Full Name: Categorisation of On-Chain Identity Layer
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Author: Spike @ Contributor of PermaDAO
Translator: John Khor @ Contributor of PermaDAO
Reviewer: Xiaosong HU @ Contributor of PermaDAO
Full Name: Categorisation of On-Chain Identity Layer
TL;DR (Summary):
The operation process of the on-chain identity layer is divided into four phases: offline identity on-chain, on-chain identity components, on-chain reputation systems, and on-chain identity standardization.
In the current identity development practices, it can be categorized into the following product forms: wallets, social media, Domain Names, and abstract accounts.
The identity layer can be applied to various offline scenarios: UBI (Universal Basic Income), RWA (Real World Assets), government identity systems, and cryptocurrency taxation.
When Elon Musk began hinting at acquiring Twitter, most Web3 users were hoping he would bring "decentralization" to Twitter. However, the current situation suggests that Twitter is becoming more like a super app, similar to WeChat, where you can perform all your daily activities.
On the other hand, X (the Twitter platform) is applying for qualifications related to cryptocurrency, but on the other hand, Musk is developing audio and video calling features and has explicitly stated that Twitter won't launch its platform coin. In his recent autobiography teasers, he also mentioned his close relationship with Dogecoin. However, as a global mainstream social platform, it's hard to imagine Twitter becoming a full-fledged Web3 social platform overnight.
People are hoping that Elon Musk will employ decentralized methods to reshape Twitter, but it seems that cryptocurrency is becoming a part of the transformation into a centralized platform.
The good news is that another mainstream social product, Telegram, is steadily progressing on its path toward decentralization. Recently, the popular TG Bots have gained attention, and from a technical implementation perspective, these bots are not very "advanced." However, they enable ordinary people, especially those with no prior exposure to concepts like DeFi or wallets, to interact with on-chain protocols.
In the past July, led by Unibot, a trading bot frenzy began. In general, most bot functionalities can be summarised as follows:
Swap
MEV Prevention
Copy Trading Strategies
Aggregated Trading
Its most significant significance lies in the completion of the mobile evolution of DeFi. Before bots, most DeFi protocols were extremely unfriendly to mobile devices, essentially supporting only web-based interactions.
Image Description: TG Bots
Image Source: CoinGecko
From this perspective, the next step for DeFi products can only be to adapt to traditional users. Currently, DeFi users, as seen in the “1inch” mobile app example, have a number in the millions. Even if this user base were to increase by ten times, it would still only reach tens of millions.
Meanwhile, mobile devices currently dominate the majority of internet-connected devices. In many third-world countries, people might not have computers, but they almost certainly have smartphones. The penetration rate of smartphones has already reached 91%. This trend is reminiscent of when China skipped the era of credit cards and directly entered the era of mobile payments. Similarly, third-world countries might skip the traditional banking system and jump straight into the era of cryptocurrency payments.
You can understand it this way: the significance of Web3 social networks isn't just about revolutionizing the current social systems. What's more important is packaging Web3 practices into more user-friendly products to compete with existing Web2 social products. This fundamentally addresses the dual challenge of Web2 platforms invading privacy and Web3 lacking users.
Therefore, after the virtual hype around Friend Tech, we need to reconsider the path of constructing the on-chain identity layer. This doesn't entirely equate to the concept of Web3 social networks. The difference lies in the fact that social networks are an extension of the identity layer, and identity is the driving force behind self-perception and relationship formation.
Another point to distinguish is from Decentralised Identity (DID). In essence, from an architectural perspective, the on-chain identity layer believes that current blockchains haven't considered embedding identity systems into the entire blockchain structure; rather, they've only conceptualized this and distributed it across various product types. This will be elaborated on further below.
In a broader sense, social networks need to establish an indispensable identity system to weather waves of disruption, accumulate a sufficient user base, and complete a positive user-product cycle. This helps break free from the negative feedback loop of gold mining - Ponzi schemes - extinction.
The On-chain Identity Quadrille: Where Does It Originate?
For a successful technological paradigm, the ability to deliver products must take precedence over marketing because most users cannot be continuously deceived. Even products with economic incentives will become unsustainable as more users flood in. However, if users have a genuine need for the product, the flywheel effect in user numbers will start rolling.
A typical example is Worldcoin (Token WLD), which gained attention for its goal of on-chain identity verification to create an independent user base separate from existing Web2 giants and local governments. Three key points are worth noting here:
Identity verification requires real-person authentication, and the core is recognizing people, not certifying them because in many third-world countries, governments cannot establish an official identity system for their citizens.
Web2 social media giants or financial institutions often harbor exclusionary attitudes towards people in third-world countries. A massive population of non-consumers, at the margin, doesn't yield profits for their products. The profit motive of companies can lead to Web2 products ignoring the needs of these populations, pushing them further away from the global economic mainstream.
When identities are on the blockchain, information flows beyond borders, fundamentally challenging the current political system based on nation-states. This is the root cause of Worldcoin frequently facing regulatory scrutiny.
However, it's essential to note that not all political entities or economies are opposed to this. For example, some island nations are open to this concept, with Palau's RNS.ID is a prime example, being issued and usable by a national entity.
Whether it's a company like Worldcoin or a national entity like Palau, a commonality in both their on-chain identity development practices is that identity cannot exist independently of offline entities or processes; it must be bound with Web2. Identity, whether on-chain or off-chain, serves as an entry point or a linking function.
In summary, the foundation of the argument for on-chain identity lies in two points. First, the current on-chain identity has reached a bottom where it must be addressed; otherwise, without feedback from real users, any product will eventually become a Ponzi scheme. Second, the integration with offline entities is not a "betrayal" of decentralization principles. Whether it's Ethereum's PoS mechanism and Layer 2 practices, RWA products, or the concept of "intent," they all practically use third-party or offline computing to enhance on-chain efficiency.
Within the Arweave ecosystem, universal payment protocols everPay and DEX Permaswap have been in practice for several years. They utilise the SCP (Storage Consensus Protocol) theory based on "offline computing and offline storage" and have infinite storage capacity. Perhaps decentralization should be better understood as a trustless collaborative model rather than relying solely on the blockchain.
In summary, the operation mode of the on-chain identity layer can be outlined as follows:
On-chain Offline Identification: Governments, enterprises, and DAOs (Decentralised Autonomous Organizations) are the three primary actors capable of handling identity information. In larger nations, governments typically assume this responsibility, while in areas with poor information infrastructure or limited administrative capacity, enterprises or non-governmental organizations may take on this role.
On-chain Identity Components: This aspect involves the integration of on-chain identity components into various applications, including DeFi, NFT products, and even traditional fiat transactions, creating deeper connections with existing financial infrastructure.
On-chain Reputation Systems: It's essential to distinguish this from previous on-chain reputation systems that were based on tracking and rating addresses on the blockchain. In the on-chain identity layer, reputation systems can be directly tied to real individuals, carry legal weight, and address privacy concerns through technologies like Zero-Knowledge Proofs (ZK).
On-chain Identity Standardisation: Similar to mechanisms like Ant Financial's Sesame Credit, when individuals accumulate sufficient behavioural information on-chain, it can serve as their offline proof of identity, which can further be propagated back to the blockchain, forming a closed loop.
This comprehensive on-chain identity ecosystem involves linking offline and online identities, leveraging reputation systems, and ultimately creating a seamless integration of blockchain technology into the broader framework of identity management.
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Image Description: On-chain Identity Layer Operation Process
Image Source: Arweave SCP Ventures
Web3 Social Curse: The Quixotic Tale of Failure
Before considering who between TG Bot and Musk's X can sound the first trumpet for mass adoption, we must first acknowledge the current situation. Presently, Web3 social products exist as an extremely niche presence on a global scale. In statistics for the mid-2023 period, not only did Web3 social products fail to make it to the top 15 in terms of user numbers, but even when we combine the user counts of crypto-friendly platforms like TG and X (1.2 billion users), it still falls short of the user base of the fifth-ranked WeChat.
Image Description: User Counts of Mainstream Social Applications
Image Source: https://datareportal.com/social-media-users
Taking it a step further, the idea of starting from existing social platforms to guide mainstream users into the world of blockchain is currently being practiced by many, but very few are achieving long-term user retention.
Take Friend Tech as an example which is very similar to Damus, both use X platform as a source of traffic, employ some form of economic incentives to draw users to their platforms, and hope to retain users through products like DeFi.
The biggest problem with such products is that they are essentially extensions of existing platforms, similar to mini-programs on WeChat or Layer 2 on Ethereum. They don't disrupt existing platforms effectively; instead, they enhance the user experience of those platforms. The advantage is that users of such products have already been filtered and may have undergone KYC or other authentication methods, which somewhat address the issue of user identity authenticity. You can think of it as the problem of "Offline Identity On-chain" already being resolved. However, their weak user experience only attracts native Web3 users who are primarily interested in profit and doesn't capture the attention and retention of mainstream users.
From Clubhouse to Damus and the current round of Friend Tech, we can observe that any product that tries to attract Web3 users through X (Twitter) cannot truly grow and thrive. After a brief surge in popularity, they fall into permanent obscurity, or their features are absorbed by X itself.
For instance, Twitter Spaces now supports displaying cryptocurrency tipping addresses, and X offers revenue sharing with creators. This demonstrates the conversion advantage of the early platform. Users have developed habits and dependencies on existing platforms, and the migration cost remains a challenge.
In this ongoing battle, X's Web3 features are becoming increasingly apparent, but fundamentally, it remains a traditional corporate model focused on advertising revenue. It doesn't distribute earnings to users through tokens.
At this stage, can Web3 social products still not make a significant impact? At least TG Bot presents another possibility.
Leveraging the bot development components of TG has proven to be an effective paradigm. Specifically, a bot is an embedded automation tool within Telegram. For example, the official wallet embedded in Telegram is a bot. Users don't need complex registration, or KYC processes, and it supports one-click deposits and withdrawals and simple trading functions. TG Bots can also execute complex commands, such as connecting to DEX like Uniswap, which can enhance transaction speed while keeping the interaction on-chain.
Furthermore, platforms like Discord have become a standard for Web3 project communities, but Discord itself gained popularity as a management tool for gaming communities. Consider this scenario: discussions about cryptocurrencies happen on Discord, while TG Bots handle transactions, creating a seamless end-to-end trading experience.
In broader terms, providing cryptocurrency functionality to Web2 users and connecting the two worlds is achieved through communities, and bots are the form that simplifies the experience.
Reputation Comes from Behaviour, Identity Systems
Currently, the on-chain identity layer isn't uniformly categorised. There isn't a single module called an identity system. It could be a wallet, a login mechanism, or a social account. It's somewhat fragmented and lacks a traditional, unified classification system like identity cards or driver's licenses.
As mentioned earlier, the problem with on-chain reputation systems isn't necessarily the concept but the inability to link addresses to real individuals. However, the situation is shifting. For example, the "Sell" feature integrated into Metamask now requires users to provide bank information when transacting, combining with the fiat deposit module to create a complete identity flow of depositing – trading – withdrawing.
Even regulations don't need to involve on-chain elements; they can focus on deposits and withdrawals. This decentralizes certain aspects while centralizing others, creating a harmonious coexistence where both systems don't interfere with each other.
Let's briefly discuss the forms that on-chain identity systems can take and analyse which models might have a higher chance of success based on practical observations:
Wallets
Social Media
Domain Names
Abstract Accounts
Take Metamask as an example. Wallets are one of the most successful products native to cryptocurrency. They've become one of the most significant sources of user traffic, next to exchanges. From a purist's perspective, wallets have replaced addresses to some extent, introducing a slight sense of centralization. However, each time you use an address, it directly interacts with the public blockchain, making it too challenging for most non-technical users to participate. Wallets are the natural choice.
In the wallet market, WalletConnect is a more foundational meta-wallet protocol. It doesn't provide wallet login or address management services but facilitates any wallet to use its services. From a project's perspective, supporting Metamask and WalletConnect fulfills the needs of most users. From a user's perspective, wallet protocols grant them the freedom to configure their wallets as they see fit.
However, it's important to note that wallets still have some form of management or development team. For example, Metamask can block IP addresses. A completely free market doesn't exist yet. But overall, wallets serve as an effective starting point for organising on-chain behavioural data.
From a user's usage habits perspective, wallets are more like "Alipay." People only use them when they have financial needs. Such products inherently have lower user stickiness compared to social media. The biggest issue with current Web3 social media is the absence of time-consuming applications like TikTok or Xiaohongshu.
To be more specific, social media can be divided into four categories:
Used by the Web3 community, such as X platform (Web2 & Web3 hybrid users), native Web3 social protocols like Lens, etc.
Used for taking advantage of Web2 incentives, as previously discussed with Damus and Friend Tech.
Extremely niche with almost no market share, with Nostr protocol and products being the most typical example. They do have a small but stable user base, but like Web3 social products, their market share is too small.
Hopes to succeed in the future, like Twitter founder's BlueSky.
Let's briefly elaborate on the current state of social protocols like Lens, which use Arweave and Bundlr as data solutions. Each transaction costs less than $0.0003, and they've completed nearly 700,000 transactions, proving the viability of Web3 social products.
However, the problem is that they lack sufficient utility. Most of them are decentralised versions of existing online products, such as LensFrens, which is essentially a decentralised version of Twitter. But the question remains: Why use Lens instead of Twitter? This problem is unsolvable.
On the other hand, products like domain names initially aimed to simplify the complexity of addresses for easier user recall. But over time, they are effective as identity markers. Binding them to on-chain addresses not only makes them recognisable to others but also fulfills users' emotional needs.
ENS (Ethereum Name Service) is undoubtedly one of the most successful Web3 product forms. It, along with DEX and wallets, constitutes the standard trio for any public blockchain. However, its limitations are quite apparent. Domain names can only be used within the Web3 realm. On traditional platforms like X, they can only appear as text and serve no other purpose beyond display.
Lastly, abstract accounts are essentially intelligent contract versions of existing account systems. When combined with traditional login systems like email and phone numbers, they offer an experience similar to TG Bots. They solve the problem of how traditional users "onboard" to the blockchain. Users don't need to remember complex concepts like private keys or addresses; they simply register and log in with a single click, just like traditional internet products.
For example, EverID, developed by EverVision, supports FIDO standards. Users can use features like facial recognition and iCloud Keychain to eliminate password management and ensure security through methods like multi-hardware device key splitting.
Vitalik Buterin, co-founder of Ethereum, is a fervent advocate for abstract accounts. We expect that they will be among the first to bring in real users, such as direct phone number logins on Ethereum. This might not be far off in the future.
Entering Every Household, Taking Identity Offline
Identity layers shouldn't be limited to online use only. This seems to be an industry consensus, but how to introduce them offline hasn't gained widespread agreement. Here, we're only imagining potential use cases, hoping to spark more ideas.
Considering the current distribution of global internet users, smartphones dominate. They have achieved nearly universal coverage across all demographics and scenarios. Importantly, in underdeveloped regions like Asia, Africa, and Latin America, due to economic constraints, smartphones are often the only devices through which people can access the internet.
For instance, in underdeveloped regions, the operation of Universal Basic Income (UBI) relies on assistance from developed economies. However, accurately identifying workloads and ensuring traceability of funds' flow has always been a challenge. The blockchain-based identity layer might be able to address such issues. For example, after Worldcoin authentication, binding real-world addresses to individuals and conducting sample comparisons.
Additionally, there's potential collaboration between the identity layer and Real-World Assets (RWA). In current RWA practices, user KYC is necessary to ensure the authenticity of participants. Without it, products involving bonds, real estate, and more can easily lead to legal disputes, thereby affecting operational efficiency.
According to RedStone's RWA report, the current RWA market is led by the US dollar, gold, and bonds, while the market potential for real estate and intellectual property is yet to be fully explored. The key lies in property rights division and pricing mechanisms. Starting from the blockchain-based identity layer, one can not only facilitate the on-chain claiming of RWA assets but also monetise on-chain earnings.
Image Description: RWA Project Categories
Image Source: Redstone Blog
In addition, if a sufficient amount of data is accumulated in the on-chain identity layer, it can even be integrated into existing government identity systems or serve as a part of their data source. In real-world scenarios such as visa processing and financial institutions like banks, proof of assets provided by individuals is a crucial source of personal financial verification. The combination of on-chain identity layers and on-chain financial data holds the potential to address such needs.
While the transition of on-chain identity layers to practical off-chain applications still has a considerable way to go, in current practices, people generally consider off-chain data as more authoritative, with on-chain behavior not holding the same level of authority. However, with the emergence of practices related to cryptocurrency taxation, it is recommended that official identity systems will eventually incorporate on-chain identities into government systems.
In the current cryptocurrency taxation systems, cryptocurrencies are often treated as subject to property-based income taxation. Most of these transactions are processed through centralised exchanges because wallets do not support user identity verification. However, if the development of identity layers proves to be successful, decentralised exchanges (DEXs) or wallets can also facilitate reporting and taxation. This, in turn, may promote the legitimacy of decentralised systems.
Conclusion
The development of on-chain identity layers is not something that can be completed overnight, and the significance of it goes beyond just the social paradigm. At least in the process of expanding cryptocurrencies to a larger user base, the identity layer is an essential component that cannot be bypassed.
Whether it's the biometric verification of Worldcoin or the practices of Web3 wallets, both have already garnered user bases in the tens of millions. However, when it comes to expanding to hundreds of millions or even billions of users, abstract accounts take on a special significance.
Taking everVision's practices as an example, once users access the system through EverID, everPay and Permaswap can satisfy daily usage needs. Furthermore, by utilising the offshore Chinese yuan stablecoin ACNH issued by Asian digital banks (ACHN is issued by Asia Digital Bank. Each ACNH issued is a reserve of equivalent real assets, including cash, cash equivalents, and short-term government bonds denominated in RMB. ACNH is anchored 1:1 to the offshore RMB and the US dollar on that day. exchange rate digital assets), users can transact with real-world asset types seamlessly, from on-chain to off-chain, providing an experience similar to traditional financial products.
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