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MAPPING THE NEW INTERNET
IDENTIFY YOURSELF, ANON.
Joel John
and
Siddharth
Sep 29, 2023
27
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Hello!
--------------------------------------------------------------------------------
Few things before we begin.
1. This piece is written in the first person for easy reading. It would imply
that I wrote all of this piece. But much of the groundwork was done by
Siddharth. He has been the brains behind some of our best pieces. If you don’t
follow him on Twitter already, you should.
2. We have been quite active on the paid side of the newsletter. We are ranking
#35, right under Jimmy Song, and a few positions away from Laura Shin on
Substack in the list for crypto. Here are the things we covered over the last
month. Some of it overlaps with today’s article.
1. On Advertisements In Web3
2. A Primer on Soul Bound Tokens
3. Bearproof Treasuries
4. On Retention in Web3
5. Using Telegram for Distribution
6. On Modular Experiments
We have activated free trials if you want to read them without paying upfront.
And yes, you can e-mail me for a refund if you decide to cancel but forget to do
it on time.
Today's piece begins with setting a baseline understanding of why reputation and
identity matter online. We then look at how blockchain networks have
historically maintained forms of reputation before understanding the primitives
that power verification in the future.
Given the length of this piece, it may break in your e-mail clients. You can
read it directly on Substack by clicking the button below.
Read Online
With all of that out of the way, let’s dig in.
--------------------------------------------------------------------------------
Remember July 1993? Me neither. I wasn't born yet. Neither was Amazon, Alphabet
(Google), Meta (Facebook) or X (Twitter). Much like blockchains today, the
internet was a phenomenon that was slowly taking shape. The applications needed
to onboard and retain users did not exist. Subscriptions to internet services
plagued users because of how costly they were. It used to cost $5/hour. The
technology was nascent and easy to write off.
=
The comic above was published that month by an artist who could not care any
less about the technology. According to sources, he had an expiring internet
subscription that cost a lot and a deadline to meet. That was all the context he
had on the internet. But it captures the state of the technology at the time
quite well. The mechanisms to verify identity and reduce bad behaviour did not
exist yet.
Most emergent networks have this trend in common. It is rather hard to establish
who engages with it during their early days. One of Steve Jobs's earliest
ventures was a device that allowed individuals to spoof identity on telephone
networks.
The evolution of the internet required verifying the identities of individuals.
Because the information superhighway (as Al Gore used to refer to it) was only
valuable so long as it could enable commerce. And doing business in meaningful
volumes requires knowing the details of your customers.
Purchasing on Amazon requires your address. Part of the reason PayPal agreed to
an acquisition by eBay was the mounting fraud risks on the payments product. For
the internet to evolve, trust became mandatory. Establishing trust requires
knowing who you are interacting with.
Internet applications collect identity information according to the extent of
consequences your actions may cause. It is a spectrum. A simple Google search
requires only collecting your IP address. Emailing 100 people would need your
email provider to have your phone number. Paying through PayPal would require
handing over your state-issued personal identity documents. Regardless of where
you stand regarding privacy, it is fair to suggest that applications can scale
when the identities of the user base are established.
Large networks like the internet evolve when there is trust in the system. The
emergence of different forms of identity instilled trust, and that has been the
basis for a more secure, useful internet over the past decade.
The amount of identification documents gathered from a user scales in proportion
to the consequences of one’s actions in most interactions.
Seen through this lens, it becomes easier to understand why information gathered
for each internet interaction is proportional to the possible consequences of
one's actions.
Accessing a social network only requires a person to submit their phone number.
But for an account that is verified and has massive reach, the social network
(like Twitter or Meta) may request additional forms of verification, such as a
government-issued identity document. Similarly, banks ask for information on
one's employment and source of funds due to the possibility of an online account
enabling illicit transactions.
At the absolute end of the spectrum is marriage (at the individual level) and a
democracy (at a societal scale). Assuming rational actors (which is often not
the case), people gather as much information as they can on a possible life
partner before committing to wedlock. The identity of voters often undergoes
multiple rounds of scrutiny, as a few thousand fake votes can tip an election to
a person who may not be preferred.
Today's piece explores a simple question: What happens when the forms of
identity we use for blockchain applications can evolve? There are ethical
considerations around why they should not evolve. Much of the industry is built
on the ethos of relative anonymity and free access. But as with the internet,
having additional context on users could be crucial for creating a new
generation of applications.
There are two reasons why on-chain identity would become a necessity:
1. Firstly, market incentives continue to drive individuals to exploit
protocols through Sybil attacks. Restricting access to users relevant to an
application helps improve the overall unit economics of businesses within
the industry.
2. Secondly, as applications become increasingly retail-oriented, regulations
would require service providers to have additional information on their
users. Placeholder's Progressive Compliance article hints at this.
A simple heuristic to use here is that blockchains, at their core, are ledgers.
They are global-scale Excel sheets. Identity products built on top of them are
vlookups that filter specific wallets depending on the need of the time.
NETWORKED IDENTITIES
The arrival of all new networks calls for the emergence of new identification
systems. The passport emerged partly due to the rail networks connecting
multiple European countries after World War I. We interact through fundamental
identification units around us even when we don't realize it.
A mobile device connected to a cellular device has an IMEI number. So, if you
decide to make prank calls, the device's owner could be traced by finding a
receipt from when the device was sold. This is in addition to the fact that in
most regions, acquiring a SIM card would also require some form of
identification.
On the internet, if you use a static IP address, your details like name and
address are already linked to your activities online. These are the primary
identification blocks on the internet.
The single sign-on button solved one of the biggest hurdles on the web, creating
a mechanism for applications to get details on a person's identity without
requiring them to fill them out each time. Developers could collect details such
as age, email, location, past tweets and even future activity on a platform like
X after collecting consent a single click. It collapsed the extent of friction
in the onboarding process.
Several years later, Apple's single sign-on button was released with deep
integration into its operating system. Users can now share anonymous email
addresses that do not divulge their details to the products they sign up for.
What is common between all of them? A desire to know more about users with the
least effort possible.
The more context an application (or social network) has on a user, the easier it
becomes to upsell products to them with targeted identities. The basis for what
we now call surveillance capitalism is the ease with which firms on the web
today can capture users' personal information. Unlike Apple or Google,
blockchain native identity platforms have not scaled yet, as they do not have
the kind of distribution those behemoths possess today.
Blockchain, native identity primitives, are unique because everyone can access
user behaviour details. However, the tools needed to identify, track or reward
users based on their past behaviour had not evolved until a few quarters back.
More importantly, the products that tie on-chain identity to your real-life
documentation, such as passport or phone number, have not scaled yet.
Part of the reason is that the products that require such use cases have not
scaled yet. During the days of the ICO boom, Civic was often used to verify the
identity of an individual purchasing tokens in a sale. Years later, they
transitioned to checking identity on beer vending machines.
For the past few years, the primitives used for identifying users in our
ecosystem have been wallet addresses, NFTs and, more recently, soulbound tokens.
They serve similar functions as the IMEI number or IP address on the internet.
Wallets can be spun up hundreds of times by the same individual, which takes a
click of a button. They are similar to email addresses during the internet's
early phase. By some measure, in 2014, some 90% of all emails were spam, and one
in 200 emails included a phishing link.
We have created elements of identity around a wallet address using its on-chain
behaviour. Degenscore and Nansen's categorisation of wallet labels are early
instances of what these look like in practice. Both these products examine the
historical activity on a wallet and issue a tag.
On Nansen, you can scan a token's holders and find the number of 'smart wallets'
that hold the token, the assumption being that the higher the number of 'smart'
token holders a product has, the higher the probability of it rising in value as
'smart money' continues holding exposure to it.
NFTs became an instrument for identity through their scarcity. Some 'blue-chip'
NFTs in 2021 were limited to several thousand mints. Bored Ape NFTs had a cap of
10,000 in total. These instruments became symbols of identity through their
ability to verify one of two things:
1. A person had access to 'alpha' by being early enough to a mint.
2. Or they had the capital to buy an NFT in the market after the mint finished.
An NFT becomes a symbol of value by virtue of who else owns one. Bored Apes were
once owned by Steve Aoki, Stephen Curry, Post Malone, Neymar and French Montana.
The challenge with NFTs is that they are static in nature and owned by a
community. An individual could have accomplished a considerable amount since a
Bored Ape's 2021 mint, but an NFT could show nothing to verify that.
Similarly, if a community develops a bad reputation, that seeps over to the
holder of the NFT too. College degrees are similar to NFTs in that both can
appreciate or depreciate depending on the actions of other parties involved in
holding the instrument of identity. (In some cases, they are also similar in
that their holders tend to hold remorse about the high prices at which they
acquired the degree or NFTs.)
Vitalik Buterin proposed an alternative to the conundrum in his paper on
soulbound tokens. Unlike NFTs, soulbound tokens (SBTs) are designed to be
non-transferable and require a user to accept them. The crux of the concept is
that issuers (like universities) could release tokens representing accreditation
to wallets from which they cannot be moved. Other token holders from a similar
accreditor could attest to the validity of an SBT.
So, if I claimed to work at McDonald's and had an SBT issued to back the claim,
a future employer could validate that claim far more quickly than by checking my
LinkedIn or CV. I could further strengthen my claim if I had a group of
colleagues attest to this claim on-chain with their SBTs. In such a model, my
claim is verified by the issuer (McDonald's) and through a network of attesters
(colleagues) willing to back that claim with their on-chain identities.
Tokens and NFTs are similar in that they are acquirable proofs of status. An
SBT's being non-transferable means the wallet that owns it has accreditation
that is usually earned
1
. In the above example, a McDonald's attestation may not be easily acquired by
going to OpenSea.
But a Bored Ape NFT could be if I had the money to do so. What makes SBTs
interesting is the possibility of mixing and matching them to create social
graphs. We need to understand LinkedIn's core value proposition to understand
what I mean.
LinkedIn, like all social networks, offers status as a service. On its feed,
people compete to be the ideal corporate man. The genius of LinkedIn was in
being early enough to create social graphs of institutions. I could claim that I
studied at Hogwarts with Harry Potter and Professor Dumbledore on the platform
in a matter of clicks. The social graph emanated from institutions.
A person's status on the social network depends on the reputation of the
organisations they associate with and the relative rank they hold at the place.
In my hypothetical example, the "strength" of my reputation grows with each new
organisation I tie my identity to. As long as the network of people within these
institutions does great things, my reputation grows with it. It's the reason why
we see the PayPal mafia as so significant.
Why does any of this matter? Because today, there's nothing stopping individuals
from making false claims on LinkedIn. The social graph is not verifiable or
attested, so much so that spies from sanctioned nation-states use it to target
researchers.
A network of wallets holding SBTs could be a more decentralised and verifiable
social graph. Hogwarts or McDonald's could issue my credentials directly in the
above example. SBTs remove the requirement of a platform middlemanning the
relationship. Custom applications could be built by a third party querying these
graphs, which adds to the value of these credentials.
Owning a Hogwarts SBT could mean I get invited to a local wizard conference. Or
it could mean wands at a discount. But it hasn't happened yet. And the reason
for it boils down to the number of users. Let me explain using BAYC as an
example.
A group of bored apes on the blockchain.
Web3's great promise has been that open social graphs will empower the issuer to
have a direct relationship with the owner of an accreditation. But we have that
here already. The graph above from Arkham is a visual representation of all the
owners of Bored Ape NFTs. But if you had to contact all of them, your best bet
would be to export their wallet addresses and send them a text through something
like Blockscan.
2
A more accessible alternative is to go through the social profiles of Bored Apes
or their Discord, but it simply repeats the initial challenge we had with
identity networks in the first place. Distributing anything through those
networks involves centralisation and permission from the management at Bored
Apes if you want to reach scale.
All of this brings back a core problem with on-chain identity networks. None of
them have scaled enough to enable network effects yet. So despite having the
theoretical mechanisms to create open, composable social graphs that validate
users through tokens, wallets and SBTs, no Web3-native social networks have
retained users and grown yet.
The largest 'verified' social graph that exists today on-chain is that of
Worldcoin. They claim to have over 2 million users on the network. That is
barely 0.1% of users on a traditional Web2 social network like Facebook. Yes,
I'm comparing apples to oranges here – but here's the point. An identity network
is only as strong as the number of participants with some identity that can be
verified.
There is a bit of nuance to be added here. When we speak of “identity” online,
it is a mix of things. If I were to break it down, it would be
1. Identification - The core primitives that individually identify who you are.
This could be your passport, driving license or university degree. They
usually verify your age, skill and location-related parameters.
2. Reputation - In the context of algorithms like the one on X, it is a
tangible measure of an individual’s skill or ability. This is linked to the
quality of a person’s content on social networks and the frequency with
which an audience base responds to it. In the context of work, it is the
graph of entities that pays an individual (or entity) over some time. Where
identification is usually fixed at a given point in time, reputation evolves
over some time.
3. Social Graphs - Consider it the interlink between a person’s identity and
reputation. An individual’s social graph depends on who interacts with them
and at what frequency. Individuals with high reputations (or social rank)
interacting frequently with an individual leads to a higher ranking on a
social graph.
As we go through this article, I will use these terms interchangeably as the
organisations solving for identification on the internet are not solely looking
to validate your passport. Some of them are building portable social graphs.
Others want to identify your behaviour on-chain to assign it a score so
developers can better identify their users.
As with most things, there is a spectrum of applications even within the realm
of identity on the internet.
THE CORE PRIMITIVES
Though anonymity was part of the feature set in crypto, we have had identity
checks at the periphery. The bits where on-chain money converts to fiat
transfers (exchanges) have historically mandated collecting user information.
Exchanges are the largest existing graph of on-chain persona linked to personal
identification documents. But it is unlikely that an exchange (like Coinbase)
will roll out an identity-linked product as of today given the conflicts of
interest such an action may provide.
One early instance of an exchange tinkering with on-chain identity is that of
Binance's experiments with BABT. Specifically, a Binance account-bound token is
the equivalent of a Soulbound Token (SBT) issued on the Binance Smart Chain. The
token was offered to users who had done their AML/KYC on the exchange. Over the
past year, over 850k wallets claimed a BABT in an early attempt at creating
linkages between wallets and real-life identity at scale.
But why bother with it? It helps applications know that a user is 'real'. By
limiting access to users who have provided their verification documents (in the
form of passports or other regional documents), products enabling access to a
handful of wallets can optimise for reducing Sybil attacks and increase the
number of real users with minimal effect.
In such an instance, the dApp does not access a user's verification documents.
That function is executed by an exchange (like Binance), which may use the APIs
of a centralised service provider like Refinitiv. For dApps, the upside is
having a verified subset of users who have already proved they are human.
The approaches with which information on a user is gathered and passed on to an
app vary depending on the context and resources at hand. There are multiple ways
to go about it. Before we get into the models, though, it helps to master a few
basic terms. A detailed breakdown of each of these concepts is beyond the scope
of this article, but I have attached hyperlinks where relevant for the curious
ones amongst our reader base.
1. SELF-SOVEREIGN IDENTITY
Think of it as a design philosophy that puts the credential owner in complete
control of their identification documents. In traditional, state-sanctioned
forms of identity, a government or an institution is responsible for issuing and
validating identification.
When a person hands over their identity documents, like a license for
verification, the government's systems must not cut the person off. SSI's core
argument is that a person should be in control of (i) management (ii) privacy,
and (iii) access to an individual's identity.
An SSI-based identity product can contain multiple forms of identity, such as
certificates from their university, a passport, driving licenses and so on. Each
of these may be issued by centralised institutions, too. SSI's core argument is
that users should control how these details are accessed.
2. VERIFIABLE CREDENTIALS
Verifiable credentials are a model of the cryptographic validation of a person's
identity. At its core, the model is contingent on three parts: an issuer, a
verifier and the credential holder. An issuer (like a university) can issue
cryptographic proofs, signed by the organisation, to a credential holder. These
proofs are used to back what is considered a 'claim'.
Source
In this context, a claim could be anything, ranging from 'X studied here' to 'Y
worked with us for five years'. Multiple claims can be merged to make what is
known as a graph of an individual. In the case of a verified credential, the
documents (like passports or certificates) are not passed along; only
cryptographic signatures from issuers are passed along to validate identity. You
can see a live version of such a model here.
3. DECENTRALISED IDENTIFIERS
Decentralised identifiers (DIDs) are the structural equivalent of a phone number
or an e-mail address for your inbox. Think of it as a wallet address for your
identification. When you use a platform that requires you to verify your age or
geolocation, providing a DID could help the application verify that you fit the
parameters needed to use the product.
Instead of manually uploading your passport to Binance, you could provide a DID.
The compliance team at Binance can then validate the location of the proofs held
by your DID and onboard you as a user.
Source: Dock.io
You may have multiple DIDs with segregated identification proofs on each, as you
hold separate wallet addresses today. Tools like Dock allow users to hold their
identification proofs and authenticate access directly from a mobile app. In
this sense, users of blockchain native applications are already accustomed to
the flow of signing transactions and verifying the authenticity of an identity
request. An alternative approach. An alternative approach to managing segregated
forms of identity across wallets is ERC-6551.
Zero-knowledge proofs (ZKP) allow users to prove eligibility without disclosing
specifics. Each time I apply for a visa to the UK, I have to provide all my
banking transactions for the past quarter. The lack of privacy from a foreign
visa administrator going through my banking transactions is not discussed much
but it is one of the only ways to get a visa.
Proving you have the funds to travel and return home is a requirement. In a ZKP
model, a visa officer could query if a person had a banking balance over a
certain threshold for a specific period without seeing all of the person's bank
transactions.
This may seem far-fetched, but primitives that do this exist here and now.
zkPass's pre-alpha was launched in July of this year, allowing users to provide
anonymised personal data (alongside verification documents) to third parties via
a Chrome extension.
A list of data types supported by zkPass’ Beta product
The range of application support goes from merely proving your identity via a
third-party service provider to proving you have learned specific courses on
Coursera. They do not host identity-related documents but query them off
websites using HTTPS.
EVOLVING INFRASTRUCTURE & USE CASES
I could go on all day about the ecosystem of identity-related applications in
Web3. Millions of dollars in venture capital have flown to many developers who
have delivered over the past few years. However, we are not building a market
map of identity solutions here; I want to focus on what the evolution of these
identity primitives means for the internet today. A piece by Dani Grant and Nick
Grossman from 2018 on USV's blog gives a good reference for the next phase.
Source: USV
According to them, first comes breakthrough applications requiring better
infrastructure. This leads to a point where infrastructure must evolve to
support scaling applications. A new generation of applications is then built on
this revamped infrastructure layer, and the cycle repeats until a mature market
exists – for example, blockchains and NFTs. In 2017, the Ethereum network
entirely clogged due to CryptoKitties and came to a standstill.
In 2021, the high price of NFTs justified spending money on NFT transfers. As of
2023, you can send millions of NFTs for less than $100 on Solana, partly
explaining why OpenSea has integrated Solana into their product over the years.
Historically, developers had no incentive to tinker with identifying their
users. They would have reduced their market size if they had forced users to
provide documentation. The law is, in part, what has nudged many developers to
implement the identification of users.
Quite recently, Celestia's airdrop for their token, TIA, prohibited persons from
the United States from accessing it. The other reason for verifying the
identification of users has been to check for Sybil airdrop farmers. In both
cases, emergent networks need primitives to prove who is becoming a participant.
A profile of a user from DegenScore
One of the primitives that has seen substantial adoption in this regard is
DegenScore. This product parses a user's historical data to assign them a score.
Apps launched on-chain can then enable access to wallets based on the user's
score. This strategy restricts people from making hundreds of wallets and
attacking emerging products for airdrops.
The product is not an identity verification tool in that it does not check
whether or not you have a state-issued document. However, it provides a
mechanism for developers to validate if users should have access to their
products based on their historical behaviour patterns.
One product that combines off-chain identity with an on-chain wallet is the
Gitcoin Passport. This product assigns 'stamps' each time people link a form of
identification to their wallet address. The stamps could be given for linking a
Facebook account, LinkedIn or Civic ID. Verified credentials are issued from
Gitcoin's servers to a person's wallet address. As such, the product uses the
Ethereum Attestation Service to bring these stamps online.
What's the point of all this? In Gitcoin's case, it is primarily used for
grants. Given that the product matches donations made for public goods, it
becomes vital for the product to verify that real users are donating money. The
use case for such a product outside Gitcoin is with DAOs. Oftentimes, a single
person could split up his or her tokens across thousands of wallets and vote in
favour of a decision that benefits them. In such instances, it becomes essential
to validate the personhood of a wallet, either through past on-chain behaviour
or through linkages with a real-world identity. This is where the Gitcoin
Passport is of use.
Naturally, a person will not maintain a single identity in all their
applications. It is normal for users to have multiple wallets while using the
same product. Consider the number of wallets you may have used with Uniswap.
Users also tend to swap wallets depending on the nature of the application they
are using.
A separate wallet for gaming, media consumption and trading is not rare.
Products like ArcX Analytics combine browser data (like Google Analytics does)
with smart contract interaction data from blockchains to help identify users.
They primarily target developers wanting to understand the behavioural patterns
of their users.
The tools for handling multiple pseudonymous identities have also been evolving
in tandem. ReDefined allows users to resolve their e-mail addresses to a certain
wallet owned by them. Their API allows developers to create custom resolvers,
which means you can have products where a user's phone number resolves to a
wallet address.
Why does this matter? It makes building a remittance application like Venmo as
easy as a few clicks. A user could upload their contact list (like one does with
Whatsapp), and a product like ReDeFined could map out all the phone numbers to
addresses on-chain.
While writing this piece, I resolved my e-mail address (joel@decentralised.co)
to a wallet address. The data on which e-mail is owned by which wallet address
is not stored on ReDeFined's servers. They cannot change it without me signing
in from my wallet address, as the resolution data (the bits that match an e-mail
to a wallet address) is stored on IPFS.
You can link wallet addresses across chains like Bitcoin, Solana or Polygon on
ReDeFined. The product checks which asset is being sent by a user and routes the
asset to the wallet on a matching chain.
But what if you wanted to identify and rank users across a protocol like Lens?
Ranking algorithms for user behaviour have been emerging on Web3 native social
networks. In the late 1990s, Google came to be what it is through studying the
relative ranking between pages on the internet.
From Karma3 ’s ranking page.
Aptly named PageRank, the system gave reputation scores to websites based on how
frequently they were mentioned on other websites. Two decades later, as the web
has slowly become composable (through Web3 native social networks), we have the
same conundrum with wallets. How do you validate a user's "value" on one social
network using their activity on a different network? Karma3 solves this.
It helps applications (and users) figure out how to rank a community member
within a DAO or see which artist's previous mints were abandoned. As the core
unit of identity (the wallet address) is used across protocols, Karma3's product
helps rank wallets. So, a user on the Lens Protocol may not have to start from
scratch when writing on Mirror.xyz.
Composable ranking gives products a relative advantage to users with high
signals on one product when they port over to a different one.
The ability to port reputation has historically not existed on the internet. You
could have 100k followers on Twitter, but when you start on Instagram, you start
from scratch. This disincentivises large creators from switching over to new
social networks. This is partly why, despite their relevance and need, Web3
native social networks have not grown to scale yet. The discovery engines are
broken, and the incentives to switch to alternatives do not exist.
In a model using Karma3's products, new social networks do not have to start
from scratch when ranking users relatively, solving the cold start problem of
attracting good creators early on. Does that mean we will see a multitude of
niche-specific social networks emerge? It is well within the realm of
possibilities.
So far, we have only talked about individual reputations, specifically about
reputation in the context of a person who is active on-chain. But what if you
could create composable metadata about firms that could be queried and displayed
across outlets? This happens today in a Web2 native fashion. Crunchbase was
pulling in details about firms from LinkedIn as early as 2008.
The problem is that nothing stops Crunchbase, in this example, from falsifying
data shown by them on a third-party outlet. You can 'trust' the system because,
in this hypothetical model, an outlet (like Crunchbase) has every incentive to
relay accurate information. However, the corporate entity is not in control.
This matters, especially in the context of Web3, as traders often make decisions
based on details they find on Messari, CoinGecko or CoinMarketCap. The Grid is
creating a network of verifiable credentials for firms. In their model, a firm
could use its private key to upload details, such as investors, team members,
funds raised, logos and so on, to a sufficiently decentralised network.
Third-party data platforms, such as VCData.site, could query information from
The Grid to show it to users. The advantage of such a system is that a firm
would not have to go across multiple platforms to update its details. Any time a
venture updates its details using verified credentials, it would be reflected on
all platforms that query its data.
(Sidenote: The Grid’s founder had previously built a company in the data space
and sold it to CB Insights. So I’d like to think he knows what he’s doing. Do
slide into his DMs on Twitter if the theme interests you).
Third-party verifiers (like community members) would be incentivised to dispute
falsified claims on such a network. It is still theoretical and far-fetched, but
the ability to have a unified update on all information related to a venture
across all platforms that mention it could be powerful.
But what applications could such reputation primitives enable? A fairly simple
instance could be loans in the context of real-world asset (RWA) lending.
The flow above shows what that could look like in practice. Grameen Bank has
made a reputation for being the go-to bank for cooperatives in the emerging
world. Part of the reason is the social reputation attached to a person
defaulting on a loan. Cooperatives, consisting of women engaged with SMEs, take
loans directly from the bank and keep a rotating line of credit that grows
depending on the frequency of repayments.
In the 1980s, when digital identities were not common, offering credit to the
underbanked with no collateral was revolutionary. In the 2020s, the model could
evolve with the digital primitives we do have.
In the image shown above, cooperatives could provide their data to underwriters
that function as DAOs. This data would primarily involve their banking details,
the SME's commercial transactions and similar data points from Web2 native
products. Tools like zkPass (referred to above) could anonymise and provide the
data to underwriters, who then could assess the creditworthiness of the
cooperatives and pass on a risk score to a marketplace.
The marketplace could source liquidity from fintech apps or institutional
investors looking to generate yields on their idle assets. There are two ways
this could work:
1. A fintech app could directly offer loans to cooperatives with credit scores
passed on by an external under-writer.
2. An aggregator (or marketplace) could source liquidity from third-party
fintech apps or institutional investors and offer loans on basis of the
credit scores provided by an underwriter.
In both instances, cryptographic primitives could be used to ensure the privacy
for data provided by borrowers. A DAO, run by multiple underwriters, could help
facilitate loans faster than a traditional entity if multiple individuals are
racing to assess the risks. Lastly, one could presume that using blockchain
rails to source liquidity from global markets could translate to better interest
rates for borrowers. Our friends at Qiro have been tinkering with such a model.
While the money flow could vary, the 'core' difference is how the underwriting
is done and how that score is passed to marketplaces. A cooperative seeking a
loan would have to provide their details only once, and they would have the
right to protect their personal banking details from third parties that should
not have access to them.
Naturally, this is not a crypto product. It is a fintech primitive that uses
blockchain technology. The blurring of lines between the two has not
historically happened due to regulatory restrictions and the lack of
identification on the internet. The nature of applications that can be built
on-chain will grow exponentially in sophistication and adoption as the
primitives we use to track and identify users evolve.
There are two clear cases where this blurring of lines is already happening.
First, with Paypal’s integration of stablecoins in the product. Secondly, with
MoneyGram releasing a native wallet in their product. We don’t entirely know
what kind of fintech applications could be built as the next hundreds of
millions of users come on-chain.
CAN’T BE EVIL
Alexa, play country roads, take me home.
The part of India I come from (Kerala) is known for its beautiful mountains
marked by long, winding roads. Local lore has it that when the British came to
colonise, they did not know the ways around the mountains and hills. So, they
bribed local tribesmen with gifts. Once they learned the routes, the tribesmen
were often killed. Many winding roads in Kerala have giant trees with locks as
part of local rituals to avoid hauntings on the roads centuries later. It is
believed the ghosts of the tribesmen used to cause accidents for passersby on
the roads. (I don’t quite believe in the tale, but these stories become a core
part of your childhood if you spent your summers in hills like the one above).
What does this story have to do with a blog that covers decentralisation? I
think the discovery of a new route is often followed by commerce and then by
varying degrees of violence. Violence is often done to ensure faster, more
secure means of conducting commerce. (You wipe out the competition.) The
“violence” we saw was not physical when the internet came along. It was the
subtle invasion of our minds and private spaces through surveillance capitalism.
The average user does not know how we pass our data on behemoths on the web.
Do I think all of them would come over to Web3 native identification primitives?
No. But I think, with the efficiencies of speed, cost & transparency blockchains
offer, we can offer superior products. The ecosystem could expand as Web3 native
products like zkPass and Soul Bound Tokens make their lives easier with the pace
at which identification can occur. Users will inevitably realise that an
alternative model exists where they can choose not to give their personal
information to strangers on the internet. That moment of realisation is likely
when the internet evolves.
Many of us did not start with strong views on decentralisation. Some of us used
Bitcoin and saw how quickly it sent money across the planet. The journey for the
following hundred million users might be the same when it comes to identity and
data-related primitives. If we build products that area meaningfully better,
they will switch over to Web3 native alternatives that put the user in control
of their data.
What excites me is the nature of consumer-facing applications that may come from
this next wave of “identified” users. It is a long-winded pathway before we map
clusters of users on-chain. But the primitives to help with those transitions
are here and now. Technology empowers users to a point where violence against
them can no longer be conducted.
We will be covering applications & business models that these identity
primitives would enable in another piece.
Adios for now,
Joel John
1
SBTs held in multi-sig wallets can indeed be moved. This is one of the flaws
with the model.
2
An alternative solution is to use something like XMTP to communicate with all
the holders of a certain digital asset.
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