April 2023

Key Insights for this month in Digital Assets : OnChain Identities and Reputation

OnChain Identities and Reputation

There are 7.7 billion people on the planet with each of us having distinct identities. We all have different likes, activities, and goals and so is our digital identity. Our identity is who we are, a collection of different activities we perform online, that define us. Today, large centralised entities — Google, Apple, Meta, Twitter, YouTube, and so on — own and control our digital identities. They know what we like to see and what we have done in the past based on our online behaviour. Everything is compartmentalised; when we switch from LinkedIn to Instagram, nothing transfers.

Decentralised identities are different from Web2 common identities by two essential premises:

  • Instead of the organisation, the user controls their identity.
  • The identity is portable and interoperable, allowing users to use it wherever and whenever they wish.

As a result, the concept of a decentralised identity is appealing. It is an essential part of the Web3 technological stack. As it matures, it will open up a whole new set of use cases in DeFi, NFTs, and future crypto paradigms. Parties involved in the DID include DID Controller, Issuers, and Verifiers. There are various types of solutions and functions –

Profiles and aliases may stand in for names, but they are not evidence of humanity. When users’ behaviours are aggregated, identities emerge in the form of credentials and reputation scores. Only once there has been enough user engagement to tell differentiate people, emergent identities are practical. The current state of generative AI’s ability to replicate human outputs suggests that without AI bot infiltration, new identity ecosystems will not grow to the size necessary for Web3 identities. Therefore, identities on-chain verified by an external third party with proprietary tech or authority will likely be required when demonstrating identity.

Web3 DID Ecosystem

  • Fractal: It is an identity provisioning and verification protocol designed for applications requiring unique and varying levels of KYC’d users. The DID registry is a smart contract on Ethereum.
  • Kilt, Dock, and Sovrin: They are application-specific blockchains for self-sovereign identity. They are primarily being used by enterprises to issue identities and credentials to end users. The tokens are used to manage DID/credential issuance, define credential schemas, and perform revocation updates.
  • Ceramic: It is a protocol for decentralised data mutation and composability which works by taking immutable files from IPFS or persistent data storage networks like Arweave and turning them into dynamic data structures. On Ceramic, these “data streams” are akin to its own mutable ledger.
  • Tableland: It is infrastructure for mutable, structured relational data where each table is minted as an NFT on an EVM-compatible chain. The owner of the NFT can set Access Control Logic for the table, allowing third parties to perform the updates on the database if that party has the appropriate write permissions. Tableland runs an off-chain validator network that manages the creation and subsequent mutations to the table.
  • WalletConnect: It is a communications protocol connecting wallets to one another and to dApps. As a minimalistic, un-opinionated protocol already serving millions of crypto-native users, WalletConnect may prove a powerful alternative to DIDComm in accelerating the adoption of self-sovereign identity infrastructure.
  • SIWE: It is an authentication standard spearheaded by Spruce, ENS, and the Ethereum Foundation. SIWE standardises a message format (similar to jwt) for users to log in to services using a blockchain-based account.
  • Itheum – Itheum is a decentralised data brokerage platform that transforms personal data into a highly tradable asset class.

Identity in Web3 can be approached in various ways, all of which can be combined to form the true picture of an individual. As mentioned in this article,  think of the analogy of a group of blind men and an elephant — everyone tries to imagine what the elephant is like when they touch it, but their version is different from the others. The elephant only emerges when all the information is put together. Some of these pieces of information include:

  • On-chain transaction history
  • Asset ownership
  • Biometric verification (bringing off-chain identity on-chain)
  • Web3 social graphs

If we talk about Reputational identity, it relies on track records and accomplishments to represent identity. Imagine a Web3 LinkedIn-type resume. This typically involves NFTs and soulbound tokens (SBTs, essentially non-transferrable NFTs). We believe these are important to focus on because several reputation-based protocols have taken off this year, some with over 1,000,000 users.

Verifiable Credentials

Verifiable credentials (VCs) are a W3C standard that makes it possible for credentials to be digital and interoperable, and they are crucial to establishing a person’s reputation. Credentials such as driver’s licences, vaccination records, and academic transcripts have long been used as forms of identification in the real world.

Credentials that can be confirmed cryptographically on the blockchain are known as “verifiable credentials,” and they are tamper-proof in the same way that a physical credential is. Venture capitalists are essentially replacing physical cash with digital currency. Credentials that can be independently verified include three parties:

Issuers – These items produce and distribute VCs to their owners. In recognition of important events, achievements, or actions, VCs may be distributed. The majority of the upcoming endeavours serve as issuers.

Holders – VCs are carried in wallets and presented to other people. They may be anyone, like you and me, or something quite different.

Trusted third-party verifiers – Access is granted, or transactions are processed based on the credentials supplied to them.

The blockchain serves as an immutable and verifiable data registry where all the information is stored, and all three parties interact with it during the process.

The identity and reputation layer that operates independently now is in a state of disarray. Credentials are being issued in a variety of forms as many well-funded Web3 businesses construct their protocols around identity and venture capital. No one has quite figured out the proper way to go about things yet. Web3 VCs will benefit from a standardised set of industry practises and data structures that promotes interoperability and new developments.


The past year has been a turning point for onchain reputation and several protocols built on top of the “reputation layer” have already gone live, and they have attracted millions of users. However, Web3’s true potential for reputation has only just begun to be explored. There will be a plethora of unexpected applications that will enable numerous use cases and business models for founders to explore and build upon.

If you were forwarded this newsletter and would like to receive it, sign up here.Questions? Feedback? We’d love to hear from you! Simply reach out to us at contact@woodstockfund.com.

Leave a Reply

The information provided on this website is for educational purposes only and should not be construed to be investment advice or considered to be a recommendation of any particular security, strategy or investment product. No portion of this content should be construed as an offer or solicitation for the purchase or sale of any security or investment. An offering may be made available only to certain sophisticated investors through official delivery of confidential offer documents along with other documents. Readers must understand that past performance is not a guarantee of future results.