Digital identity is the invisible glue of the connected world.
Every action we take online or through connected devices—logging into a smart‑home app, authorizing a machine technician, onboarding a new sensor to an industrial network—depends on identity.

1. What Is Decentralized Identity (DCI)?

Decentralized identity—often called self‑sovereign identity (SSI)—is a way of managing digital identity where:

Individuals and organizations own and control their identifiers and personal data.
Verification happens through cryptographic proofs and verifiable credentials, not by constantly asking a central database.
Trust is anchored in decentralized networks such as blockchains instead of one central authority.

With DCI, your identity works more like your physical wallet:

You hold credentials issued by many authorities (government ID, employee card, membership card).
You decide which credential to show, to whom, and for what purpose.
A shop, border control, or access gate can check the authenticity of a credential without phoning the issuer every time.

In digital form, DCI uses open standards like:

Decentralized Identifiers (DIDs) – globally unique identifiers that you control.
Verifiable Credentials (VCs) – tamper‑evident digital attestations about you or your devices.
Digital wallets – software that securely stores keys and credentials on your phone, computer, or secure hardware.

The result is a privacy‑preserving identity layer that can work across the entire internet and, crucially, across the rapidly expanding internet of things.

2. The Limits of Centralized Identity in a Connected World

Before diving deeper into DCI, it’s helpful to understand why the old model struggles, especially in IoT environments.

2.1 Data breaches and honeypots

Traditional identity systems gather millions of records—names, emails, passwords, device IDs—into huge centralized databases. These are irresistible targets:

A single breach can leak millions of identities.
Stolen usernames and passwords are resold and reused in credential‑stuffing attacks.
In OT/ICS environments, compromised credentials can directly impact safety and operations.

2.2 Fragmented identities and poor user experience

Each service you use maintains its own account:

Different usernames and passwords.
Repeated KYC (Know‑Your‑Customer) checks.
Inconsistent security levels.

For IoT, the problem multiplies:

Devices may be registered in separate vendor systems.
Operators struggle with multiple dashboards and identity silos.
De‑provisioning a user across all platforms is complex and error‑prone.

2.3 Limited user control and privacy

In the centralized model:

Providers collect far more data than strictly necessary.
Users can’t easily see who stores what about them.
“Consent” often means ticking a box once and hoping for the best.

This clashes with modern regulations such as GDPR, which emphasize data minimization, purpose limitation, and user rights.

3. The Six Pillars of Decentralized Identity (From the Infographic)

The infographic summarizes how decentralized identity works with six interlocking concepts. Let’s break them down and see how they apply to people and devices.

3.1 Control over personal data

“Users have complete control of their identity information, enhancing privacy.”

In DCI, the user (or the device owner) holds the private cryptographic keys that represent their identity. These keys:

live in a digital wallet under the user’s control,
are used to sign verifiable credentials,
and can be rotated or revoked without needing permission from a central provider.

Instead of creating an account on every service, you present credentials from your wallet. You choose:

which credential to share,
which attributes are revealed (age vs. full birthdate, for example),
and how long the service may retain the data.

For IoT:

A factory operator could carry a digital badge in a wallet; gates and HMIs verify it locally.
A smart‑home owner can decide which third‑party services may access which sensors through credentials rather than static API keys.

3.2 Independence from central authorities

“Reduces reliance on central entities for identity verification.”

DCI doesn’t do away with authorities; governments, banks, and enterprises still issue credentials. What changes is the verification model:

The issuer signs a credential with its private key.
The verifier checks the signature against a public key anchored on a decentralized network (such as a blockchain or a distributed ledger).
No central database lookup is required.

Because verifiers don’t need to phone home:

Issuers can’t track where you use your credentials (better privacy).
Services remain resilient even if the issuer is temporarily offline.
Interoperability improves—any service that knows how to validate credentials can participate.

For IoT and OT:

A robot vendor could issue a credential proving that a certain gateway runs certified firmware. Any plant around the world can verify this without contacting the vendor’s servers.
An employee’s digital ID can be used across multiple plants, contractors, or partner companies without creating shadow accounts everywhere.

3.3 Use of blockchain technology

“Blockchain ensures data is secure, transparent, and tamper‑proof.”

Blockchains (or related decentralized ledgers) play a specific, limited role in DCI:

They store public keys, DID documents, and sometimes revocation registries, not full personal data.
Because the ledger is append‑only and distributed, it’s extremely hard to tamper with these records.
Everyone can verify the integrity of identifiers without trusting a single party.

Think of the blockchain as a global address book for identifiers and trust anchors. It tells you “this is indeed the public key for issuer X” but doesn’t expose who you are or what credentials you hold.

For IoT:

A device manufacturer can write a DID for its product line to the ledger.
Devices can then prove their origin or firmware status to any verifier that understands the DID method, even in offline or disconnected environments.

3.4 Selective information sharing

“Share only what’s necessary, maintaining data minimization principles.”

One of the most powerful aspects of DCI is selective disclosure. Using advanced cryptography (including zero‑knowledge proofs and BBS+ signatures), credentials can be designed so that:

you reveal only specific attributes,
you prove statements (e.g., “over 18”, “employee of Company X”) without revealing underlying values.

Example:

At a bar, you need to prove you are old enough to drink. Showing your entire ID exposes your address and exact birthdate. A DCI credential could prove “age ≥ 21” without sharing any other personal data.

In IoT:

A smart charger only needs to know that a vehicle is authorized to use the service and a payment method exists. It doesn’t need the driver’s full identity.
A third‑party analytics tool may only see anonymized, consented subsets of sensor data as defined by credentials.

Selective disclosure is key for data‑protection regulations and for building user trust.

3.5 Enhanced security and privacy

“Advanced encryption techniques protect user identities from theft and fraud.”

DCI combines several security benefits:

Public‑key cryptography – credentials are signed and verified cryptographically, not by trusting URLs or text labels.
No shared passwords – authentication can be done by proving control of a private key, eliminating password databases.
Reduced data exposure – fewer central honeypots for attackers to target.
Revocation and rotation – lost devices or compromised keys can be revoked and replaced without monolithic account resets.

For IoT, this improves:

device onboarding, where gateways and sensors prove who they are cryptographically;
remote maintenance, where technicians authenticate with strong wallet‑based credentials instead of reused passwords;
supply‑chain integrity, where components carry attestations about origin and compliance.

3.6 Universal application and interoperability

“A global, interoperable framework allows use across various services.”

The end goal of DCI is universal digital identity:

A credential you use for online banking could also help you sign a work contract or log into a government portal.
Your IoT device credentials could work across different platforms, cloud providers, or applications without one vendor owning the master identity graph.

This is made possible through:

open standards (DIDs, VCs, OIDC extensions),
governance frameworks for trust lists and assurance levels,
and cross‑border agreements (for example, emerging EU frameworks for eID and wallets).

Interoperability is crucial for IoT, where ecosystems are naturally heterogeneous: multiple device vendors, network providers, cloud services, and operators must collaborate securely.

4. How Decentralized Identity Works in Practice

Let’s walk through a typical DCI flow in more detail, focusing first on people, then on devices.

4.1 For people: verifiable credentials and wallets

Wallet setup
- A user installs a digital identity wallet app (on a phone, browser, or hardware token).
- The wallet generates one or more key pairs and corresponding DIDs.
Credential issuance
- A trusted party—say, a university, government, or employer—verifies the user using traditional methods (documents, face‑to‑face, KYC).
- The issuer creates a verifiable credential: a signed data structure containing statements like “Alice is an employee of ACME Corp in role: Field Engineer.”
- The credential is sent to the user’s wallet and stored locally or in an encrypted cloud backup.
Using the credential
- When Alice tries to enter an industrial site or log into a maintenance app, the verifier sends a presentation request describing what proof it needs.
- Alice’s wallet prepares a verifiable presentation from one or more credentials, applying selective disclosure if required.
- The verifier checks the cryptographic signature and any revocation status using data from the decentralized ledger.
- Access is granted or denied based on the verified attributes, without ever calling the issuer directly.

4.2 For devices and IoT nodes

The same pattern can be applied to devices:

Device identity creation
- During manufacturing, each device is assigned a DID and key pair.
- A “manufacturer credential” is issued, attesting that this device model X with serial number Y is genuine.
Onboarding to a network
- When the device is deployed in a factory or building, the operator issues additional credentials (e.g., “part of Plant 5’s HVAC system”).
- Gateways or controllers verify these credentials before accepting connections.
Lifecycle events
- Firmware updates, ownership changes, or decommissioning can all be captured as additional credentials or revocations.
- Service providers know they are interacting with legitimate, authorized devices.

This approach is far stronger than default passwords or MAC‑address white‑listing—and it works across vendors and cloud platforms.

5. Why Decentralized Identity Is a Game Changer for IoT

Now that we know how DCI works, let’s connect it explicitly to IoT and Industrial IoT.

5.1 Identity for “every thing”

IoT adds billions of new participants to digital ecosystems:

sensors, actuators, gateways, robots, vehicles, drones, wearables, smart appliances.

Each of these “things” needs:

a secure way to authenticate,
an authorization model that controls what it can do,
a way to prove its provenance and integrity.

DCI offers a scalable framework for assigning identities and credentials to devices at manufacture time and then managing them through their lifecycle.

5.2 Stronger zero‑trust architectures

Modern security best practice for OT and IT alike is zero trust:

Never assume a device or user is safe just because they are “inside the network.”
Continuously verify identity, context, and policy before granting access.

Decentralized identity fits perfectly:

Verifiers don’t rely on static IPs or network zones; they rely on cryptographic credentials.
Policies become “only devices with a valid credential X can talk to controller Y,” independent of network topology.
Multi‑party environments (vendors, contractors, partners) can be brought under consistent trust frameworks.

5.3 Privacy‑preserving data sharing

IoT is all about data, but uncontrolled data sharing quickly becomes a liability:

energy usage patterns reveal household behavior,
industrial telemetry can expose trade secrets,
location data from vehicles raises surveillance concerns.

With DCI and selective disclosure:

data subjects (humans or organizations) can specify exactly what data is shared with whom;
consents can be managed as credentials themselves;
analytics providers can work with anonymized or aggregated proofs instead of raw personal data.

This becomes a strategic advantage in regulated markets or where customer trust is critical.

5.4 Interoperable ecosystems and less vendor lock‑in

Large IoT projects often involve:

several hardware vendors,
multiple cloud services,
integration with existing enterprise systems.

Without a common identity layer, every vendor builds its own login, registration, and API‑key standard.

A DCI‑based approach allows:

shared identity for users (technicians can use one digital ID across systems),
device identities that remain valid even if you change platforms,
easier M&A integration when companies or plants change hands.

6. Business and Regulatory Benefits

Beyond technical elegance, decentralized identity offers tangible business and compliance advantages.

6.1 Alignment with privacy regulations

Regimes like GDPR, CCPA, and others emphasize:

data minimization,
user consent and control,
right to access and erase personal data.

DCI:

enables minimal disclosure by design,
gives users a straightforward interface (their wallet) to manage permissions,
reduces the amount of personally identifiable information stored in your back‑end systems.

This doesn’t magically solve all compliance issues, but it provides a much more solid foundation.

6.2 Reduced breach risk and liability

Because DCI encourages:

less central storage of sensitive data, and
stronger cryptographic authentication,

the attack surface shrinks. Even if an application database leaks, the most critical identity attributes remain under user control in wallets.

For executives and risk managers, this translates into:

potentially lower insurance premiums,
less costly incident responses,
and improved reputation as a privacy‑respecting brand.

6.3 New business models

Decentralized identity opens doors to:

portable KYC – once a user is verified for one financial or mobility service, they can reuse that credential elsewhere.
usage‑based services where devices prove participation without revealing full identities, enabling privacy‑preserving marketplaces.
data‑sharing agreements in supply chains where each party keeps control of its data but proves compliance and traceability via credentials.

7. Implementing Decentralized Identity: A High‑Level Roadmap

Adopting DCI is not a single product purchase; it’s a strategy. Here is a practical high‑level roadmap for IoT and enterprise teams.

7.1 Understand the standards and ecosystem

Start with key standards and organizations:

W3C Decentralized Identifiers (DID)
W3C Verifiable Credentials (VC)
OpenID for Verifiable Presentations (OIDC4VP)
Industry groups like Trust over IP Foundation, DIF, and sector‑specific alliances.

Look for vendors and open‑source projects aligned with these standards to avoid lock‑in.

7.2 Identify priority use cases

Pick one or two high‑value, limited‑scope pilots, such as:

technician access control in a single plant,
secure commissioning of new devices,
customer login for a smart‑home portal using verifiable credentials instead of passwords.

Define clear success metrics: reduced onboarding time, fewer support tickets, improved security posture.

7.3 Choose wallet and agent solutions

Decide how users and devices will store credentials:

mobile wallets, browser wallets, hardware devices, or cloud wallets;
“agents” or services that help automate credential exchange for devices.

For IoT, you may embed lightweight agents into gateways or firmware.

7.4 Set up issuer and verifier infrastructure

You will likely play multiple roles:

Issuer of credentials (for employees, contractors, devices).
Verifier for external credentials (government IDs, certifications).
Holder when interacting with other ecosystems.

Plan for:

secure key management for issuers,
integration with existing IdPs, HR systems, or manufacturing execution systems,
monitoring and logging for auditability.

7.5 Governance, trust lists, and policies

Technology is only half the equation. You must also define:

who is allowed to issue which credentials,
which external issuers you trust and why,
how revocation is handled,
what assurance levels are required for different actions (e.g., plant entry vs. reading a dashboard).

Many organizations join or create governance frameworks that define these rules across consortiums or industries.

8. Challenges and Open Questions

Decentralized identity is promising but not magical. It faces several challenges worth considering.

8.1 User experience and key management

Expecting every user to manage cryptographic keys is unrealistic:

wallets must be intuitive and secure,
backup and recovery processes must exist for lost devices,
guardianship models are needed for minors or dependent individuals.

For IoT devices, secure key storage (TPMs, secure elements) and remote management are key concerns.

8.2 Scalability and performance

Blockchains and distributed ledgers can introduce latency and scalability issues if misused. Fortunately, DCI designs typically:

keep heavy data off‑chain,
use the ledger only for small DID documents and revocation lists,
rely on caching and layer‑2 solutions.

Proper architecture is essential for high‑volume IoT deployments.

8.3 Regulatory clarity

Regulators are still catching up with decentralized identity:

How will digital wallets and credentials interact with national eID schemes?
What liability do issuers and verifiers carry if a credential is misused?
How are cross‑border trust and recognition handled?

Keeping an eye on evolving standards and legal frameworks is necessary for long‑term planning.

9. Conclusion: DCI as the Identity Layer for the Internet of Things

The infographic at the top of this article captures the essence of decentralized identity in a simple diagram:

user control over data,
independence from central authorities,
blockchain‑backed integrity,
selective information sharing,
enhanced security and privacy,
universal applicability.

Taken together, these properties describe exactly what the IoT and Industrial IoT world needs:

a way for people and devices to prove who they are without surrendering data to a handful of platforms,
a trust fabric that can span plants, cities, and nations,
and a privacy‑respecting foundation for billions of connected interactions.

Decentralized identity is still evolving, but the direction is clear. For organizations building the next generation of connected products, smart factories, and digital infrastructure, now is the time to experiment, pilot, and design architectures that assume DCI as the identity layer.

The payoff is significant: more secure systems, happier users, easier compliance, and an IoT ecosystem that truly puts control back where it belongs—with people and with the organizations that own their devices, not with whoever happens to run the biggest login database.

As you plan your next IoT project, ask a simple question:

“Can this system benefit from decentralized identity instead of another siloed account database?”

In many cases, the answer will be yes—and that’s where the real transformation begins.

How Decentralized Identity Works – And Why It Matters for IoT