberattacks. - Smart Contracts:
Smart contracts are self-executing programs that automate identity workflows − such as issuing, verifying, and/or revoking credentials. For example, a university can issue a digital degree that a recruiter can verify in real-time, without needing to contact the university. - User Ownership:
Individuals can save their credentials in a secure digital wallet and only share relevant credential information when needed, thereby reducing their dependency on centralized platforms for control over their authentic identity. - Security Through Cryptography:
Public-private key encryption ensures that identity credentials can only be accessed and used (i.e. modified, shared and/or revoked) by the rightful owner.
Key Components of a Blockchain-Based Identity System
- DIDs (Decentralised Identifier): A unique string representing a user that is not registered or expressed in any one location.
- Verifiable Credentials (VC): A digitally signed and tamper-proof document, such as a digital passport, degree, or license, that is issued by a trusted authority.
- Issuer-Holder-Verifies Model:
- Issuers: A type of authority (e.g. universities) that issues credentials.
- Holders: The user who holds the credential in their digital wallet.
- Verifiers: A web app or service that verifies credentials.
- Digital Wallet: A secure app (either mobile or browser-based) that provides safe storage, use and management of a user's DIDs and credentials.
Identifying DID’s Importance for Fintech and Digital Lending
Digital lending and FinTech operate on a set of transactions characterised by fast and secure identification, verification, and re-verification. Let's look at how DID can change the way each of these stages operates in digital lending:
1. No Friction Onboarding
Users can onboard through the presentation of verifiable credentials from trusted issuers (i.e., bank or government ID issuers). There is no onboarding process with various documentation and duplication of form filling.
2. Instant KYC and Credit Verification
Users are able to perform KYC by providing already verified credentials (i.e., PAN verification, income proofs, and credit bureau scores), and the lenders can then experience an instant check through the blockchain's metadata.
3. Knowledge and Awareness of Data Privacy
A User-Centric consent model, combined with practically no data disclosure, complements the principles of data protection legislation that have emerged from the GDPR and are reflected in India's DPDP Act.
4. Portable Deployable Identity Across Co-Existing Fintech Platforms
Users can use the same identity across co-existing Fintech platforms, opening the potential for shared KYC, federated consumer credit scoring, and eventually seamless loan transfers.
5. Minimised Fraud Risks
The use of immutable credentials, which are almost impossible to create using a credential trail and cryptographically verified identity, is virtually unhackable and will significantly reduce the risk of fake IDs being made, ID theft occurring, or duplicate accounts being created and misused.
India under Digital Identity Ecosystem: A Real Strategic Advantage
India is uniquely well-positioned to spearhead the adoption of DID in the fintech sector. They already have:
- Aadhaar: The largest biometric ID system in the world.
- DigiLocker: A digital document depository that can issue verifiable credentials, and so on.
- Account Aggregator Framework: Enables secure data sharing through user consent.
- IndiaStack: An open API framework, supporting financial inclusion. If India were to integrate their systems into the DID architectures, India could leverage a secure, privacy-preserving identity backbone for all digital financial services.
Future Trends in Decentralised Identity
The landscape of decentralised identity is poised for significant transformation as technological advancements continue to reshape online identity management. As industries adapt to these changes, several key trends are expected to emerge in the near future.
Expanded Control for Users of Their Data
A major shift we see in decentralised identity is the level of control users have over their data. Rather than relying on organisations to manage and store identity data in a separate database, users will maintain their credentials in wallets, and exactly which information is shared will be based on their preferences. This mechanism enables selective disclosure through zero-knowledge tuning, allowing a user to prove something, such as age, without sharing specific sensitive data points, like a birthdate. This will provide stronger privacy, lower fraud, and more trusted relationships in digital ecosystems.
Increased Interoperability Across Systems
As the notion of self-sovereign identity continues to gain traction, it is expected that the interoperability of decentralised identity systems will continue to improve. This enables users to seamlessly transition across interconnected platforms and services while maintaining their online identity. New identity management solutions will allow organisations to leverage already established decentralised identity solutions with built-in trust and interoperability. Increasingly, organisations will be able to implement decentralised identity with more legitimate onboarding processes that eliminate friction and allow for robust authentication.
Growth Adoption Across Industries
The possibilities for applications of decentralised identity are limitless, and various sectors are beginning to explore new use cases. As an example, there are already indications that verifiable credentials will continue to be used in employee onboarding and access management, especially regarding the growing prevalence of remote work. Organisations will continue to see value in decentralised identity and look to add new uses to enhance security and privacy, while streamlining operations.
Conclusion
With the rapid expansion and evolution of digital lending, traditional identity systems are beginning to struggle. Decentralised identity built on the blockchain gives an alternative that is both flexible enough to adapt and secure enough to defend against malicious actors. In a digital world increasingly defined by identity fraud, trust is no longer based on paper and passwords, but on codes and user agency.
DID is not just a technology upgrade, but it reflects a shift in digital trust and power. DID redistributes control to the user and mitigates inherent systemic risks in the consumer lending process, opening previously unthinkable financial experiences.
To innovators in fintech, the message is simple: those who build for decentralised identity today will become the trusted ecosystems of the future.