Decentralized KYC

The core principle where users hold and control their own verifiable credentials in a digital wallet. This eliminates the need for repeated data submission to different services. Credentials are issued by trusted entities (e.g., governments, accredited institutions) as cryptographically signed attestations, which users can then present selectively to prove claims (e.g., age, residency) without revealing the underlying document.

A cryptographic method enabling users to prove they satisfy a KYC requirement (e.g., "I am over 18" or "I am not on a sanctions list") without revealing the specific underlying data. This provides privacy-preserving verification. For example, a user can generate a ZK proof from their credential to demonstrate compliance to a DeFi protocol, which only learns the validity of the statement, not the user's name or birth date.

Verifiable credentials or their cryptographic hashes are often anchored to a public blockchain (like Ethereum or a dedicated identity chain) to create a tamper-proof, globally verifiable record. Attestation registries (e.g., Ethereum Attestation Service) allow issuers to post proofs of credential issuance, letting verifiers check their validity against the chain's immutable state, establishing trust without a central database.

Users can reveal only the specific attributes necessary for a transaction. Instead of handing over a full passport scan, they can disclose just their country of residence or age bracket. This data minimization reduces privacy risk and exposure. The technical mechanism is often built using verifiable presentations derived from the original credential, which contain only the required claims.

Decentralized KYC relies on open standards to ensure credentials work across different platforms and blockchains. Key standards include:

• W3C Verifiable Credentials (VCs): The foundational data model.
• Decentralized Identifiers (DIDs): A new type of identifier for verifiable, self-sovereign digital identity.
• DIDComm: A protocol for secure, private communication between DIDs. These standards enable a portable, vendor-agnostic identity layer.

Mechanisms to invalidate credentials if they expire or are compromised, crucial for maintaining system integrity. Instead of a central blacklist, methods include:

• Revocation Registries: On-chain lists of revoked credential IDs.
• Status List Credentials: A special verifiable credential that contains a bitstring indicating the status (valid/revoked) of a set of credentials.
• Time-based Expiry: Credentials contain a built-in expiration timestamp, after which they are no longer valid.

The cryptographic engine for privacy-preserving verification. ZKPs allow a user to prove they meet specific criteria (e.g., age, citizenship, accredited investor status) without revealing the underlying sensitive data. This enables compliance with regulations while preserving user privacy.

• Example: Proving you are over 18 without showing your birth date.
• Key Benefit: Minimizes data exposure and breach risk.

The standard format for tamper-proof digital credentials. A Verifiable Credential is a cryptographically signed attestation (like a digital passport or diploma) issued by a trusted entity. Users store VCs in a digital wallet and present them as needed.

• W3C Standard: Ensures interoperability across platforms.
• Self-Sovereign: Users control what, when, and with whom they share.

The foundation for user-controlled identity. A Decentralized Identifier is a globally unique, cryptographically verifiable identifier that is not tied to a central registry. Users create and own their DIDs, which serve as the root for their Verifiable Credentials.

• Key Property: Enables authentication without relying on a central database.
• Use Case: Logging into a DeFi platform using your wallet-based DID.

Public, immutable records of verification. An on-chain attestation is a signed statement from a verifier (like a KYC provider) stored on a blockchain, often linked to a user's wallet address or DID. It acts as a reusable proof of verification.

• Example: An attestation from a provider like Verite or Polygon ID stored on-chain.
• Benefit: Allows dApps to check compliance status with a simple on-chain query.

The principle of minimal data sharing. Selective disclosure allows users to reveal only the specific attribute required for a transaction, rather than their entire identity document. This is a core privacy feature enabled by ZKPs and VCs.

• Example: Sharing only that your country of residence is 'Country X' for a geo-restricted service.
• Contrast: Traditional KYC often requires submitting a full passport scan.

The ecosystem of trusted entities. A decentralized KYC system relies on a network of accredited Issuers (banks, governments, licensed providers) who issue credentials. Trust frameworks define the rules and standards these issuers must follow for their attestations to be accepted.

• Critical Role: Establishes the initial source of trust in the system.
• Example: A regulated financial institution issuing an 'Accredited Investor' VC.

Platforms can implement risk-tiered access based on verified credentials without exposing raw user data. A user can prove they are a jurisdictionally compliant entity to access higher loan-to-value ratios or uncollateralized loans. This replaces traditional credit checks with cryptographic proofs, enabling permissioned DeFi pools that comply with regulations while maintaining user privacy.

Used to prevent Sybil attacks and ensure fair distribution of rewards or governance power. Projects can airdrop tokens or grant voting rights only to wallets that prove unique human identity or membership in a specific community. This creates soulbound tokens (SBTs) or non-transferable badges that represent verified attributes, fostering more resilient and legitimate decentralized communities.

Financial institutions can use decentralized KYC to streamline compliance for international transactions. A user verifies their identity once with a trusted issuer, receiving a verifiable credential (VC). They can then present cryptographic proof of their KYC status to multiple corridor services, eliminating repetitive paperwork. This reduces costs and settlement times for compliant crypto-to-fiat gateways and remittance platforms.

Businesses can verify the legal status and credentials of counterparties in a supply chain or B2B network. A company can issue verifiable credentials to its certified suppliers, who can then prove their authorized status to other participants. This enables automated, trust-minimized compliance for trade finance, proof of origin, and anti-money laundering (AML) checks across organizational boundaries.

Several foundational protocols enable these use cases:

• Verifiable Credentials (W3C VC): The standard data model for cryptographically secure digital credentials.
• Decentralized Identifiers (DIDs): User-controlled identifiers independent of central registries.
• Zero-Knowledge Proofs (ZKPs): Allow users to prove compliance (e.g., "I am over 18") without revealing the underlying data.
• Attestation Stations & Registries: Smart contracts or decentralized networks that issue and revoke credentials.

A cryptographic method that allows one party (the prover) to prove to another (the verifier) that a statement is true without revealing any underlying data. This is critical for privacy-preserving KYC.

• Application: A user can prove they are over 18 or accredited without disclosing their birthdate or income.
• Technology: zk-SNARKs and zk-STARKs are common ZKP systems used to generate these attestations.

A tamper-evident digital credential whose authorship and integrity can be cryptographically verified. In decentralized KYC, a user's verified identity attributes are issued as VCs.

• Structure: Contains claims (e.g., country of residence), metadata, and a digital signature from the issuer.
• Flow: A regulated entity (issuer) signs a VC, which the user stores. The user then presents this VC to a dApp (verifier) for access.

A governance model where individuals or entities have sole ownership and control over their digital identities without relying on central authorities. Decentralized KYC is a key application of SSI principles.

• Core Tenets: User control, portability, interoperability, and minimal disclosure.
• Contrast: Differs from traditional federated identity (e.g., "Login with Google") where the provider acts as a central point of control and failure.

A mechanism to cryptographically verify that an entity is a unique human, often to prevent Sybil attacks. It is a related but distinct concept from KYC, which verifies specific legal identity.

• Methods: Can include biometric verification, social graph analysis, or hardware attestation.
• Use Case: Used in decentralized governance (e.g., voting) or airdrop distribution to ensure fair allocation per human, not per wallet.

A regulatory requirement (FATF Recommendation 16) for Virtual Asset Service Providers (VASPs) to share sender and beneficiary information for transactions above a threshold. Decentralized KYC systems are being explored as a solution.

• Challenge: Applying the rule to pseudonymous blockchain addresses.
• Solution: Protocols like the Travel Rule Protocol use decentralized identifiers and VCs to share required data between VASPs in a compliant, privacy-enhanced manner.