Digital identity is the way we recognize, remember, and respond to people and things across digital systems and online services. It encompasses how individuals prove their identity when accessing services, conducting transactions, or interacting with institutions through digital channels.
At its core, digital identity answers a fundamental question: how can you reliably prove something about yourself, your name, age, qualifications, or authorization, without being physically present?
Why does digital identity matter?
Identity is the trust layer of the digital world. Every interaction online depends on it: logging into a platform, applying for a loan, proving eligibility for benefits, or accessing healthcare. Yet the internet was built without an identity layer. Early networks were designed by and for trusted communities, such as governments and universities. As the internet expanded, no universal approach for trusted identities emerged.
The result is a fragmented landscape. Each application manages its own silo of user data, forcing individuals to juggle countless credentials. The average person manages well over 100 online accounts, each with its own login, password, and recovery process. These silos create friction for users and massive security risks for organizations, with each database becoming a target for bad actors.
What are the two types of digital identity?
Digital identity can be understood through two categories. Foundational identities are legal documents, such as passports, driver's licenses, or birth certificates, that establish who you are in the eyes of the government and the law. Functional identities are context-specific identifiers, such as proving your age to purchase alcohol, verifying that a nonprofit owns a bank account, or confirming professional licensure.
Both types of identity have traditionally relied on physical documents – paper or plastic credentials that are cumbersome to manage and easy to counterfeit. Verification processes often require notarizations, phone calls, or manual checks. Transitioning to native digital identity built on automation and cryptographic signatures promises significant gains in efficiency and security.
What is the current state of digital identity?
Today, proving identity for high-value use cases, such as opening a bank account, often requires showing a physical card to a webcam or visiting a branch in person. These steps are slow, prone to fraud, and create unnecessary barriers for individuals and businesses.
The costs of this fragmentation are substantial. In 2024, Americans reported record losses of $16.6 billion to internet crime and $12.5 billion to consumer fraud. The average cost of a U.S. data breach reached $10.22 million in 2025. Synthetic identity fraud, where criminals combine real and fabricated information to create false identities, accounted for $35 billion in losses in 2023.
Digital identity infrastructure offers a path forward, encompassing everything from authentication and access to decentralized identity via self-custodial, verifiable credentials – where credentials can be portable, privacy-preserving, and under individual control rather than scattered across vulnerable databases.
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