Happy New Year. I’m starting a new blog series in 2024 – The Economic Models of Identity.
Identity is the #1 shaping force in new payment schemes, Web3, blockchain/crypto and more broadly “trust” interactions in government, commercial and social (see Trust Networks). Most investors haven’t spent much time thinking about identity because it was the realm of tech geeks or bundled into the services we use (see Separating Identity and Payments). The reason to pay attention today? Identity is shaping a redesign of the internet’s infrastructure AND governments are defining new LAW on what constitutes a digital identity (ex India’s UIDAI and Europe’s eIDAS/eID).
Let’s unpack the word Idenitity to ensure a consistent taxonomy. While most people relate a drivers license or passport to identity, it is much more than that. Who are you? And who can answer that question? Are you a US citizen? Licensed Driver? Doctor? Skier? Great credit risk? While your SSN or DL# are legally issued identitiers that only the government can issue and authenticate, you are also biometrically defined and have credentials, behaviors, preferences and other attributes. Identity and the contexts in which it is used are the foundation of trust, contracts and relationships.
Historically, the management of “identity” was informal societal (in person) interaction. You were defined by the observations made about you within your community. Your identity influences communication and trust, just as we use different words and tones in communicating to a trusted friend, or established expert vs a complete stranger.
Dr Rod Cook, one of the world’s leading biomatricians (biological statistician) was my head of research and told me that in 2000, roughly 90% of your interactions were in your local community in …. Today less than 50% are. As our interactions have expanded beyond our local community, the needs of consumers to manage their identity have also greatly expanded. The solutions available are limited to narrow transactional contexts (ex payment, passport).
Changes to how we manage trust and assertions have been profound moments for society at large. For example in Weak Links, Peter Csermely outlined how the creation of paper money (a token) changed society, our specialization, how we connect with other people, and how we define ourselves. The future of identity, and the shaping force it exerts on the next wave of innovation, will likely drive even greater societal change (see blog).
Governments since Roman times have maintained the central role of defining who was a citizen (see Roman Census). While Government is best placed to lead in identity issuance, law and compliance regimes, it is not the only ID that matters. For example, our identity is known to family members. But how can we leverage this family ID beyond the family? This is the challenge of bridging networks: assertion and trust. Historically, trust was extended by a common connection who had knowledge of both parties. For example one of the most efficient payment networks in the world are Hawalas, an informal communal network of money brokers. In OECD 20 countries, Banks have filled this transactional trust role today, but it is limited and comes with a very steep cost (2% interchange tax).
We are at a formation stage of a new infrastructure. There is very little likelihood “identity” innovation will disrupt existing value changes or flows of funds. The reason is that the core of value exchange happens within commercial agreements. However an improved ability to managed and exchange identity may enable more agreements and connections and better user experiences (Web3.0 vision).
For example, today Visa and Mastercard hold the only commercially enforceable agreement between you and a retail purchase (Consumer-Issuer, Issuer-Network, Network-Acquirer, Acquirer-Merchant). In this card process there is active management of every entity in the transaction. Consumer payment is guaranteed by Issuer, merchant delivery risk is owned by Acquirer. Could another party like Amazon take on all risks more effectively with immutable identity verification of buyer and seller and item (ex expensive watch with NFT)?
This brings up another key point. Identity is not just about people, objects also have identity many of which can be authenticated today (ex painting, property, stock certificate, car, or rare watch). Objects, legal entities and people relate to one another and also have history and/or provenance. To protect privacy, we can’t keep all of this data in one location (or IMHO a public blockchain). Owners must be in a position to permission it, and those capable of confirming the information (as an assertion) must have economic incentives to do so.
How others accept and validate our identity, and how others share insight about us will define the #1 growth vector in public and private markets over the next decade (see Trust Networks and Authentication in Value Nets). Across industries, there are many parallel efforts attempting to guide the structure, protocols, exchange, and assertions associated with identity. For example
- Payments – AVS, CVV, tokenization, binding/provisioning, 3DS, payee confirmation (UK),
- Crypto/DeFi – DAOs, Authentication Provider, Oracle,
- Web 3.0/Metaverse – Decentralized Identifiers (DIDs), Verifiable Credentials (VCs)
- Government – Adhar, EDL, ePassports, eID (EU)
- Healthcare (NIST-800-63-3, RFC 3647, OIDC, UDAP, …etc)
- Authentication (FIDO, eIDAS2-EU, EU Digital ID Wallet, OAUTH2, …etc)
This new blog series will be in 6 parts:
- Identity Models and Government efforts in identity (and law), and governance structures
- Survey of identity efforts, case studies, and economics
- Impact of Consumer friendly “federated” models of identity management (eID, Google/Apple Wallet)
- Market impacts to existing players (ex payments), key problem domains and potential winners.
- Privacy and technology
- Economic models of identity
I hope to have part 1 complete this weekend.
Happy New Year and thanks for subscribing.