This summer, the revelation of a 30,000-phone bot farm in Vietnam, gaming crypto airdrops, laid bare a fundamental flaw in Web3’s identity model. Anonymous wallets may have fostered early freedom, but now the same anonymity is being weaponized against real users.
From Sybil attacks in DAOs to manipulated airdrops and regulatory ambiguity, the absence of a robust identity infrastructure is no longer sustainable. This necessitates the integration of decentralized identity as a prerequisite to Web3’s next phase of maturity.phase of maturity.
Identity is Fundamental to Trust
Web3 was meant to offer decentralization while ensuring every participant stood a fair chance to partake in voting, airdrops, and more. However, this fair chance is at risk of exploitation with protocols basing participation purely on plain wallet ownership. April 2025 alone saw over $92 million lost to DeFi hacks, highlighting the financial devastation wrought by these vulnerabilities.
This is where decentralized identity opens a pathway that establishes uniqueness and accountability without compromising privacy. Through cryptographic proofs and verifiable credentials, systems can ensure that participants are real and distinct individuals. This leads to better decision-making, stronger governance, and more equitable distribution of value, elements that are crucial to the success of Web3.
Identity is the Missing Layer in Web3
Decentralized identity is the foundational protocol that Web3 desperately needs. Until now, the promise of a decentralized, fair, and private internet has rested on shaky ground, easily undermined by bots, fragmented governance, and regulatory ambiguity. But with decentralized identity, those vulnerabilities can become core strengths.
This isn’t about copying legacy identity systems or dragging Web2 frameworks into Web3. Instead, it’s about building a new architecture – one where identity is portable, cryptographically verifiable, and entirely user-owned. In this model, trust isn’t issued by an institution. It’s carried by the individual, verified by the network, and flexible enough to work across finance, governance, compliance, and the real world.
For Web3 to achieve mainstream adoption and credibility, decentralized identity must move from the periphery to the core of its infrastructure. It cannot remain an optional add-on; it needs to serve as the groundwork upon which governance, compliance, and participation are built. By placing identity at the center, Web3 can finally evolve into an ecosystem where fairness, accountability, and innovation can coexist at scale, while respecting the privacy that compliance entails.
Compliance Needs Identity, but Not Surveillance
Regulation is approaching, whether the industry is prepared or not. With some political and regulatory semblance ‘achieved’ in the last quarter, capital allocators and entities still view compliance and regulation as bottlenecks, but in a different fashion. Many entities are beginning to recognize that long-term adoption will require meeting some compliance expectations, including those related to identity and jurisdiction.
In the EU, MiCA (Markets in Crypto-Assets Regulation) is now fully in effect. Exchanges and asset providers must comply by late 2025, with dozens already licensed or in the process Web3 must navigate these rules – but without turning into Web2’s surveillance-heavy identity systems.
Decentralized identity provides a better path. Instead of revealing everything, users can share only what’s required, like being over 18, or being in a specific region – held privately, confirmed cryptographically. This allows compliance and peace of mind, and crucially does so without sacrificing privacy or centralized control, issues that are prominent beyond the world Web3.
Beyond Crypto, the World Faces Similar Challenges
Traditional industries are also dealing with fragmented identity systems. Financial institutions spend billions on verification processes. Users repeatedly submit the same documents across services, often with little transparency about where their data is stored.
Decentralized identity offers a way to simplify and strengthen these systems. A portable and self-managed identity could reduce friction in finance, healthcare, education, and travel. A student could instantly verify academic credentials. A patient could selectively share their health records. A traveler could navigate identity checks without oversharing. These are not theoretical ideas; they are practices piloted by major financial institutions, healthcare providers, and even government agencies in 2025, signaling that decentralized identity is moving from concept, to reality, to the foundation of Web3 social governance and compliance.