If a secure identity verification system…
- Doesn’t collect conventional identity touchpoints (like name, address, phone number, etc.) or traditional forms of identification (like driver’s licenses and passports)
- And can’t reveal your actual identity
Can it actually work? And if so, what is a system like that worth? Those are the questions at the heart of this month’s crypto recommendation.
In the “centralized” world we live in today, identity verification is fairly straightforward. If you’re opening a bank account, you need to provide a driver’s license or passport and possibly another form of address verification. And if you’re purchasing something online, the name and billing address you fill out for a transaction needs to match the name and billing address on file for your payment method. Additionally, some transactions could require you to upload a driver’s license or other photo identification.
In the crypto or decentralized universe, the rules for identity verification vary. For centralized exchanges like Coinbase that provide the on-ramps from the traditional financial system into crypto, identity verification works like it does in the centralized world. You’re going to need a photo ID of some sort to fully utilize an exchange’s services. But decentralized transactions don’t require any form of identity verification (outside of being able to access your wallet to initiate the transaction). And even then, it’s not a “traditional” form of verification as we know it today. That makes more complicated transactions hard to perform. Additionally, identifying and tracking a user’s digital footprint to develop a full customer profile is pretty straightforward in the centralized universe.
That’s why developing a digital ID in the crypto space is critical. As we move into a world where transactions become more complex and involve more than one blockchain, there needs to be a single identity that works across multiple chains. Similarly, the crypto blockchain universe is extremely fractured. It’s very difficult to track user behavior. But a single crypto ID across multiple chains would help crypto networks, Web3 companies and decentralized apps understand their users’ behavior. For example, if a crypto organization or app discovers that someone uses their network quite a bit across multiple chains, they could airdrop some coins to the user as a result. But it doesn’t work if the user can’t be identified.
Litentry is taking a unique approach in creating this much-needed digital ID. It combs through the blockchain universe looking for transactions that belong to you. Then it takes all of the transactions it finds, compiles them using its special sauce, and generates an ID score that it can use to essentially decide whether a transaction or action is being initiated by you or should involve you in some way. And it does all of this without collecting anything that identifies who you are “in real life.”
Litentry can create a system like this because of the nature of crypto and blockchain technology. Most transactions are written to a public blockchain. So the wallets being used can be tracked, as can the flow of assets or information. But there’s no information that identifies the person that’s written to the blockchain. So a group of transactions originating from a wallet can be attributed to a unique individual. But the identity of that wallet’s owner is unknown.
Litentry doesn’t care about the identity of the individual. What it wants to do is aggregate all of the ways the unique individual can make transactions across multiple chains. If it can group all of that information together under a unique identifier, then it can easily process cross-chain or complex transactions. And it can create a blockchain history of a user, the same way we generate web histories right now for individual users.
Litentry operates on the Polygon network. And it will be using its LIT token to drive the process. I say “will be” because much of the functionality is still a work in progress. Litentry is still building out its identity parachain and decentralized app (dAPP). Development on the dAPP began last month. And it hopes to release the parachain first followed by the dAPP right after. Litentry revealed in a Telegram Ask Me Anything (AMA) chat earlier this month that progress has been slow recently because “engineering power hasn’t been the best.”
Despite the slower than expected progress, I’ve been fairly impressed with the Litentry team and community and the project’s transparency. In that AMA earlier this month, the team also detailed where they were in terms of project timelines and the organizational changes they were making to improve efficiency. Overall, the team and community showed the dedication, commitment and enthusiasm I look for when investing in a good crypto project.
That said, investing in LIT carries more risk than most typical crypto investments. The base protocol and dAPP aren’t even in beta yet. And then there’s adoption risk. Litentry’s approach to identity verification makes perfect sense in the decentralized blockchain world. But it runs counter to basic identity verification principles in the centralized world, which require an attempt to determine the physical identity of users to complete many transactions.
Litentry, by contrast, isn’t interested in the physical identity of a user, but rather whether the digital identification of a user is valid and authentic. That means regulatory bodies from the centralized world might not accept it as a valid identity verification check. This isn’t a big problem now. But it could become one as governments and regulators roll out rules for the crypto ecosystem.
That said, I believe Litentry provides an attractive risk-reward ratio. That’s why we’re going to add it to the speculative portfolio for Crypto Asset Strategies. Litentry is operating on a new frontier. And if it succeeds, the payoff could be immense.
LIT can be acquired on KuCoin and Uniswap.
Rules of the Road
Investing in a bear market is tricky. It is likely that the market will go down further from here. But it’s important to be opportunistic. So if you have capital to invest — and you’re psychologically and emotionally willing to enter what promises to be a highly volatile market — here are some guidelines to follow.
- Do not invest money you can’t afford to lose. The markets are in for a rough ride. If you can’t afford to lose the money, don’t risk it.
- Focus on projects with strong use cases.
- Look for teams or communities that are active and committed to their projects.
- Always enter a position using dollar cost averaging. That means buying a small amount each week rather than buying your entire position at once. That way, if prices continue to fall, you lower your overall acquisition cost.
- Don’t try to time the market perfectly. Nobody can. And I believe this bear market will be around for several months. So if you want to wait, that’s perfectly okay. But when you do invest, make sure you utilize dollar cost averaging to buy into the market.
- Diversify your crypto portfolio. From a percentage standpoint, bitcoin and ethereum should be the biggest investments in your crypto portfolio. But you need exposure to a much broader and more diverse set of coins to take advantage of the full upside of the crypto markets. Bear markets are a good time to diversify your portfolio and increase exposure to different crypto sectors.
Remember, investing in crypto is risky. Investing in a crypto bear market carries even more risk. Less than 5% of your overall portfolio should be invested in crypto.