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A16z: How to build a decentralized identity system based on reputation?

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Decentralized identity systems will make our property and reputation relevant to us, not platforms, that we can take with us and use at will.

With Decentralized Identity, Your Reputation Travels With You Across Cyberspace

Scott Kominers & Amp; Jad Esber, a16z

Richard Lee, ChainCatcher

Web3 has a premise that every Internet user has a unique Internet identifier (similar to an email address) that can be linked locally to any software and stored on a blockchain network. As part of a "decentralised identity", part of a person's online activity will be "on-chain", meaning it is public and easily searchable through an individual's encrypted wallet.

With such a decentralized identity -- a unique, accessible history for each individual -- a person's encrypted wallet would act like a "profile" for Facebook or LinkedIn. But unlike Web2 profiles, decentralized identities are backed up by hard evidence: a permanent, time-stamped record of a person's achievements, contributions, interests and activities to date.

If decentralized identity is widely adopted, people will be able to take their entire selves with them as they move from one cyberspace to another: whatever platform they create, contribute, earn and own online reflects their preferences and experiences. This will bring us closer to the way things work in the physical world -- possessions and reputations are about us, not platforms that we can take with us and use at will.

As far-fetched as it may sound today, the real opportunity in this space is to use on-chain reputation for off-chain purposes. In the creator economy, for example, we might see a Web3 version of YouTube, where videos don't belong to the platform, they belong to the creator. As a result, creators can take their videos to any online space and get any value associated with those assets.

Similarly, on-chain data can be used to measure a user's level of engagement or interest in a particular creator or brand. For example, music artists can easily identify their number one fans based on on-chain interaction data and reward them with privileged rewards. In finance, decentralized identity could help achieve Internet native credit scoring, which could be used to issue loans, conduct user background checks, establish credit, etc.

Web2 to Web3: The transition from fleeting "likes" to building a long-term reputation

In contrast to most Web2 profiles, decentralized identities are not ephemeral. This means, for example, that the diploma NFT in your encrypted wallet will become a permanent academic certificate. Similarly, everything you post online is permanently linked to you (unless you choose to delete it). In addition, having a public history can prove that you were involved in a trend or project long before it took off, such as being a fan of Taylor Swift before it became popular, or reading this article when Web3 was still in its infancy.

This continuity creates new incentives for reputation building: Web3 promotes long-term thinking, rather than creating temporary profiles as we did in Web2. If people have the right to establish and maintain a permanent identity online, we believe on-chain systems can encourage people to be more careful about managing their online footprint -- which may carry reputation markers into the future. In this case, managing a permanent NFT library is riskier than a series of social media posts, because it's a badge of reputation you'll carry around in cyberspace.

1. The infrastructure needed for decentralized identity

If decentralized identity is the future of the Internet, then the contributions you accumulate in your encrypted wallet -- the articles you write, the content you curate, or the things you buy -- will become very important. They will carry your online personality and be the foundation of your reputation.

But in order for decentralized identity to become mainstream, we first have to build systems that map people's relevant experiences down the chain to the social relationships on the chain. We then have to establish mechanisms to standardize, process, and prioritize the data flows that will be added to the chain. In doing so, we need to address the unique challenges of decentralized identity, including the lack of background information about on-chain records and issues related to access to decentralized networks.

From there, we can begin to explore the many use cases that on-chain reputation can lead to, given the publicly searchable nature of decentralized identity that will bring on-chain reputation into real-world activities in the future.

2. Map off-chain experiences and on-chain social relationships

Currently, blockchain technology is mostly used for financial transactions and is often unfriendly to the average consumer. For decentralized identities to become practical and popular, it is important to introduce portals that allow people to record their experiences and social relationships on blockchain networks, such as their educational achievements, professional achievements or fan relationships.

Some companies are already responding to the challenge. Violet is working to verify personally identifiable information on-chain. Rabbithole, Polywork, and 0xStation allow users to keep track of their professional achievements on the chain. Koodos allows for the aggregation of a wide variety of on-chain relationships, enabling people to transform anything on the Internet into a customizable NFT, a meaningful collection of their online identity. (Disclosure of interest: Esber co-founded Koodos, and Kominers advises companies on market design.)

There are two ways to record people's activities and social relationships on the chain: active and passive. Proof-of-attendance protocols (POAP) enable event organizers to generate tokens that participants can collect and are a proactive record-keeping method. When people claim these tokens, they intentionally record a "life event" on the chain, making it part of their digital identity. Similarly, people may actively demonstrate skills, character traits or accomplishments by sending tokens to others, which can be verified through peer review or on-chain activity evaluation.

Or, when a person's wallet interacts with an app or website, information about those interactions may be passively recorded. For example, if your wallet is connected to Discord and you earn server badges, those badges can be added to your on-chain favorites.

3. Handle reputation data and data standards & NBSP;

Once all this identity data is recorded on the chain, we will need systems in place to organize and interpret it, ensuring that the data itself is meaningful to the wallet holder and the person interacting with it. This task is particularly challenging because wallets are also used for ordinary content storage and transactions: they accumulate a lot of jumbled data.

To simplify the logic (and because different aspects of a person's identity naturally overlap and interact), it makes sense to store one person's related activities and contributions in the same wallet. But any given person is not just a creator, builder, investor, or collector; they are many things at once. So we need some way to capture a piece of their decentralized identity and show it to different audiences in different digital Spaces. Imagine a design where the entire contents of a wallet are secret, but access to specific aspects of a person's reputation requires specific keys.

Etherscan, which has a more advanced version, is also useful, allowing users to see all the interactions of a wallet for a certain category of activity, such as those related to community services.

In addition to organizing raw data, it's important to have a system that aggregates and simplifies wallet information, making it legible and easy to compare. A recent example is the DeGen Score, a system that measures users' "obsession with cryptocurrencies" and aggregates all transactions in wallets as data sources. At the same time, Ceramic helps applications keep track of large volumes of variable data and encode relevant information on a chain, allowing data viewers to compare people's contributions to different projects at a higher level.

Managing reputation information also requires publicly accessible data standards -- agreed data formats, such as "what proof of a contribution looks like or" how to represent a necklace of records ". Structured processing of these inputs ensures interoperability:

(1) Enabling people to meaningfully combine "identity" information from different services,

(2) It also minimizes the friction that may arise when the platform interacts with information about different aspects of reputation on the personal chain.

4. The challenges of mainstreaming decentralized identity

Of course, there are inherent challenges to building such decentralized identity systems. Existing technologies for recording inputs are often primitive -- largely limited to transaction histories -- and something as subjective and complex as "identity" will require more context. Contextual information explains why you acquired or purchased an artwork. For example, earning an NFT for your contribution to the project should provide background information about why you earned it and what skills you demonstrated. An event to buy digital art should include your reasons for buying art, how it makes you feel or what you think.

A system built on permanence also presents challenges for escaping past identities, as is evident in today's credit scores and other long-term reputation mechanisms. It may mean that you can never escape mistakes.

In addition, current encrypted wallets offer little protection against data loss or leakage. Before encryption becomes a mainstream repository of identity and reputation, it needs to provide the kind of security protections we've become accustomed to.

More broadly, expanding access to on-chain sources of reputational information is also crucial. Right now, cryptocurrencies tend to be more skewed toward the rich, male, and white. If the playing field for establishing on-chain identities is not level, this new source of reputation will primarily benefit the privileged, thereby exacerbating existing social and socio-economic divides.

Decentralized identity will bring downstream opportunities

Despite these challenges, we believe on-chain reputation will unlock a wide range of use cases. Some of these uses are explored below, but many others are believed to be beyond our ability to imagine. By moving "identity" up the chain, we can upend antiquated financial processes and provide equitable access to capital, redesign how talent and projects are matched, and provide a whole new paradigm for identifying and compensating labor online.

The traditional financial system makes it hard to form and even access a person's credit history. At the same time, the portability and accessibility of decentralized identities can significantly undermine the way our reputation is used in the current financial system. For example, decentralized identity can help enable credit scoring that is native to the Internet, unlocking a variety of financial use cases such as issuing loans, user background checks, and establishing credit.

Also, unlike existing credit scoring systems, on-chain systems can be easily ported across borders and applications. In particular, however, it is important to think carefully about how users can add context and organize their permanent public history to avoid undue bias. It's important to avoid being evicted in the digital world, which can hinder your ability to get housing in the future.

In the recruitment world, a decentralized identity, based on a fine-grained record of professional activities and achievements, ensures an "open resume". This gives a fuller picture of someone's past work and a more nuanced insight into their skills and contributions.

While recording and storing this level of professional activity can be complex, an on-chain aggregation of such activity data can be performed more quickly than a static user-generated professional profile on LinkedIn. This opens up a use case for facilitating talent matching. Imagine another version of Behance -- where a designer's portfolio can be populated with projects that are automatically tracked and validated, enabling a direct, blockchain-mediated recruitment.

There's also a whole class of apps that use on-chain reputation to inspire new forms of creation or contribution. So far it has been difficult to identify the head items. By tracking a person's contribution activity across the Internet with a decentralized identity, we will be able to better measure someone's early interest in a topic or trend and the value of someone's contribution to a topic. Startupy, for example, encourages experts to contribute entrepreneurial knowledge and gain a reputation for radiating across the Internet in specific areas.

The sheer volume of information stored on the chain could even upend the massive market for search and discovery. The publicly queryable nature of decentralized identities will enable a range of matching algorithms that previously could only be developed by people with access to our data.

Also, until now, we've only been able to measure how much value people have associated with content based on basic engagement metrics, such as how much time they spend on apps or whether they "like" them. If we better understand people's willingness to pay for different content, we'll have a better idea of how engaged or interested they are.

Moreover, if every piece of content on the Internet was truly composable or remixable, it would be possible to determine what would inspire further creation or be the most memetic. This will provide a new way to present content, similar to TikTok's system. Finally, and perhaps most destructively, creators themselves can be a new platform for discovery -- particularly incentivized through the Token model.

If we move towards an Internet where "identity" is linked to individuals, rather than scattered in isolated Spaces, we will be closer to how things work in the real world: our online possessions will belong to us, and we will be able to present our full, authentic selves in cyberspace.