Self Sovereign Identity
In the last blog, I referenced “the Web 3.0 framework - an internet where users are in control of their own data, identity and destiny”. These are core concepts of decentralisation.
Let’s look at being in control of identity - what does that mean.
Many people involved in decentralisation believe that the concept of ‘self-sovereign identity’ is the answer (https://sovrin.org/wp-content/uploads/2017/06/The-Inevitable-Rise-of-Self-Sovereign-Identity.pdf)
Phillip J Windley says “An Internet-like identity system would allow any person, organisation, or thing to have an identity relationship (something we call a “claim” in the world of identity) with any other. (https://sovrin.org/wp-content/uploads/2017/06/The-Inevitable-Rise-of-Self-Sovereign-Identity.pdf)
And to do this without the need for authorisation from someone else. Because anyone can use these identities and the resulting relationships, without an intervening authority, they’re called “self-sovereign.”
Because the current internet only recognises computers as endpoints, and not humans, each website or online organisation operates their own process for how they recognise you.
This results in the hundreds of usernames and passwords that people have to manage in order to interact with organisations operating on the web.
In turn, each organisation must operate and manage the storage of user ids, passwords and apply appropriate security. The aggregate cost to organisations to host and appropriately manage this sensitive data runs into billions of dollars.
Further, this approach creates duplication and inefficiency, as well as being a target for hackers to steal identity data. It is the linking of abstract business data with a human’s identity that makes data valuable to a criminal. The silo methods by which businesses manage identity, facilitates stolen identity information being used to create new false identities.
A self-sovereign identity is a wrapper for a group of identity objects or transactions that crucially only you control.
No one can take it away from you. You can make the choice to reveal certain information to others. You can also allow others to make claims about your identity, to increase the level of trust in the statements that you make about yourself.
Consult Hyperion define a useful model. (http://www.chyp.com/wp-content/uploads/2016/07/PRJ.1578-Digital-Identity-Issue-Analysis-Report-v1_6-1.pdf)
They state that “digital identity” is any system or scheme, where identification (establish identity), authentication (assert identity) and authorisation (use identity) are performed digitally.
Darryl Morris suggests that identities are “relational and pluralistic”. (https://medium.com/bitfwd/self-sovereign-identity-systems-blockchain-alternatives-to-aadhaar-76335fcd2090)
He talks about Transactional (a growing record of transactions between entities), Reputational (driven by 3rd party assessments) and Attested (Identity by ‘accepted’ attestation of facts by third-parties such as an attendance record or certificate)
A Self Sovereign Identity model has :
Privacy through self created de-individualised entities
Pluralistic for different purposes
Identity through ownership of private keys
Act as locally authenticated single-sign on to block-chain and off-chain services
Personal data is locally accessible
So what does all this have to do with Blockchain?
There are developments underway to use blockchain as decentralised public key infrastructure which would enable self sovereign identities to be used across the internet.(https://w3c-ccg.github.io/did-spec/#dfn-did)
First - an understanding of a Decentralized Identifier ‘DID’ is needed.
“Decentralized Identifiers (DIDs) are a new type of identifier for verifiable, "self-sovereign" digital identity.
DIDs are fully under the control of the DID subject, independent from any centralized registry, identity provider, or certificate authority. DIDs are URLs that relate a DID subject to means for trustable interactions with that subject.
DIDs resolve to DID Documents — simple documents that describe how to use that specific DID. Each DID Document contains at least three things: cryptographic material, authentication suites, and service endpoints.
Cryptographic material combined with authentication suites provide a set of mechanisms to authenticate as the DID subject (e.g. public keys, pseudonymous biometric protocols, etc.). Service endpoints enable trusted interactions with the DID subject.”
In summary, a DID is an internet address (similar to www.google.com) which holds your self-sovereign identity data,. So the DID is stored in the same way as a website. It is not stored on the blockchain.
The blockchain represents a decentralised public key infrastructure, where only the public key for each DID is stored.
The internet is extended to create a new type of URL called a DID. This DID is a reference point for holding identity information - representing yours, mine, a robot’s identity information. The information held relates to the ideas presented earlier about a self sovereign id.
The public key associated with a DID is recorded on the blockchain
Imagine two people, Alice and Bob. They both created DIDs to capture their self sovereign identity information. They then register their DID unique identifiers and associated public keys on the public blockchain (DPKI) network.
Alice then chooses to encrypt a private document and sends it to Bob, along with sending Bob her “DID”. Bob validates the DID, and uses its unique identifier to retrieve Alice’s public key from the public blockchain.
He then uses the public key to decrypt the document, which also proves that Alice is the person that encrypted the message.
Everything you always wanted to know about Decentralisation but were afraid to ask
Any time you read anything about Blockchain, Bitcoin or distributed ledger it won’t be long before you come across the term “Decentralisation” – often referenced as though it is an ideal state, or a holy grail.
This won’t be the only jargon that you will hear, it will often be accompanied with “peer to peer”, trustless, consensus, self-sovereign identity, cryptoeconomics, cryptographic proof and so on.
It can be hard to make sense of the content, when each sentence is littered with unfamiliar concepts. This difficulty comes from the fact that most blockchain articles are trying to describe the differences from the established ways of doing things, and in so doing they generate hard to consume (and understand) literature. Pointing out what something is “not”, is different from stating what it is.
So why is the blockchain community so focussed on this topic?
Simply put, it is because decentralisation is about putting you and me in control of our interaction, and not depending on somebody else, who exists between us and places a price and terms for their involvement.
But, you might say, what and who is in control? Well when you think about the services you rely on to interact with others, a large percentage of them require you to depend on an organisation to coordinate the services and the associated agreement about the terms and conditions (T&Cs) of those services.
It’s easier to list the types of services that don’t require an external organisation, or middle man than those that don’t.
Prior to the internet, middle men were essential to the functioning of an economy because they were the key nodes in a network, and represented a trusted 3rd party to oversee, arbitrate and coordinate interactions – as well as to find and match buyers with sellers.
Why should we move away from centralisation now?
In the early days of the telephone, a person expected to speak to a switchboard operator, and that person would complete the connection to the destination telephone number. At the time, it may have seemed unimaginable that the operator could be replaced with a machine. But it happened, and as a result the process of using a telephone to speak to someone else became quicker.
Elaborating this to the level of a larger business, 3rd parties often levy high prices to cover their cost of operations and the need to make profits.
These organisations have created a core dependency in their markets and they can arbitrarily make decisions impacting customers, and users of their services. Customers have little alternative, and many individuals and businesses depend on these core services.
Consumers organise themselves into pressure groups to campaign for improved services, and in some instances governments appoint “regulators” and “watchdogs” to drive similar outcomes. It all seems rather old-fashioned to need an organisation to exist to apply pressure to another.
Finally, these organisations are often slow and cumbersome to deal with – and they’re not incentivised to improve due to a lack of true competition. In some cases, they can refuse to provide services – which has led to an inability for many members of society to access their services.
However, since the internet, especially internet search, connecting individuals directly with each other has become far easier. The internet, via the web, has been successful in acting as an access platform to economic organisations that have built an online presence for themselves.
However, the internet has been missing a technology that can coordinate, supervise and be “trusted” – which has led to the emergence of new centralised internet businesses (internet middlemen) to cater for this trust and coordination gap.
These new internet-based middlemen have developed the “platform” business model. This model bring buyers to sellers, and layers on necessary commerce infrastructure to support trade (payment, fulfilment, dispute handling, shipping as required by the specific trade).
These businesses add little to the overall service but extract value for themselves and their sharedholders from those participating via fees, personal data, advertising. They’re often price setters, not price takers.
Examples of this model that you will recognised are AirBNB, UBER, Facebook, Amazon. These businesses’ main contribution to the process is supervision, coordination and “trust”.
We now have more middlemen, than prior to the existence of the internet.
What is decentralisation?
Decentralisation is the process of eliminating the middleman, by introducing a technology that can coordinate, and be trusted to record changes in state and ownership of assets.
This technology also introduces incentives to encourage a population (or network) of interested parties to work together for collective gain via motivated by individual self-interest.
This is achieved through the operation of a common token which powers all activity, and value accumulation within the community.
Trust is delivered through the collective acceptance of the way in which technology records and shares the information related to interactions across the internet in a tamper-proof way.
This is the cryptography and consensus method used by the public blockchain technologies to confirm and synchronises changes in state of network member’s assets.
As the types of transaction between participants increases in complexity and requires the involvement of others to provide additional services, so it is necessary to link a software program to the trusted technology – where the program is similarly tamper-proof and transparent – so we can trust it to do what we expect.
This is the promise of blockchain and ‘smart contracts’. The smart contract represents and executes the terms of the agreement which governs our interaction (or trade) and the core blockchain stores the resulting changes in state of our assets.
New internet trust and coordination technology facilitates decentralisation. Decentralisation eliminates the unnecessary middleman and enables interaction between you, me and others. It enables “peer to peer” with an electronic witness, that the network trusts.
But in the absence of a central, 3rd party organisation to organise payment to “employees” – a token is used to incentivise those people that participate in the peer to peer network.
As KJ Erickson says in her article (https://medium.com/public-market/the-future-of-network-effects-tokenization-and-the-end-of-extraction-a0f895639ffb
) “When a network is owned by a private, centralized company, economic value ultimately flows away from network participants and towards an exogenous group of shareholders who hold equity in the corporation. In a network in which there is no single entity that owns and controls the network, this dynamic does not hold true.”
The organisation of processes and agreements between people, the crypto economics that incentivise disparate people to cooperate with each other inside a network, and the technical implementation specific to the Web 3.0 framework “An internet where users are in control of their own data, identity and destiny”. These are the core concepts of decentralisation.
These areas will be explored further in subsequent blogs.
A quick example?
A smart contract (representing the parametric insurance policy) once written, becomes an internet trust technology (akin to ftp, https) or ‘public infrastructure’.
This means that you can dispense with an insurance company (at least with regard to managing claims on flight delays), and rely on the smart contract executing against the flight timings service oracle.
This smart contract becomes part of the fabric of the internet, hence eliminating the need for AXA’s flight delay handling process, and the associated operational cost.
This can be implemented through a decentralised tokenised blockchain ecosystem like https://etherisc.com/ or IBM’s parametric platform
How does a stable coin backed by the US dollar revolutionise payments?
There’s a lot of discussion regarding payments on a blockchain.
Many are sceptical of Bitcoin, Ethereum or XRP ever becoming viable currencies.
However, the “stable coin” is increasingly being seen as a ‘cross-over payment’ mechanism – enabling the advantages of new technology with the certainty and utility of the world’s fiat currencies.
Let’s look at stable currencies in more detail.
What do we mean by stable, with regard to a currency?
“Price stability means that inflation is sufficiently low and stable so as not to influence the economic decisions of households and firms. When inflation is low and reasonably stable, people do not waste resources attempting to protect themselves from inflation. They save and invest with confidence that the value of money will be stable over time.”
So, stability refers to the price of a currency, as expressed against other currencies and the value of an average household’s “basket of goods”. Changes in this year over year are referred to as inflation (or deflation if the basket becomes cheaper).
As Paul Krugman said in 2012, “The advantages of a common currency are obvious, if hard to quantify: reduced transaction costs, elimination of currency risk, greater transparency and possibly greater competition because prices are easier to compare”.
So ideally a currency is minimally impacted by inflation, and because of the scale and size of the currency area in which it can operate, it is a viable medium of exchange for a large population.
With regard to crypto currencies, being stable is particularly significant. Because most crypto currencies are relatively new, and goods and services are not priced in
them – their stability relates primarily to their value against other crypto currencies, or fiat currencies such as the US dollar.
Factors affecting the stability of a cryptocurrency often relate to market sentiment in the underlying technology of that cryptocurrency and its future utility. Holders of the currency may be speculators rather than active users – i.e. they treat the currency as a growth asset, as opposed to a medium of exchange for the purposes of payment.
Further, crypto liquidity is often limited. To elaborate, in order to exchange 1 Bitcoin for US dollars, a bitcoin buyer needs to exist and a bitcoin seller needs to exist. But as buyers of crypto are often speculative in nature, their goal is to push the price down at any opportunity when buying, and seek to hold until prices rise.
These two opposing viewpoints, in addition to the relatively small percentage of the population who own cryptocurrencies, serve to drive volatility. This volatility then acts as a constraint on the coin acting as a medium of exchange. To put it simply, crypto is acquired and infrequently spent.
Ultimately, currency price stability gives certainty over the purchasing power in the short, medium and long run. This certainty frees people to spend with confidence.
Businesses with significant financial commitments look for this certainty, and larger businesses may engage in financial instruments such as futures contracts, and hedging, in order to guarantee this price stability.
So, what is a stable coin?
A stable coin, is a coin or token issued on a blockchain set up in such a way as to reduce price volatility in order to generate the benefits mentioned earlier.
There are 3 known types of stable coin (fiat, crypto, seignorage)
Each unit of the stable coin issued on a blockchain has a corresponding unit of fiat currency deposited into an account (e.g. 1 US dollar deposited creates 1 US dollar stable coin). Think of it as a virtual Dollar bill.
To withdraw a stable coin, the unit is deleted “burnt” and the fiat currency paid to the owner of the stable coin. This option places responsibility on the deposit bank account to remain entirely synchronised (and protected) with the actual amount of coins issued on a blockchain.
Each unit of the stable coin issued on a blockchain has a 1:1 or greater unit of crypto currency (or group of crypto-currencies) locked into an account / wallet supervised by a smart contract.
All activity is handled on a blockchain, hence it can be automated and executed quickly. This option makes stability complex due to the volatility of the collateralized cryptos, and hence it is not capital efficient. It doesn’t require an associated deposit bank account.
In this model, an algorithm maintains the supply of currency. When the price goes up the algorithm prints more tokens (generating profits known as seignorage) to make the price go down to the stable price ideal (for example $1 / unit).
If the price goes down, it uses the profits it made previously to buy units to drive the price up. (This is similar to the actions of some central banks who attempt to influence their own currency value).
Further complicating this model, if no profits exist then the algorithm will issue shares in future profits to investors (in order to generate funds) – however this assumes that over time demand for the stable coin grows.
If it doesn’t the activities of investors and stable coin owners will be to withdraw and sell, sending the value of the stable coin lower. This ultimately defeats the point of a stable coin.
So why is a fiat backed stable coin preferential to an independent crypto, or other stable coins?
As detailed above, crypto-backed and seignorage shares have more inherent volatility and complexity than a coin pegged to the US dollar.
In summary, fiat backed is likely to be the most stable. Similarly, volatility driven by liquidity issues for crypto and seignorage will impact their stability.
Why are stable coins important?
The relative stability of the US Dollar can be taken for granted.
A digital, decentralized currency that is widely accessible and price stable would offer a much-needed alternative for people living in countries with unstable monetary systems and restrictive capital controls, as well as those already transacting in US dollars.
Having a US Dollar stable coin is the first step towards mainstream adoption of blockchain based payment technology.
85% of foreign exchange involves USD
64% of all central bank forex reserves in USD
$580 billion in hard US currency is held outside US
1/3 global GDP from countries who have adopted or pegged to USD
Hence, if you combine US dollars with blockchain technology through a US dollar backed stable coin, you have “all the utility of dollars, moving at the speed of the internet.”
What do we mean by payments?
Typically, the movement of a fiat currency (such as the US dollar) from one bank account to another, uses traditional banking technology such as ACH, Faster Payments, CHAPS.
When funds move across borders the transaction typically involves a foreign currency exchange process, followed by a move through the SWIFT correspondent banking system.
Issues with payment operated via banking networks
Bank accounts are needed, and for global payments often in multiple jurisdictions
Fees can be high – especially cross border through correspondent banks
Time to transact. Moving money globally can take several business days to complete through correspondent banks.
So – what’s happening next?
It is anticipated that an increasing number of financial institutions will provide token issuance and custody services for stable coins through the widely utilised payment oriented blockchains.
Banks themselves could even begin extending credit to real time transactional networks through the issuance of stable coins.
In a blockchain network, settlement can be achieved in real time using tokens and coins.
There is no post-transaction processing required as with conventional payment systems today. This is the primary advantage of a distributed ledger over conventional inter-bank payment technology, i.e. there is only one ledger which every participant “trusts”.
Clearly those who wish to hold or exchange stable coins would be required to comply with terms and conditions set forth by the issuer and its regulatory authorities, but this may be a worthwhile step to leverage the subsequent benefits.
To conclude, a US dollar backed stable coin does for payments what email did for the postal service.
Access to services can retain the regulatory framework that exists for conventional money, and exchange rates are the same as in regular currency markets.
The currency is familiar, stable and has global utility.
However, money movement and settlement can be instantaneous, reducing time, fees and new markets and geographies can be accessed, that were previously constrained by existing banking networks.
Distributed ledger technology connects all parties in a trade in real time for fast payment processing, while maintaining an audit trail.