The Challenges and Rewards of Blockchain Identity Management

One of the more challenging aspects of the digital economy is making sure that the person you are dealing with is actually who they say they are.

Millions are spent every year on bolstering identity and access management (AIM), and this task is becoming more onerous as data environments migrate across data centers, cloud, and edge infrastructure.

Blockchain turns all of this on its head by providing not just a distributed data environment but a fully decentralized one. No single entity controls the chain, not its creator, because the entire stack is hosted on multiple servers worldwide.

But since anyone with proper access can see all the data stored on the chain, user anonymity is a core element of most blockchains, which begs the question: how can user identities be properly vetted without giving up the privacy protections that distributed ledger technology is supposed to maintain?

Blockchain for All

It turns out that blockchain offers several advantages in the realm of identity management, in large part because the ID management tools themselves are decentralized.

In a traditional environment, all personal data, including user IDs and passwords, are stored on a central server, which makes them vulnerable to theft. Once a hacker breaks through the firewall, all that information is up for grabs.

With blockchain, users maintain control of their own IDs in personal, decentralized wallets, not on the actual chain. This provides a high degree of protection because hackers now need to break into numerous copies of the wallet, not just one, in order to steal the information it contains.

At the same time, it provides a single ID for transactions with multiple third parties rather than the plethora of user names, passwords, and other data for each service provider.

Distributed Identity Management is a Surging Market

This will likely cause the blockchain Distributed Identity Management (DIM) market to double every year until at least 2028, when it will top $35 billion, according to a new report from Markets and Markets.

The healthcare industry, particularly in North America, is at the forefront of this movement as it looks to streamline processes and lower costs without compromising the integrity of patient privacy.

Many gaming platforms are turning to blockchain and DIM as well, giving players enhanced opportunities to exchange tokens, rewards, and other assets.

This sometimes creates virtual economies where players can enrich themselves by creating unique items and experiences. As this market progresses onto the metaverse, a reliable, resilient means of identity management will be crucial to widespread adoption.

Self-Ownership

Two critical elements of DIM are Self-Sovereign Identities (SSIs) and Know Your Customer (KYC).

SSIs transfer ownership of identity and access information from the organization that maintains the digital platform to the user’s decentralized wallet.

This is what essentially democratizes the field of ID management away from central authorities to individuals.

KYC is the companion technology that strikes the balance between privacy and identity management. It does this by allowing members of the chain (both organizations and individuals alike) to verify user identities without requiring members to reveal themselves.

As a decentralized tool, KYC enjoys the same level of trust as the blockchain itself,; that is, if confirmation of one’s legitimacy can be established across enough nodes on the chain, it is safe to proceed with the transaction. In this way, it helps protect against fraud and abuse while maintaining the crucial need for members to remain anonymous.

Knowing the Risks

Blockchain DIM is not risk-free, of course. For one thing, says market analysis firm Financial Magnates, identities are only as secure as the blockchain itself and the cryptography methods it employs. As blockchains proliferate, users will have to take care when deciding which ones to support.

Also, greater control over one’s digital ID also comes with greater responsibility for its integrity. This means it is up to the user to ensure personal information does not wind up on the chain itself since, once there, it can never be removed.

This will require a fair bit of knowledge as to how blockchains work, which at the moment is in relatively short supply.

ID management can also weaken when blockchains are forked or interact with one another. Blockchains currently operate on multiple technologies, standards, and regulatory frameworks, and this complicates the ability to maintain full interoperability across multiple functions, including access and security.

The Bottom Line

While these issues will likely remain for some time, it appears that decentralization will be a significant net positive for identity and access management. Users will benefit by having a single, trustworthy means of accessing all manner of digital services, while providers will see streamlined operations and faster payments and order fulfillment.

Vigilance will always be required to ensure new threats do not become serious impediments to robust digital activity, but simply converting to blockchain-based DIM solutions should push the safety and security of the world economy to an entirely new level.