Can Implementing a Distributed Ledger Lead to Better Security for Digital Identities?

Can Implementing a Distributed Ledger Lead to Better Security for Digital Identities?

Blockchain is more than just a buzzword. It’s already being used to solve real-world problems in a number of industries. But how does it work? In this article we explain what distributed ledger technology and blockchain are. We also explain how these technologies work to keep data secure, create sovereign identities, and streamline KYC processes.

 

Defining the Difference Between Blockchain and Distributed Ledgers

Distributed ledger technology (DLT) is an umbrella term for “technologies which distribute records or information (the kind you might find on accounting ledgers) among all those using it, either privately or publicly”. Blockchain is just one type of DLT. There are other solutions such as directed acyclic graph (DAG) and consortiums. Blockchain, however, is the most widely used DLT by far.

 

Blockchain: Keeping Data Secure

Understanding how blockchain works to keep data secure is easy to do, especially by comparing it to more traditional technologies. For decades, we have relied upon databases to store, send, and receive information. Think of every time you purchase a product or service online or fill out information on a social media site. Even when you pay for items in brick-and-mortar stores with debit or credit cards, your data is kept on record. Essentially, as long as you’re not using banknotes or filling out paper forms, you’re relying on a company to securely process your personal information, financial transaction, or other data.

Traditionally, businesses have used centralised databases for processes like identity management/ KYC checks, payment processing, and other operations. Blockchain, however, uses decentralised databases. This means that, rather than using one computer to store data from all users, blockchains utilise large networks of computers. In this system, each computer constantly checks for data accuracy in order to verify information with other computers in the network.

From a technical security perspective, hackers can easily succeed at exposing sensitive information on a traditional, centralised database because all of the focus of an attack can be concentrated. Packet sniffing, SQL injection, and query string manipulation are just a few of the many kinds of database attacks that exploit centralised database vulnerabilities. Moreover, there are several other established and up-and-coming hacking methodologies that continue to threaten the data security of our digital identities.

What makes blockchain networks more secure? Essentially, blockchains require hackers to attack all computers (a.k.a. nodes) within the decentralised network at the same time. This is a significantly more difficult task than hacking a centralised database, since blockchains don’t have a single point of failure. Even if a group of hackers manages to compromise a few nodes, this would not damage the security of a blockchain network. Unless a hacker is able to exploit more than half of the nodes of a given network, data on the blockchain remains secure. It’s true that some blockchains can (and have been) been hacked. Statistically speaking, however, the chances of doing this are much lower than hacking the centralised databases we rely upon today. Moreover, we find that the biggest vulnerability of blockchain appears to be on the user end (i.e. falling for phishing attacks or re-using passwords) rather than the technical architecture of distributed ledgers.

This means that users of blockchain-based technologies have a greater ability and responsibility to protect their own digital identities. This also means that users of blockchain technologies don’t have to be as concerned with stolen data, identity theft, and other crimes caused by factors that are outside of their own control as we continue to see with traditional database technologies. Even though banks and traditional financial institutions are investing heavily in blockchain, blockchain can actually be used for much more than transaction verification of digital payments (i.e. cryptocurrencies). Blockchain can also be applied in any instance where data security needs to be improved.

 

Creating Sovereign Identities

One useful application for blockchain technology is the creation of self-sovereign identities. Traditional data storage processes for identity management are highly flawed, mainly due to above-mentioned utilisation of centralised databases. When we think of today’s biggest data breaches, many hackers target personal information of millions or even billions of individuals simultaneously. Once hackers have this information, they can create synthetic identities and commit identity fraud. At the same time, the victim doesn’t know this has happened until after the crime has occurred. In some cases, it could take months or years to realise a particular person’s identity has been stolen.

So how can blockchain serve as a better solution? Due to the enhanced security of blockchain networks, the ability of a hacker to access this information is significantly reduced or even eliminated altogether. Additionally, blockchain can improve data security for individuals who don’t want their information sent to third-party organisations. For example, with blockchain, we can prevent instances where our identities are unknowingly shared without warning or even sold to other companies. Thus, all individuals can use blockchain to empower a future where applications include data privacy as the default standard, rather than having to tell users to change privacy settings to risk further data exposure.

 

Using Blockchain to Streamline KYC

To take the above example a step further, blockchain can be used for a specific application like KYC checks. KYC checks require individuals who are purchasing products and/or services to provide basic information about themselves and their backgrounds to reduce the risk of fraud.

For example, if an individual wants to purchase a loan, a bank will likely need to conduct a KYC check on that customer. This ensures that the bank is not loaning funds to someone who has a poor credit history, is using a false identity, or is involved in criminal activities (i.e. money laundering). Traditionally, each KYC check has been done manually. In contrast, blockchain is automated. Utilising blockchain over traditional KYC processes can mean a future of more efficient fraud detection, and simplified approval processes for consumer services. As a result, businesses can better serve legitimate customers. In addition, businesses will be more capable of stopping identity fraud, money laundering, and other crimes.

 

Conclusion

Distributed ledger technologies like blockchain aim to replace many of the antiquated processes still in use today. If you’re a consumer interested in keeping data more secure from cybercriminals and third-party organisations, a distributed ledger can help.

If you’re an organisation that wants to reduce costs of KYC checks and curb the trend of large-scale data breaches, a distributed ledger could provide a more secure solution than a centralised database. To find out more about how identification management processes can be improved with blockchain, check out our comprehensive guide on this subject.

Read about blockchain for ID management

 


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