There seems to be several factors to blame for the recent crypto fallout – everything from contagion fears stemming from FTX’s fast and precipitous fall; to the need for more stringent regulations, especially around stablecoins; and more. But another big part of the decline of crypto 1.0 certainly has to do with the failure to address authentication and fraud appropriately, shaking the public’s trust.
Consider the following: a Consumer Financial Protection Bureau (CFPB) analysis published this past fall revealed that fraud made up about 40 percent of all cryptocurrency-related complaints it received between October 2018 and September 2022. Recently it’s only gotten worse, with fraud growing to 63 percent of CFPB-reported crypto complaints in September 2022, the last month on record. In this context, part of crypto’s comeback is going to involve properly addressing authentication and fraud once and for all. But what is it going to take to get there?
Decentralization: The Future of Authentication
The concept of decentralization is a core tenet of Web3 technology.
Decentralization provides users with ownership, access and control over their own data without relying on Big Tech intermediaries, and increasingly we’re seeing this notion of decentralization extending to identity and authentication. Decentralized authentication means there is no central authority needed to verify a person’s identity. In this model, users authenticate themselves to a neutral third-party only once, with proof of one’s identity then saved in an identity trust fabric (ITF) that may include blockchain technology. This ITF acts as a middleman between a user and all of his/her service providers, handling all identification and access requests. Any data held by the ITF is encrypted and encoded under complex mathematical operations, increasing security to levels the likes of which humankind has never before seen.
An immutable record of a person’s data being recorded in an ITF or on a blockchain might sound a little scary and risky. But this is where the concept of decentralized identifiers, or DIDs, comes in. Traditionally, many digital services have relied on password-based logins, but given how easy it is for passwords to be lost or stolen, this is a highly insecure approach. Alternatively, multi-factor schemes can increase security, but these add friction that often reduces user productivity and adoption. Think of when you’re trying to access a service, only to find once you successfully enter your password, you need to scramble for your phone to receive and submit a one-time code sent to you via text. DIDs, on the other hand, securely confirm a true, unfalsifiable digital identity without adding aggravation or inconveniencing users.
There are multiple ways to create and prove this true identity, with biometrics being one notable example – after all, nobody can fake someone else’s fingerprints, voiceprint or faceprint. When one’s DID is linked to a physical attribute, the individual can authenticate securely without having to reveal their name or any other identifying information.
Biometrics also deliver the universally accepted standard for exchanging and verifying digital credentials that decentralized authentication requires.
The Benefits to Crypto Service Providers Adopting Decentralized Authentication
In my view, decentralized authentication is the way of the future and crypto service providers that understand and capitalize on it will create and benefit from a long-standing competitive advantage. These companies will reduce the often-heavy compliance burden of dealing with and handling users’ private info. These providers will also enjoy a higher level of security and information protection themselves, with no central database of client information to hack.
But perhaps most of all, crypto service providers adopting and participating in decentralized authentication will have a leg up due to the extra comfort and convenience they can afford users by doing away with cumbersome passwords and multi-factor authentication.
The importance of this cannot be overstated. Convenience has become one of the most important factors for consumers as they decide who they will do business with, almost to the exclusion of everything else. As Ev Williams, co-founder of Twitter once famously said, “If you study what the really big things on the internet are, you realize they are masters at making things fast and not making people think.” Convenience is achieved through two things – speed and cognitive ease – and bringing these to the authentication process is critical.
Conclusion
Interestingly, I believe that this Web3 concept of decentralized identity will pave the way for crypto 2.0 – a world where chaos is reduced, spooked investors are assuaged and overall user and market confidence in this space is increased, through bullet-proof guarantees that only authorized users are being allowed in while fraudsters are being kept out. Furthermore, in the crypto world, it may be cool to be anonymous but when you’re exchanging money, you do have to play by some kind of rules. Decentralized authentication meets these ends. It is the key to advancing the next wave of crypto and smart crypto service providers will pay close attention.
