DID, which is easily overlooked, is the passport to Web3

Original title: 《 Decentralized Identity: Passport to Web3 》

Original author: Amber Group

Original translation: Evelyn, W3.Hitchhiker

Introduction

The Internet was created without a native identity layer for people. Because of this, the problem of digital identity was relegated to websites and applications. This isolated approach may have been appropriate in the early days of the Internet, but with billions of people now online, its shortcomings are becoming increasingly apparent. Usernames and passwords remain the mainstream model, despite being repeatedly proven to be an insecure model. The average person has to deal with 70 to 80 passwords, resulting in a significant decline in user experience. In fact, there are some multi-million dollar businesses built around helping businesses and individuals manage their fragmented accounts, such as Okta, 1Password, and Dashlane. The bottom line is that users don't actually own their online identities. Instead, they rent it from companies and centralized entities. As a result, they are vulnerable to the risk of their digital identities being hacked, manipulated, censored, or simply lost.

The emergence of Web3, where economic transfer is fundamentally embedded, has brought a renewed emphasis on creating strong identity systems. While decentralized identity (DID) is a largely overlooked topic compared to DeFi, NFTs, and DAOs, we believe it is a critical technical foundation for enabling Web3 native applications. If we create a shared, flexible, and resilient identity layer, we can greatly unleash the pace of innovation by creating a much broader design space.

In this report, we provide a high-level introduction to key DID concepts and the current DID ecosystem, and dive into some of the projects at the forefront of building the identity foundation for Web3.

Decentralized Identities (DID)

The DID specification from W3C is a widely accepted standard that ensures identity systems can interoperate across different networks and platforms.

Below is an overview of the DID architecture. A DID is an address on the Internet that someone can directly own and control. It can be used to find connected DID files, which contain information related to the DID. DID files contain relevant information to enable use cases such as check-in, data encryption, communication, etc. Cryptographic proofs, such as digital signatures, allow entities to prove control of these identifiers.

Basic Components of DID Architecture

In summary, DID is the identity hub. Because users control their hub, they can decide when, with whom, and under what conditions to reveal elements of their digital identity. As the DID standard is adopted by more people, individuals will not be locked into a single ecosystem or isolated approach.

DIDs provide users with control, security, privacy, and portability

DIDs enable new use cases

In the physical world, identity is integral to a well-functioning society. Passports enable governments to identify their citizens, driver’s licenses enable citizens to claim the right to be on the road, university degrees confer qualifications, and so on.

Similarly, DIDs will enable high-value Internet economic activity. Below, we highlight some of the current Web3 pain points that DIDs can solve.

NFTs — Authenticity and Identity

Fraud and plagiarism continue to plague artists and creators. For example, Derek Laufman, digital artist and designer for Marvel's Super Hero Adventures, saw his work auctioned off on NFT platform Rarible without his knowledge. Stories like this are common.

NFT Fraud Continues to Plague Artists

Source: Twitter

A strong DID infrastructure can solve this problem. Applications can be built on DIDs, allowing creators to prove that NFTs representing digital or physical assets were created by them. Buyers and sellers will also be able to verify the provenance of digital artworks. DIDs can also help facilitate more engagement between artists and their communities, such as limiting ownership of NFTs to community members to limit speculation by scalpers, or providing exclusive NFT content to specific holders.

More broadly, NFTs can serve as an anchor for decentralized identity. There are already some users who identify their online presence not only with usernames but also with NFT items. As an example, Manifold co-founder @richerd explained that he turned down a $9.5 million offer for his cypherpunk NFT because he considered his cypherpunk to be his identity and brand.

NFTs as Online Identity

Source: Twitter (@richerd)

Unlocking the Next Phase of DeFi

To date, collateralized lending has been the backbone of DeFi growth. But because crypto financial protocols aim to be completely trustless and permissionless, they often require over-collateralization. For example, loans issued with ETH on MakerDAO require a collateralization ratio of 130-170%. This has fueled DeFi's growth over the past year, but collateral requirements have limited usage primarily to crypto traders looking to take on leverage. For most, the reason they want to borrow is that they don't already have the money they need.

Lowering or completely eliminating collateral requirements is key to bringing DeFi to mass adoption. Having a strong DID layer can allow for "on-chain" credit scoring, providing users with credit-based lending opportunities. Additionally, because users have direct control over their credit scores, they can better monitor and adjust their borrowing and lending behavior. Therefore, DIDs offer the opportunity to further democratize the decentralized financial system.

In addition, having a strong identity layer in financial applications can solve other current problems in DeFi, such as:

· Improve the fair distribution of token airdrops by verifying actual members and reducing the possibility of bot-diluted airdrop events.

· Use DIDs to gate access to DeFi pools to reduce spam/Sybil attacks, or enable institutions to participate by providing compliance tools to identify counterparties.

· Guide users through the dark forest of Ethereum, illuminating actors that can be trusted to act in a positive-sum manner.

Decentralized Autonomous Organizations (DAOs)

DAOs often use token-based governance for voting, influence, and priority. This often makes sense — large numbers of token holders have the most skin in the game — but it can exclude or deprive active contributors who may not have large amounts of capital. While members can build their reputation within a DAO, they may need to build that reputation from scratch in a new setting.

DIDs can preserve a user’s reputation across multiple DAOs. The portability of credentials from one DAO to another mirrors the reputation portability we already enjoy in the physical world, preventing active contributors from starting from scratch. Additionally, other Web3 backgrounds, such as participating in Gitcoin, publishing on Mirror, or contributing code on Radicle, can further help a DAO find qualified candidates.

The DID Ecosystem

The DID ecosystem can be broken down into a number of layers, each of which builds on top of the underlying protocol. We leveraged and slightly modified DIF’s 4-layer identity model to map current DID projects to their primary focus, but caution that this is a simplified model and most projects go beyond one layer.

Layered Decentralized Identity Ecosystem

Source: DIF, Amber Group

· Layer 1: Identifiers and Standards

Standards, identifiers, and namespaces create a public trust layer that ensures standardization, portability, and interoperability. They also allow the network to register and manage DID methods, providing rules and context for the network ID system for developers and users.

The Decentralized Identity Foundation (DIF) is a key player in this layer and the cornerstone of the ecosystem. It serves as a center for development, discussion, and management of all activities required to create and maintain an interoperable open ecosystem for the DID stack.

· Layer 2: Infrastructure

The infrastructure and proxy framework allow applications to interact directly with each other and verifiable data registries. These solutions include communication, storage, and key management. We highlight Ceramic and ENS as projects on the front lines of building DID infrastructure (while ENS’s classification can be debated, we put it in the infrastructure layer because we foresee credentials and applications being built on top of ENS in the future).

· Layer 3: Credentials

Credentials must be managed, updated, and exchanged. The purpose of this layer is to figure out how DIDs negotiate proofs of control and authentication, as well as securely pass data between identity owners.

BrightID is a notable project in this space. It is a social identity network with over 30,000 users that allows people to prove to applications that they are not using multiple accounts, thereby minimizing the chances of Sybil attacks.

Vitalik Buterin talks about the potential applications of BrightID

Source: Twitter (@VitalikButerin)

· Layer 4: Apps, Wallets, and Products

This layer is likely the most familiar to readers and intends to provide real-world use cases and value to consumers. Some projects, such as Goldfinch (uncollateralized lending), use proprietary unique entity checks, but aim to leverage decentralized ID solutions as they mature. In contrast, other applications have already leveraged existing DID technology, such as TrueFi (uncollateralized lending with on-chain credit scoring), Gitcoin (funding public goods), and Essign (decentralized electronic agreements).

· Layer X: Transversal

These projects largely transcend any individual layer and have impacts on multiple levels. For example, Europe’s GDPR data protection law has an impact on all areas of the ecosystem.

Tokens in the DID Ecosystem Value

Source: CoinGecko, Coinmarketcap as of 22 November 2021

Selecting DID Projects

Ethereum Name Service - Ethereum's Public Archive

The Ethereum Name Service (ENS) is a foundational tool that turns any Ethereum address into a public archive. Its main job is to map human-readable names to machine-readable identifiers. Instead of transacting with "0x7fc7a9694A09077e137f953108265ad59cCF5ba3", you can enter "amberfin.eth" instead. And, because of the hierarchical nature of ENS, anyone who owns the domain may also own subdomains. For example, because Amber Group owns "amberfin.eth", it can also create "pay.mberfin.eth". ENS domains can also have text records, which allows users to store a wide variety of data, all tied to a single identifier. In this setup, there is no centralized entity or company involved.

· Amber Group's ENS Records

ENS use cases continue to grow. Full DNS integration for ENS launched in August, so you can send cryptocurrency to "example.com" instead of "example.eth." Additionally, .eth domains can be used to build decentralized websites. For example, Ethereum co-founder Vitalik Buterin used this DNS integration in conjunction with IPFS to create a robust, censorship-resistant website https://vitalik.eth/ .

ENS is likely to play a key role in the future of portable and decentralized identity. It is registered as a DID-representation, allowing ENS names to be wrapped as DIDs to facilitate interoperability. Many Web3 users already use ENS as their identifier. A survey of ~300 Ethereum users found that ~64% already have an ENS, and on-chain analytics show that ENS users own an average of 2.5 domains. As additional features are introduced (such as NFT avatar support) and dApps adopt ENS more and more, Web3 users may increasingly use ENS as their de facto public identity on Ethereum.

ENS Name and Avatar Support on Uniswap

ENS Ecosystem

On November 2, ENS announced that it was moving toward decentralized governance by accepting applications from DAO representatives and airdropping ENS governance Tokens . The airdrop consists of 25% of the total maximum supply; the remainder will go to community treasury and contributors. The distribution essentially gives half of the total Tokens to those who have been there (former contributors and users) and half to those who will be there (the community treasury).

ENS Token Distribution

ENS Token holders only hold governance rights for the DAO and receive no additional monetary value. Uniquely, ENS Token holders are asked to sign the ENS Constitution, which highlights key principles—like enforcing property rights, avoiding rent-seeking behavior, and integration with the global namespace—in order to claim their Tokens . Therefore, one of the most exciting aspects of the ENS Token is that it is a grand experiment in how markets price digital public goods.

ENS has generated nearly $20 million in revenue, primarily from new domain name registrations, which go to the DAO treasury.

ENS Monthly Revenue

Source: Dune Analytics (@makoto)

ENS revenue per transaction is also increasing, suggesting that users are registering domains for longer periods of time, acquiring higher value domains (i.e. shorter domains), or both.

ENS revenue per transaction

Source: Dune Analytics (@makoto)

After hitting an intraday high of around $8.4 billion, ENS’ fully-diluted market cap is now [$4.2 billion], meaning it’s trading at 236x trailing 12-month earnings.

ENS Market Cap (fully-diluted)

Source: CoinGecko

MetaMask - Gateway to Blockchain Applications

In the new technology paradigm, the solutions that users interact with most often have a huge impact on the future development of the industry. Similar to how browsers were the battleground for Web1 (Netscape, Internet Explorer, Google Chrome) and applications for Web2 (Facebook, Instagram, Netflix, Spotify), wallets may become the battleground for Web3.

If you have ever interacted with a Web3 application, you have most likely used MetaMask . MetaMask Launched by ConsenSys in 2016, MetaMask is a non-custodial cryptocurrency wallet that allows users to interact with the Ethereum blockchain and any Ethereum-compatible network (such as Polygon, Arbitrum, Avalanche).

While not strictly focused on decentralized identity, MetaMask serves as the de facto application for over 21 million monthly active users to access their Ethereum addresses. Parallel to the Web2 Single Sign-On (SSO) option, nearly all EVM-compatible Web3 applications will offer a "Login with MetaMask ".

Registration options for Augur (left) and OpenSea (right)

MetaMask serves as a powerful mental model of what a broader DID solution might look like, while also highlighting the promise and perils of self-sovereignty. Since MetaMask users hold their own private keys, they truly own the assets in their wallets. There is no need to trust a third party with security and custody. Additionally, users can seamlessly transfer assets from one application to another. For example, an NFT purchased on SuperRare can easily be sold on OpenSea, limiting platform lock-in and enhancing portability. Arguably, the customer experience is also improved — instead of dealing with complex registration procedures and managing multiple usernames/passwords, users can simply connect their MetaMask wallet to try out new applications. And, while it may seem like "connecting with a wallet" is fragmented, it's important to remember that these wallets are just user interfaces and all use the same basic account system - you can import your Web3 accounts into other wallets.

Import an account to MetaMask

However, hacks and scams abound. Web3 users must remain vigilant about the security of their wallets to avoid losing control of all their assets. Even just losing a wallet's seed phrase can result in permanent loss of funds. Therefore, some users may still prefer to entrust account security and management to a third-party custodian.

MetaMask is expected to gradually transition to decentralized governance. Joseph Lubin, founder of ConsenSys, recently said that MetaMask will launch a Token in the near future. Erik Marks, a senior software engineer at MetaMask, said the project is "absolutely open to the idea of making the project community-owned," though the team hopes the use case for the MetaMask Token will be compelling. Some have speculated that if MetaMask does conduct an airdrop, users who have used MetaMask's swap feature will be a major deciding factor.

Consensys CEO talks about MetaMask Token Issuance

Source: Twitter (@ethereumJoseph)

MetaMask monetizes primarily through its embedded swap feature, which aggregates data from decentralized trading platform aggregators, market makers, and DEXs, and adds a 0.85% swap fee on top. Swap adoption has grown significantly since the beginning of the year — MetaMask earned around $40 million in swap fees from its swaps last month.

MetaMask swap daily volume and DAUs on Ethereum L1

  Source: Dune Analytics (@tomhschmidt)  

In fact, the revenue growth of MetaMask ’s swap function significantly exceeded that of Sushiswap and Curve.

MetaMask ’s revenue compared to DeFi protocols

Source: Dune Analytics (@momir)

Uniswap and 1inch, the leading Ethereum DEX and DEX aggregator respectively, make up the majority of MetaMask ’s liquidity sources.

MetaMask Swap liquidity sources

Source: Dune Analytics (@momir), November 21, 2021

MetaMask The potential valuation range for tokens is wide. There is no direct comparable to stock valuations, but ConsenSys’ recent equity raise ($200 million at a $3.2 billion valuation) can provide a rough estimate of the possible value of the MetaMask Token (when Sky Mavis raised equity at a $3 billion valuation, AXS Token was worth about $4-5 billion). Direct Token comparability also suggests a wide range. Applying a multiple of $500 to $1,000 per MAU suggests a potential valuation range of $10.5 billion to $21 billion.

ConsenSys valuation benchmark

Source: Public filings, Capital IQ, CoinGecko, Amber Group estimates

Ceramic

Ceramic is a public, decentralized data network for managing dynamic and mutable information on the Internet. It provides developers with the ability to build applications without databases or servers by creating a flexible primitive called Ceramic streams.

On Ceramic, each piece of information is represented as an append-only commit log called a stream. Each stream is a directed acyclic graph (DAG) stored in IPLD, with an immutable name, called a StreamID, and a verifiable state, called a StreamState. A stream is conceptually similar to a Git tree, and each stream can be thought of as its own blockchain, ledger, or event log. Tile Documents is a type of Ceramic StreamType, and is often used as a database replacement for identity metadata (such as profiles, social graphs, linked social accounts), user-generated content (such as blog posts, social media), DID files, verifiable credentials, etc.

The protocol does not rely on any specific blockchain. Instead, it can be conceptualized as a "document chain" where verifying the state of a particular document only requires the user to synchronize the data of the given document. Users do not need to synchronize the state of the entire network as most blockchain networks (such as Bitcoin, Ethereum) typically do. Therefore, there is no global file ledger.

One of Ceramic’s key tools is IDX, a cross-chain identity protocol that provides a unified repository where all applications can register and discover data sources associated with a user’s DID. It can be thought of as a decentralized user table. As a result, IDX allows users to control their identity and data without being locked into any single application, and to easily protect and port their data across applications. At the same time, it allows developers to build data-rich applications without forcing users to recreate the same data on each application.

Ceramic is an important middleware in the DID technology stack. Some of the projects built on top of the Ceramic network that have seen traction and market adaptability include:

· Boardroom: A governance management platform for DAOs that uses Ceramic’s platform to store proposal comments.

· Rabbithole: An application that incentivizes people to use Web3 projects, allowing them to earn points and cryptocurrency. Rabbithole uses Ceramic’s network to connect multiple Web2 and · Web3 accounts into a unified, cross-chain DID, and allows users’ reputation to span other Web3 applications.

· ArcX: A decentralized application that provides on-chain credit scoring and identity by issuing “DeFi passports”.

Conclusion

The Internet is perhaps the most important invention of this century. Over the past two decades, it has transformed the fundamental nature of information flows in society: media, politics, news, education, social interactions, and more. Yet, even as economic activity increasingly moves from atoms to bytes, our online identities still lack true ownership and remain siloed within platforms.

With the advent of the Internet of Value, robust DID solutions will be needed to make Web3 mainstream by enabling new use cases. We are still in the early stages, but the future is bright. Due to the composability and interoperability of the DID standard, the momentum generated by each new application will influence another. We expect the importance of DID solutions to continue to grow exponentially in the coming years and kick off the next major cycle of Web3 applications.

Appendix I: A Beginner's Guide to ENS Domains

First, connect your wallet to the ENS application.

Search for the domain you want to register. The price of ENS domains varies by length - the shorter the domain, the higher the price. If it's available, you'll be able to register for multiple years. Each registration and renewal costs money, so it's most cost-effective to register for at least a few years. Click "Apply for Registration," wait a minute, and then complete the registration to secure your ENS domain.

Go to "My Account" and set up a reverse record. You can only have one primary ENS name per Ethereum address. Afterwards, any party you transact with can refer to your .eth address instead of your public key.

You can also click on your ENS name to modify the text record for your name. The ENS Medium blog has published a guide if you want to also connect a DNS registrar you own to your ENS name.

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