Today, most digital identity systems are exclusive, fragmented, and insecure. Digital transformation of businesses worldwide has enabled increased exploitation of vulnerabilities; leading to increased cyber-attacks.
87% of Americans have their personal information exposed on the internet and about a third of individuals in the USA have been identity theft victims.
Globally, over 1.1 billion individuals have no way of claiming ownership of their digital identities; indicating a high level of vulnerability.
Given the increasing cases of digital identity theft, blockchain in digital identity verification is becoming more popular. Why blockchain technology?
This article explains blockchain for digital identity fraud prevention, highlighting the process and benefits of blockchain in digital identity verification.
Problems With the Current Digital Identity Systems
Before diving into why blockchain is suitable for identity fraud prevention, here are a few problems realized with current digital identity systems:
- Centralized systems
- Time-consuming and Costly KYC/AML
- Limited data control and ownership
Blockchain for digital identity management ensures digital identities are traceable, verifiable, and auditable, in seconds.
Why Blockchain for Digital Identity Fraud Prevention?
Blockchain is increasingly popular for transparency, decentralization, and cybersecurity in business. These features are crucial in improving digital identity safety and verification, for preventing fraud.
Notably, the global blockchain for digital identity market size is expected to grow from the $1.3 billion recorded in 2023 to a whopping $35 billion before 2030. This translates to a 92.7% CAGR. This indicates how significant blockchain for digital identity will become.
Blockchain technology can impact digital identity verification in the following ways:
- Decentralized Identity
In digital identity management systems where users’ identities are stored in central servers, the users have no control over their data.
With blockchain, every user gets data ownership; choosing who to share their identity with and for how long.
- Self-Sovereign Identity
Using blockchain in digital identity verification enables users to have authority over their information. Users can manage, modify, and verify their identities without relying on third parties.
In contrast, without blockchain users must involve the centralized authorities when modifying or verifying their digital identities.
- Digital ID Verification
Digital identity verification has always been performed by centralized authorities. But, in blockchain-based identity verification systems, verification is done through consensus mechanisms like proof-of-stake and proof-of-work.
In addition, the ID verification process can be automated through smart contracts; with preset terms for verification.
The global blockchain market is approximately $20.1 billion by 2024. This figure is expected to grow reaching a staggering $249 billion by 2029.
How Blockchain in Digital Identity Verification Works
- Registration
A user enters identity information, for example, name, date of birth, and email address. Then, the provided data is verified through the standard Know Your Customer (KYC) process.
- Data Encryption
The collected data is encrypted through cryptography techniques like Hash functions and digital signatures.
- Blockchain Registration
The encrypted user identity data is then recorded on the blockchain in blocks.
- Consensus Mechanism
This step involves the validation of the blocks in which the encrypted digital ID date is recorded through a consensus. The common consensus mechanisms for most blockchains are proof-of-work (PoW) and proof-of-stake (PoS).
- Block Confirmation
Each validated block becomes a permanent part of the blockchain after validation by all network nodes.
- Decentralized Storage
A copy of this blockchain is shared across many nodes in a decentralized network for decentralized storage.
- Verification Request
Every time a user requests identity verification, their encrypted data is retrieved from this blockchain network.
- Data Decryption
Then, the retrieved data is decrypted through specific cryptographic keys. In cryptography, we have encryption and decryption keys.
- Verification Process
For each criterion, say address, name, or password, the decrypted data is verified.
- Result Generation
The verification results are generated based on a specific comparison.
- Blockchain Update
The results are then recorded as a new transaction on the blockchain.
- Consensus Mechanism
Again, this new transaction must be validated through a consensus (consensus mechanisms; PoW or PoS)
- Block Confirmation
Once validated, the new transaction is recorded in blocks; added onto the blockchain.
Blockchain in digital identity verification offers numerous benefits to startups and businesses when correctly implemented.
Let’s look at the specific benefits that allow a business to prevent identity fraud with blockchain in the next section.
Benefits of Blockchain for Digital Identity Fraud Prevention
The benefits blockchain offers in digital identity verification can be summarized into the following:
- Increased privacy and security of personal data
- Streamlined digital ID verification and interoperability
- Reduced digital identity fraud and global inclusion of ID ownership
- Auditable and transparent ID management systems
- Scalability and cost savings
- Empowering user control of data and user consent
Conclusion
Blockchain for digital identity fraud prevention is transforming how ID verification is handled by businesses. Blockchain provides transparency, security, and immutability in managing digital IDs.
As such, different industries – including retail, real estate, healthcare and cross-border payments – are exploring how to prevent identity fraud with blockchain.
As more innovative solutions emerge on blockchain technology, we should expect to experience more enhanced identity verification processes for institutions and businesses. Stay updated.
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