Coinbase Acquires Distributed Systems to Double Down on Digital Identity

Fibo Quantum

Earlier this year, the executors of #DeleteFacebook engaged in a form of decentralized group therapy. Catharsis came in a zip file downloaded before deletion, containing the data you shared with Facebook—your friends, your photos, your posts—and with it, the data Facebook shared about you: the ads you clicked, the list of businesses that know where you live and where else you shop. A portrait of the modern digital identity—or, at least, part of it.

But what if Facebook never held onto any of that data in the first place? To some enthusiasts, blockchain technology holds that promise: a way to return ownership of personal data to the individual, along with the power to share that data with others and revoke it as they please. On Wednesday, Coinbase, one the world’s largest exchanges for buying and selling cryptocurrency, announced it had acquired a team working to do just that.

The five employees of Distributed Systems, a San Francisco startup, will join Coinbase’s Identity team, which spun out as a dedicated engineering unit last winter. Coinbase, which did not disclose the terms of the deal, says the new arrivals will help the company explore ways to integrate decentralized identity across its services. The startup had been at work on an open identity standard for users of Dapps, or “decentralized apps,” computer programs that run on a blockchain’s network of computers.

‘Empowering users is a great rallying cry, but what will ultimately happen is users will end up punting these problems to centralized services.’

Ari Juels, Cornell University

The purchase joins a string of acquisitions in recent months aimed at diversifying the Coinbase’s offerings beyond its cryptocurrency exchange. In an industry rife with fraud, the company has leveraged its reputation for relative safety and approachability to become popular with retail investors. Despite some growing pains, the company now hosts some 20 million accounts and is valued, according to Recode, at $8 billion. But its core business remains exposed to the harsh whims of the cryptocurrency markets: Since its peak in December, Bitcoin has shed more than two-thirds of its value.

B Byrne, a product manager for Coinbase’s Identity team, envisions decentralized identity as part of a more robust blockchain ecosystem that extends beyond cryptocurrencies. The basic premise: Personal data could be verified once by a third-party, like the government agency, and then retained securely by an individual. Rather than sending your Social Security number to a company or service, for example, the Social Security Administration could put an unalterable stamp of approval on the blockchain that can be verified on request. A user could provide proof that they’re a real person without ever revealing the Social Security number itself. Replacing a system where sensitive information is copied into multiple points of weakness—like, say, Equifax’s servers, or even Coinbase, which itself requests Social Security numbers from its users—has obvious appeal in a time where corporate hacks of sensitive data are a constant occurrence.

But how that technology would work in practice remains unclear, says Ari Juels, a Cornell University professor and former chief scientist at RSA. Storing personal data on a public blockchain, like Ethereum, would require people to manage their own encryption, chiefly their private key, the lengthy alphanumeric string that allows someone to sign blockchain transactions. “People are notoriously bad at key management,” says Juels. An identity system would have to account for secure recovery of private keys if they’re stolen, lost, or destroyed, lest someone lose access to proof of their identity. (WIRED, too, has reckoned with the consequences of destroying a private key.)

Decentralized identity could also exacerbate the very privacy issues it tries to solve. If a user relies in a single identifier, as some identity systems have proposed, that ID could become a kind of “supercookie,” says Juels. And even when measures are taken to increase anonymity, researchers have proven adept at tracing blockchain transactions.

“Empowering users is a great rallying cry, but what will ultimately happen is users will end up punting these problems to centralized services,” says Juels. “Where do people store their bitcoin today? In Coinbase. Coinbase handles key management for you; it handles storage for you. If users want to make their experience relatively easy, they’ll likely recentralize it.”

Bottom line, managing your identity is more work, and potentially less safe, than letting someone else do it.

But Byrne says that part of his team’s focus is to figure out ways to make the company’s decentralized products as easy to use as its centralized services. Among those products is Toshi, relaunched this morning as Coinbase Wallet, a open-source “Dapp browser” that allows users to interact with applications on the Ethereum blockchain. So far such applications haven’t gained much traction, with the most popular attracting daily users numbering in the hundreds, but they include games, like CryptoKitties, marketplaces, and prediction markets.

‘We’re further ahead on the tech than on the utility.’

B Byrne, Coinbase

Coinbase hasn’t committed to developing an identity protocol of its own with the purchase of Distributed Systems, saying it remains open to partnering with others working in the space. It has plenty of options. The Decentralized Identity Foundation, which counts more than 50 partner organizations, including tech giants like Microsoft and IBM, is coordinating various attempts at decentralized IDs with an overall aim of making those systems interoperable, so users aren’t left with their personal data fragmented across multiple protocols. A company called uPort has already partnered with the Swiss canton of Zug to offer digital IDs to residents, connecting real-world identities to the blockchain.

But even if a solution to blockchain identity emerges, the hard part may well be getting users to adopt it. “We’re further ahead on the tech than on the utility,” says Byrne. “Where we’re more behind is, how does this help someone solve a problem in their life today?”

In other words, before people start putting in the hard work of maintaining their own digital identities—helping ensure long-term relevance for Coinbase and other crypto firms—they’ll need a reason to engage with the decentralized web in the first place.

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