The Future of Encrypted Native Consumer Products: How Web3 Digital Identity Plays a Practical Role?

Original Title: The Future of Crypto Native Consumer Products Part 4: Digital Identities

Written by: Mercedes Bent, Lightspeed Partner

Translated by: Deep Tide TechFlow

If you have a friend who is about to go on a first date through Bumble (a dating platform), she might say, "I’ve already looked them up online; they were on the college soccer team, work at a startup, have a very cute Labrador named Dusty, and bought a house a few miles from me seven months ago. Just in case you never see me again, here’s their contact information."

A little online research can tell you a lot about someone you’ve never even met, but how do you know that information is real? MTV's reality show "Catfish" has repeatedly proven how easy it is to fabricate an online identity.

So where’s the solution? Yes, you guessed it—blockchain.

Blockchain-based decentralized identity platforms will play a crucial role in enabling people to prove their identities.

With the help of decentralized identity, in a few years or quarters, "friends" will be able to view their date's digital identity profile, which lists the digital communities they belong to, the events they attend, the causes and artists they support, the PFP NFTs they own, and any tokenized goods they possess.

Today, all this data is recorded on the blockchain. People’s cryptocurrency wallets reveal a wealth of information about who they are and what they’ve done—if you know their wallet address. And that’s precisely the problem digital identity platforms are trying to solve: how to conveniently display all of a person's on-chain activities.

A Truly Unique Cryptocurrency Consumer Product

Digital identity platforms are one of the most exciting consumer product areas in cryptocurrency for the following reasons:

1. They directly leverage the core innovation of blockchain technology (verifiable, immutable records of who did what).
2. Having an identity layer is one of the most strategically significant positions on the internet—just as the decade-long battle between Apple, Facebook, and Google to become the one-click login king of Web2 has shown. (Meta/Facebook had an early lead but has now lost to Apple, which entered later but has done better than the others.)
3. Digital identity is a rare example in the cryptocurrency consumer category that is leveraging blockchain to do something truly innovative.

In the cryptocurrency community, there have already been many articles about the potential of this new product. It’s not a question of whether it will happen, but rather who will build it.

Many believe that wallet providers (like Metamask, Phantom, Coinbase Wallet) are the de facto leaders in this space, but I don’t believe wallets will ultimately build our decentralized digital identity.

Why? Because, just like bank accounts, people will maintain different wallets for different purposes, and as more mainstream users enter cryptocurrency, they simply don’t want to self-custody or consciously manage wallets.

Winners will either be fun, useful, or both.

When we look at how the dominant Web2 identity providers emerged, it becomes clear:

• Google: The broad utility and convenience of search and email made it a central hub.
• Facebook/Instagram: The ability to easily connect with friends online and share photos.
• AppleID: The ability to log into multiple devices using your Apple ID.
• LinkedIn: A unique role in replacing offline resumes with digital links.

In short, whoever can create a compelling reason to aggregate and update user profiles—either by providing a useful tool or creating entertainment value—will dominate the blockchain identity space.

A Crowded Field: The Game of Identity Power

There are numerous startups vying to create Web3 digital identity platforms.

For digital identity profiles to thrive, users must be motivated to update and add content.

Successful platforms will give people a good reason to use them, whether through network effects (everyone else has it, so I need it), real-world use cases (my profile can help me find a job or date), or economic incentives (if someone finds my profile attractive, they’ll pay to contact me).

After that, more practical factors start to come into play—such as which platform has the broadest distribution, who has the most complete view of on-chain activity, who has the ability to tie advertising and marketing dollars to profiles, who has the most compelling real-world use cases, who has the greatest first-mover advantage, and who stands to lose the most by not capturing the Web3 identity market…

Portfolio aggregators like Zerion or Zapper (in a multi-chain world) or CeFi fintech companies like Coinbase or LemonCash (in an interoperable cross-chain world) will be my top choices.

Below are the cases I believe have a better chance of succeeding in this space (from the perspective of human emotional needs):

1. CeFi Fintech Companies (Coinbase, LemonCash): These companies have already provided the primary experience for new users to purchase cryptocurrency, arguably the first killer product of blockchain. Coinbase started working on digital identity as early as 2018, and many CeFi fintech companies have simultaneously implemented fiat on-ramps and self-custody wallets.

Emotional hook: The need to own and accumulate wealth.

2. Portfolio Aggregators (Zapper, Zerion): They can provide a comprehensive view of your holdings across multiple wallets and have already achieved very high engagement.

Emotional hook: Dopamine kicks in when the tokens you hold go up or down, the need for financial security and assurance, seeing all your held tokens rise in one place.

3. Domain Services (ENS, Unstoppable Domains): These are already public profiles that people use to share their crypto affiliations.

Emotional hook: The need for completion and establishment.

4. Identity, Social, and Data Protocols (Lit, Ceramic, Lens, Arweave, CyberConnect): These open-source protocols primarily serve as middleware integrated into consumer identity profiles, but if any of them decide to enter the application layer (Lens is already experimenting with profiles), they could become a significant competitor.

Emotional hook: The need for security.

5. Wallets (Metamask, Phantom): Existing digital identity layers required by many dApps allow you to log in. Many wallets also offer privacy features (public and private keys) to protect their contents.

Emotional hook: The need for self-ownership.

6. Web2 Social Identities (Google, Facebook/Instagram, LinkedIn): If a new digital identity standard takes off around cryptocurrency, they stand to lose the most.

Emotional hook: The need for completion, impact, and connection.

7. Marketplace Platforms (Magic Eden, OpenSea): They already possess the primary data involving any commercial transactions related to NFT holdings. It can be argued that NFTs share our identity information more than fungible tokens do.

Emotional hook: The need for self-expression and creativity, the need for stimulation and connection.

8. Proof Protocols (POAP, ProjectGalaxy): An independent source of information about non-financial crypto activities—like attending events or being a community member—creates a new layer of identity that doesn’t exist in Web2.

Emotional hook: The need for belonging, connection, and impact, the need for achievement and building.

9. Web3 Social Networks (DeSo, Bitclout, Entre): Existing social profiles that have yet to generate significant entertainment value or gain substantial traction.

Emotional hook: The need for self-expression and creation, the need for influence and connection.

10. Token-Gated Platforms (CollabLand, Mintgate): They have already served as certification tools based on token or NFT communities.

Emotional hook: The need for belonging, connection, and influence.

11. Ticketing Platforms (Afterparty, Tokenproof): Tokenproof is essentially a proof of ownership platform but has seen success in ticketing use cases. These platforms have another form of non-financial crypto data that hasn’t been captured by other platforms.

Emotional hook: The need for belonging, connection, and impact.

12. Advertising Support Platforms (Layer3, Brave): They have strong user retention and are ready to share data with external parties.

Emotional hook: The need to control one’s data and ensure its security.

13. Messaging (Dialect, XMTP): How we connect with others.

Emotional hook: The need for connection and belonging.

Taking Control of Our Identity

A reasonable question is: If all on-chain activities have immutable records, why do users need to update or manage their identity profiles? Shouldn’t that happen automatically?

The answer is privacy.

People won’t be forced to share everything they do online; digital identity simply means that everything you do online (and want to share) is verifiable.

Thus, your friend using the dating app Bumble can be assured that she won’t be catfished. She can trust that her date is indeed the person described on the app while still leaving enough mystery to keep things interesting.