In case you've been living under a rock, cryptocurrencies have pretty much been the talk of Wall Street and the investment community for more than a year now. Last year, the combined market value of all digital currencies added together rose by more than 3,300%, marking perhaps the single-greatest year for an asset class in history. Though things have cooled off a bit so far in 2018, the intrigue that virtual currencies offer hasn't waned.

While there are numerous factors that investors and businesses are excited about, arguably none stands taller than the introduction of blockchain technology.

A businessman touching an encrypted block on a digital screen that's part of a larger blockchain.

Image source: Getty Images.

The buzz about blockchain

For those of you who are unfamiliar with blockchain, it merely describes the digital, distributed, and decentralized ledger that's tethered to a cryptocurrency and is responsible for recording all transactions without the need for a financial intermediary. In other words, it's a transparent logbook of all transactions that's unchangeable and doesn't allow banks to act as middlemen during a transaction.

Blockchain's entrance on the center stage, which essentially occurred when bitcoin debuted in 2009, is a result of perceived flaws with the current payment platform in place at financial institutions. In particular, blockchain was seen as a way to lower transaction fees by ditching banks as the third party during transactions and to significantly speed up processing and settling times, since blockchain-based payments are proofed 24 hours a day, seven days a week. In fact, some blockchains offer the ability to process transactions almost instantly -- even cross-border transactions.

To summarize, blockchain offers the potential for quicker transactions, lower fees, and perhaps stepped-up security as a result of its decentralization, which ensures that no single entity (including hackers) can ever gain control over a network or cryptocurrency.

Though financial institutions are the most logical beneficiaries of blockchain, there are countless applications beyond the realm of currencies. Blockchain can be used to make supply chains more transparent, and they can be a perfect solution for immutable medical records. But for tech-giant Microsoft (MSFT -1.84%), blockchain is being viewed as the perfect solution for digital identities.

A person holding a golden lock amid a connected digital structure.

Image source: Getty Images.

No joke: Microsoft is developing a blockchain-based ID

Microsoft has been dabbling with the idea of blockchain-based IDs for more than a year. In fact, it teamed up with Accenture (ACN 0.46%) in June 2017 to create the ID2020 blockchain solution, which is designed to solve the identity challenges faced by more than 1 billion people worldwide. This project combines Accenture's knowledge of blockchain and biometrics with Microsoft's cloud platform Azure to give people who've previously been shut out of owning a business, traveling, or keeping their identity safe, a means to do so. 

However, a recent Microsoft blog post suggests that "Ole Softy" is diving headfirst into the idea of decentralized IDs built within its Authenticator app, which is currently used by millions of people. For those wondering, an authenticator is an extra layer of protection beyond just a password that uses a token or code, as an example, to identify a returning device or user.

Microsoft's cloud community and developers believe that blockchain represents the perfect way for users to control their digital identities, while also giving users control over who accesses that data. For the past year, the company participated in the Decentralized Identity Foundation with individuals and organizations, leading to the idea of a blockchain ID that'll have four key components:

  • Decentralized identifiers (DIDs).
  • An Identity Hub, which is where encrypted identities will be stored.
  • A Universal DID Resolver, which is a server that resolves DIDs across blockchains.
  • Verifiable credentials.

In simpler terms, as described by ZDNet, whereas today's identity systems require authentication and access management by numerous apps, a decentralized blockchain ID system with DIDs and identity hubs could allow developers to customize apps and services that rely on attestations -- claims about parts of an individual's identity that other entities endorse -- requiring less of a user's personal information to be processed.

Binary code and blockchain nodes with the digital outline of the continents in the background.

Image source: Getty Images.

There are going to be some major challenges

Of course, we all know that no game-changing idea comes easy, and developing DIDs within the construct of the Authenticator app is going to create a lot of challenges. Tops on the list is scaling it all to work for millions of people without a degradation in performance. Ankur Patel, from Microsoft's Identity Division, said in the blog post:

Some public blockchains (Bitcoin [BTC], Ethereum, Litecoin, to name a select few) provide a solid foundation for rooting DIDs, recording DPKI [decentralized public key infrastructure] operations, and anchoring attestations. While some blockchain communities have increased on-chain transaction capacity (e.g. blocksize increases), this approach generally degrades the decentralized state of the network and cannot reach the millions of transactions per second the system would generate at world-scale. To overcome these technical barriers, we are collaborating on decentralized Layer 2 protocols that run atop these public blockchains to achieve global scale, while preserving the attributes of a world class DID system. 

Here are some things to note about this statement. First, there are performance scaling issues for some of the most successful blockchain projects. Secondly, solutions aren't at the ready. Microsoft is merely at the point of collaborating on how to fix these scalability issues so performance doesn't suffer.

How long is it going to take to develop these protocols and prove that they work when scaled? No one knows for sure, but I wouldn't hold my breath.

Just as importantly, how long will it take for developers to tailor apps to properly recognize and rely on attestations? Microsoft can do what it can on its end to push the development of a scalable decentralized ID, but it won't get very far if developers and businesses don't embrace it. This remains perhaps the biggest Catch-22 of blockchain: No businesses will dive in until scalability has been proven, yet scalability can't be proven until businesses give the technology a chance.

Personally, I applaud Microsoft's initiative, but I doubt it becomes a viable global project anytime soon because of these challenges.