Understanding Decentralized Identity: Can On-Chain Reputation Become an Anchor of Trust?

Author: FRANCESCO

Compiled by: DeepTech TechFlow

In recent years, there has been a lot of discussion about on-chain reputation. Since 2017, multiple projects have been trying to solve this long-standing challenge, aiming to empower on-chain users to understand who they are dealing with through a reputation layer. Today, this seems more important than ever, with various SocialFi projects and celebrities frequently launching so-called shitcoins. This article introduces the concept and importance of on-chain reputation, focusing on projects researching in this field, such as Debank and Ethos Network.

On-chain Reputation

On-chain reputation answers a simple question: How do we evaluate the trustworthiness of individuals interacting in a decentralized system?

In centralized systems, third parties typically ensure such reputation (e.g. credit scores, Interpol red notices, bank accounts).

Is there a way to replicate this reputation guarantee in a distributed system?

These efforts are not limited to a single protocol, but rather innovate in space. In order to be applicable, this reputation system must go beyond a single protocol and create a unique set of standards that can be recognized on Web2 and Web3 platforms, establishing a universal framework for cross-chain reputation.

Any attempt that does not become a new standard will make this process meaningless.

According to a16z’s perspective, 'In order to popularize decentralized identity, we must first establish a system that maps people’s relevant off-chain experiences and associations to the on-chain, ‘then’ we must build mechanisms to standardize, process, and prioritize the data flow added to the chain, and ‘address the inherent challenges of decentralized identity, including the lack of context in on-chain records and the problem of accessing decentralized networks’.

Currently, even the blockchain explorer only records very basic inputs. Without additional context of transactions, it will be more difficult to map and assign reputation scores to them.

For example, receiving NFT as part of an exchange should have different weight than receiving NFT for outstanding community contributions to a project.

In addition, in the field of encryption, reputation takes various forms, such as protocol trust, lending credit scores, and the records of project founders.

Only after considering all these factors can the system be suitable for many use cases, incorporating on-chain reputation factors into the “offline activities” based on decentralized identity public query nature.

Three steps:

• Record data on-chain
• Mapping and interpreting data
• Convert to ‘reputation score’

Truly Standardized Reputation

In their Request for Builders, the Base team outlines how they see on-chain reputation as the foundation for success. They liken the “on-chain” to the next “online”, and reputation in every on-chain account plays an important role.

In this context, the ‘reputation protocol’ can create more trust on-chain. They assume this might be similar to FICO (the most well-known credit scoring name) or Google Page Rank score.

The wallet can implement these standards as anti-fraud mechanisms and issue warnings for risky addresses. We have seen Rabby take the lead in issuing warnings about new contracts or fraudulent tokens.

Others that have introduced some reputation measures include blockchain analysis companies based on on-chain behavior, such as Chainalysis, and DeBank, which creates DeBank credit scores.

The credit score is a comprehensive measure of “user authenticity, activity, and value”. A higher score means more activity and user authenticity, but at the current state, the DeBank credit score cannot serve as a proxy for reputation.

In addition, we can also see that the importance of formal identity verification has received much attention, which is still a controversial topic in the encryption field.

An example of a successful reputation mechanism is Gitcoin Passport. Gitcoin Passport claims to be an “identity verification aggregator application”.

Just like a regular passport, users can collect stamps through verification of previous activities or completion of tasks and validations from different Web2 and Web3 validators:

• Holonym (KYC)
• Civic (biometric)
• Google and LinkedIn (Web2)
• Guild and Snapshot (Web3)

These seals add default human ratings, which are proxies for the trustworthiness assigned to each user. Higher human ratings provide more opportunities, with a minimum requirement of 20 points to be considered human.

Here are examples of collectible seals:

The greatness of Passport lies in its preservation of user privacy, using zero-knowledge methods, “creating a verifiable credential to prove that the user has performed specific activities, but without collecting any personal identity information”.

Another interesting attempt to create proof of validation is being carried out by Ethos Network.

Ethos is developing a ‘credibility platform’ that is integrated into a wider ecosystem, not limited to a single dApp. The platform can be integrated into existing interfaces (Chrome extensions, Metamask snaps) and dApps.

The blueprint of this new social consensus is similar to Proof of Stake, with users acting as “social validators”.

• Users can stake people to show that they trust them
• Bad actors can be reduced
• Social consensus providers can receive rewards

Ethos has introduced financial rewards and penalties to ensure:

• Reputation is protected by financial security, making falsifying reputation expensive.
• Reputation has value
• Easier to observe social interactions

At the same time, a balance must be found in reputation that cannot be simply bought.

On the Ethos Network, users will be able to:

• Review: Development Beyond Provides Financial Stake Reputation
• Guarantee: Similar to stake, users can delegate their ETH to others and earn staking rewards. The person you guarantee will receive a 10% reward to incentivize validators and referrers.
• Reduction: If validators behave improperly, those who have guaranteed ETH to them can propose a reduction, deleting up to 10% of the violator’s staked ETH from the Ethos contract. Those who propose a rejected reduction will be punished.
• Proof: Reflecting the authority, reputation, and influence from other sources

All these mechanisms will be converted into a single trust score.

Although not paying much attention to on-chain reputation, other notable nominations in the field include:

• Worldcoin: The giant operated by this venture capital firm promises to scan your irises and airdrop some WLD tokens for the inconvenience.

Whether their intentions are noble or utopian can be debated. Nonetheless, they have achieved human authentication through user iris biometric scanning. While this opens up new avenues of risk, it is an exciting experiment.

• ENS: Convert encrypted addresses into human-readable names, promoting on-chain messaging

The road ahead is long and distant

Developing a truly standardized and universal on-chain reputation system will be a long and arduous journey, and will encounter many challenges.

• Decentralized Solution : The main challenge is to ensure that all these systems are truly decentralized, rather than controlled by a centralized party, such as Worldcoin or Gitcoin Passport.
• How do we achieve on-chain reputation in a decentralized manner? Anything below this standard will cause the entire system to lose its trustless nature.
• The reputation of encryption may be manipulated/purchased
• Privacy must be protected
• Must go beyond a single wallet attachment and have universality

This implementation will be a joint effort of all participants, wallets, Block Explorers, dApps, and networks.

Vision of Using Real Use Cases

What is the ultimate vision of on-chain reputation?

Here are some examples and real-life scenarios where on-chain identity may be helpful:

• OpenCVs: Anyone can assess the reputation of other participants by assigning a single reputation score to each user. In addition, each article, contribution, or community participation will be recorded and can be used as proof of reputation.
• Celebrity Token Issuance：With celebrity tokens becoming a new trend, the issuance data can be used to determine the trust profile of each celebrity. We have seen many of them engage in serial fraud. Conducting a quick risk assessment can partially address this issue, showing users to be cautious with these tokens.
• Internet memes developer: This is the peak period for internet memes developers. However, many people abuse this power to pump and dump or even engage in outright fraud. We have seen some figures acting as serial internet memes developers, constantly engaging in fraud. It is very useful for the deployer of tokens to identify previous fraudsters for risk assessment of users.
• KOL sell-off：One important part of encryption Twitter is KOL selling their bags and selling their fans at the same time. Imagine if you could rank the reputation of your favorite KOL, or just know who is a complete sell-off and scammer.
• Loyalty Program: Developing an on-chain reputation system will allow dApps to have more in-depth user interaction information, create custom plans specifically for high-quality interactions, and provide high-value rewards for the protocol.

Other existing reputation tools

In addition to the aforementioned, various tools have already made contributions to promoting trust and accountability.

Reputation Building and Tracking

• Collab.Land: This is an NFT access control robot that verifies ownership and DAO contributions.
• Karma: Visibility of DAO Contribution
• PNTHN: Tracking DAO member reputation
• SOURC3: On-chain Reputation Management Platform

Reputation and Identity Verification

• Pentacle: Help users navigate protocol
• ONT ID: Decentralization Identifier and Verifiable Credential Identification Framework
• Krebit: Users can prove their identity without revealing it, protecting privacy
• Orange Protocol: A multi-chain reputation system as verifiable credentials
• OutDID: ZK proof for private identity verification

Reputation and Governance

• Metopia: Reputation system for governance
• Astraly: on-chain reputation and reputation-based token distribution platform
• Spect: A no-code tool that helps DAO contributors create sub-DAOs
• SourceCred: Help incentivize contributors and reward high-quality participation