Technologies and ecosystems, such as decentralized autonomous organizations (DAOs), non-fungible tokens (NFTs), and decentralized finance (DeFi), are but a few of the more groundbreaking developments spawned from the Web3 boom. However, more recently, Decentralized Identifiers (DIDs) have emerged as the latest tech solution out of the Web3 pipeline. This on-chain user verification method seeks to disrupt intrusive and outdated Know-Your-Customer (KYC) models that function in contrast to the pseudonymous ethos of Web3.
In this article, we’ll take a closer look at what DIDs are, their applications to Web3, and how they can potentially play an integral role in DeFi’s mass adoption.
Decentralized identification is a method for securely verifying our on-chain identity while protecting our personal information and privacy. It resembles tangible identification papers such as driver’s licenses and passports but features superior data security that eliminates the possibility of theft or forgery. Similar to how we use our physical ID for day-to-day activities, decentralized identities may be utilized to access complicated financial instruments, commerce, and more.
Unlike Web2 identification methods, which typically require users to KYC across many different platforms and store their credentials on a centralized server, DIDs offer a universal solution that connects to their decentralized wallet and provides proof of verified credentials (VCs). A trusted third party cryptographically stores these credentials without using a centralized database.
To the naked eye, DIDs may resemble NFTs, as they are immutable digital assets that users store in their DeFi wallet. However, the two technologies are inherently different and should not be bundled together in the same category.
An NFT can be traded or sold on marketplaces or sent from one wallet to another. In contrast, DIDs do not reside on a blockchain the way NFTs do and are bound to a user’s wallet. As a result, DIDs cannot be swapped for cryptocurrency or traded for other NFTs. A modern-day comparison would be to think of it as a decentralized pseudonymous passport that enables its owner to circumvent the hassle of repeated conventional KYC requirements and traverse several Web3 borders freely.
In recent years, the proliferation of decentralized services such as digital asset trading platforms and DeFi has attracted considerable interest. However, they have not arrived without repeated hazards. As the rapidly increasing DeFi sector radically transforms financial operations, authorities continue to spotlight the system’s faults.
Anonymity is a core pillar of DeFi and a significant selling point for Web3 maxis. Unfortunately, it’s also a central pain point that regulators seek to resolve. The absence of regulatory oversight is a severe concern to governing bodies and law enforcement. As the sector evolves, so does the opportunity for hostile actors to engage in illegal acts without consequence. Case in point, in 2021 alone, scammers made off with approximately $14 billion at the expense of everyday DeFi users, setting record-breaking losses.
Federal authorities have also addressed DeFi’s lack of anti-money laundering and anti-terrorist funding compliance since the anonymity of users in the space not only allows for both of these illicit activities to occur but also provides them with a means to flourish.
Enabling DIDs offers DeFi platform developers and moderators a way to push back against the lack of control and filter out bad actors based on attributes such as their on-chain reputation or credit score. Should a user demonstrate a clear intent to scam or refuse to adhere to platform rules, moderators can blacklist their wallet address and ban them from their ecosystems entirely.
DIDs can help Web3 gaming developers win the seemingly never-ending battle against the nascent sector’s most infamous villains: Sybil attacks and bots.
Levan Kvirkvelia, the co-founder of the anti-bot detection tool Jigger, disclosed in a recent study that 40% of Web3 games are plagued with bots. And we’re not talking about a modest infestation — rather the opposite, to the tune of over 200,000 maliciously programmed bots across just 60 Web3 games.
Certainly, not all bots are deemed “evil bots” since game creators use some to allow human players to participate in gaming platforms during off-peak hours. The majority of the bots in question, however, are not the “good bots” that Web3 players and developers want for their environment, which has created a serious issue:
The integrity of Web3 games has been badly compromised, and the entire sector may be susceptible to manipulation by a swarm of malicious actors attempting to extract every last ounce of value from play-to-earn games and deprive real gamers of a fair opportunity.
DIDs arm Web3 game developers with the necessary defenses to verify that all users on their platforms are humans and holders of a single wallet, thus preventing multiple bot-controlled addresses from infiltrating their game. Furthermore, should a player demonstrate suspicious activity in the game, platform moderators can blacklist their wallet address from participating again.
For now, aside from a select few forward-thinking entities, many governments and corporations have not yet included DID networks into their Web3 strategy. This is attributed mainly to the short time frame in which this service has been available. Yet, despite their recent introduction, DIDs and VCs have an opportunity to deliver much-needed security, legitimacy, and stability to an asset class that is viewed by traditional counterparts as the “Wild West” of digital finance — and push for its global adoption once and for all.
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