Chuy Cepeda
- Dec 1, 2022
- 6 min read

What can I do with Blockchain Identity?

By Lucas Jolías, Ana Castro y Jesús Cepeda

To be able to implement a Decentralized Identity model, it is necessary to have a decentralized public information registry that is immutable and reliable. Blockchain is precisely the technology that, by definition, is a decentralized and public network where each record or transaction made there is immutable, traceable, and secure, providing the necessary trust to all actors involved in its use. Now, the relationship between blockchain and Decentralized Identity has 4 transformative uses: Verifiable Credentials, Network Economy, Tokenization, and Decentralized Participation.

Verifiable Credentials

We have the issuing entity, responsible for authenticating the identity of users and providing (issuing) any document of the person that can be digitized from the physical world into a verifiable credential. When the issuer issues a credential and writes it under certain international standards, this credential is called a verifiable credential, representing statements made by an issuer in a way that evidences manipulation and respects privacy. Verifiable credentials combine the digital watermark of data through cryptography and privacy preservation techniques, allowing not only physical credentials to be securely converted to digital ones but also allowing owners (users or recipients) of these credentials to share specific information from the credential without exposing all the data, and without exposing the data itself. For example, a user could share with a third party that they are of legal age, without the need to actually show their date of birth or any other data typically included in physical credentials. These third parties with whom the credentials are shared are known as verifiers (for example, a service provider), as they need to validate some data, attributes, or permissions of the users through their verifiable credentials. This verification is done instantly and securely, being able to know if the information is valid, if it has not been tampered with, and if the credential remains valid or has been revoked, without the need to go to the issuer or even to complex legal or notarial processes. These verifiable credentials that have been issued to the user and that belong to them are stored and managed by the person themselves from a digital wallet, giving them portability of their data, agility in managing their attributes, and ultimately returning sovereignty over their identity. Finally, anchoring these credentials within a blockchain will free the user from any possible censorship or unauthorized alteration by the issuer, as that digital document is now in the user's power. The most appropriate use cases for issuing verifiable credentials from a public issuing institution to a citizen user or recipient are those where a procedure or service ends in an official document or plastic that the person will use to demonstrate ownership of a permit, license, certificate, proof, act, among other elements that are part of the citizen-government interaction and that are requested in our daily lives. It is important to differentiate that those documents that have the possibility of being transferable are not recommended to be issued as verifiable credentials, as the value of the verifiable credential lies in its immutability and therefore, changing ownership, for example, of a vehicle, is much more feasible and convenient to do with a token, as we will see later.

Network economy

When thinking in terms of a decentralized economy and society, really exciting things can start to happen. When people all over the world become owners of their own information, this can be a catalyst for a new set of business models, products, and services that allow for completely new ways of interacting. A government that has officially recognized people's Decentralized Digital Identity and has confirmed it by depositing official documents as verifiable credentials, is a government that has invited sectors such as social, academic, and private to start interacting with people's wallets. As Web 3 penetrates more and more, we will see a "Connect Your Wallet" button on various websites. All these sites will be able to interoperate through putting the citizen at the center. This is an opportunity to create a new network economy that not only promotes innovative economic development but can also become a mechanism of financial sustainability for government platforms that recognize digital identity. For example, every time a company asks me for an official document, the government can receive a reward. This network economy allows for unprecedented transactional dynamics of services and has a lot of potential to become a new revenue collection method that is more agile, transparent, reliable, and zero bureaucratic.

Tokenization

Starting with citizens with their wallet in hand, in which they carry their verifiable credentials issued by different public and private institutions, we can now think of the possibility of carrying tokens. The path of these tokens is dual; they can be non-fungible tokens (NFTs) or fungible tokens. The most certain use case for NFTs in the public sector is for any document that represents property and is transferable. Unlike a verifiable credential whose issuer and receiver are immutable, an NFT allows its holder, the public key associated with that token, to be recognized as the true and only owner. Therefore, for example, a land title or a change of ownership of a vehicle is now quite simple to sell and transfer with the security of having blockchain capabilities against any type of fraud. This agility promises a more dynamic economy, but above all, complete certainty about the true owner in the face of the duplication or falsification of deeds. Problems that today take decades and high costs in legal complexities to resolve would cease to exist in this future governance model.

On the other hand, almost all governments in the world, but mainly in Latin America, suffer from budgetary limitations. During this COVID-19 pandemic, almost no government has a budget, for example, to renew all its public lighting to modern LED technology. They focus on health and economic recovery because that is the smartest political move. And what is even more complex, McKinsey ensures that 20% of the annual public budget is lost simply in inefficiencies and unnecessary bureaucracies. But what if we had a digital mechanism based on blockchain to allow people to invest in their cities? We know that's what taxes are for, but instead of having "the cost of living in society today," we could create "an investment mechanism for living in society." A mechanism where anyone can invest to improve public services and get financial returns at the same time. To do this, the key to new mechanisms of public budget, or rather, public-private budget, lies in the ability of blockchain technology to reduce transactional times and costs of subscribing to companies and distributing dividends in more efficient ways, allowing investing from very low amounts to accumulate very high capital, such as changing all the beds in public hospitals, renewing streets and parks, or changing all the lighting or transportation service for the most modern technologies. The tokenization of public services is a possibility to have quality services through the use of fungible tokens. For example, let's imagine that we incorporate a Public-Private Partnership (PPP) with a unique purpose: to change all public lighting to LED technology. Let's imagine that the investment needed to achieve this is $100 million, but the government doesn't have it. It is the PPP's job to obtain that investment from the private sector, to be able to provide the service to the government and for the latter to deliver the public service.

Decentralized Participation

While the government commits to paying a fixed fee for a certain period for the new lighting, the APP begins to look for investment partners. With the current costs and legal complexities of notarization, stock subscription, and dividend distribution, having 100 partners of $1 million each is already quite expensive. But the most limiting factor is how many citizens have $1 million to invest in their city? On the other hand, if we buy tokens representing a share of the APP's stock from the citizen's wallet, we could now have 100 million partners contributing $1 each without increasing legal complexities or administrative expenses. The acquisition of the stock would be legally supported by the token, and the distribution of dividends could be automatic based on the number of tokens in each citizen's wallet. This is an opportunity to break out of the vicious circle of inadequate or poor-quality public services and budgetary constraints that make any intention of improvement impossible.