In its current form, decentralized identity is a compromise. “Users will own their data” is a familiar mantra for how blockchains will revolutionize the internet, but right now it isn’t possible. Enigma’s privacy protocol makes it possible to include sensitive data in smart contracts, without moving off-chain to centralized systems.

In the world of decentralized applications, there are two types of data: on-chain and off-chain. On-chain data is the record of transactions, balances, and computations that compose the blockchain. Off-chain data is everything else. Today we’re going to begin exploring how Enigma works with on-chain data, off-chain data, and self-sovereign identity management to enable true decentralization.

First, in this article, we’ll focus on on-chain data as a building-block for truly decentralized “operational reputation”.

The two types of “data” found in decentralized applications.

From Transactions to Computation

With the introduction of smart contracts, blockchains have grown from simple transaction ledgers to computation platforms. Fred Ehrsam has drawn this analogy: Bitcoin is a calculator, Ethereum is a computer. The type of complexity that is required to interact with applications is now available to blockchains. Smart contracts allow us to do more than send and receive tokens. On-chain applications can make conditional decisions based upon on-chain data. In order to access the real value of on-chain data, we need to start thinking about every address as an identity.

Currently, on-chain data is pseudonymous, but we must realize that this is far from anonymous. Furthermore, it is almost public and identifiable. As all transactions ever made are publicly auditable, we argue it’s not that hard to tie your pseudonymous identity to your real world identity. Let’s think about the following examples.

If you’ve ever sent cryptocurrency to an exchange or participated in an ICO that runs KYC, your on-chain data can be linked to your real-world identity. This becomes an issue if this exchange or ICO is hacked or subpoenaed. We all know these things are happening nowadays, at an increasing frequency. Even sending cryptocurrency from a main wallet to a friend is equivalent to sending your friend a detailed bank statement. Maintaining pseudonymity, by creating new addresses for different transactions, helps you protect yourself. However, this can quickly become a daunting exercise.

But the on-chain data associated with your addresses isn’t just a liability: it’s an opportunity. Identities can also be superstructures, containing the data history of many different addresses. This is good, because applications need identities and data to work. It also means we need to rethink pseudonymity as a privacy solution, because it will limit the utility we can achieve with decentralized apps.

Operational reputation means that your reputation is performance-based, built through your actions. Currently, “decentralized reputation” in practice means bringing some aspect of your existing life (like a bank account or FICO score) into a reputation profile. But we’re already building reputation without this, through our on-chain operations. For example, a history of repaying blockchain-secured loans, a reliable staking history, the contracts you’ve interacted with, and your balance history across your addresses, are all in fact valuable sources of operational reputation data. However, without Enigma, it’s difficult to provide access to these data sources without compromising your privacy. We’ll explore this idea through a few examples of how powerful on-chain identity can be.

Credit & Lending

It is possible to borrow and lend cryptocurrency using only smart contracts. These smart contracts that function as digital loans reveal important information about an individual’s payment capability; her credit worthiness. Being able to consolidate this payment information on identity level (multiple contract addresses) is the first step to building a financial reputation. ETHLend, for example, is a platform where individuals can pseudonymously borrow cryptocurrencies and pay back their debt in a mutually agreed payment schedule.

Descriptive Wallet History

Another type of financial reputation could be your history with token sales. Many companies having a token sale want investors who believe in the long-term utility of the project. We can invent a new type of token sale, that has some ground rules for participation meant to identify these types of investors. The three rules (and they could be anything) are:

You must have more than 1,000 ETH to participate in a token sale (this is the threshold to be an accredited investor) You must have participated in 3 token sales in the past. You don’t flip tokens for 6 months after the sale is concluded (not shown in the diagram below).

The beauty of on-chain data is that it is possible to find investors that meet these criteria. But if you’ve been maintaining good pseudonymity, it would be hard to qualify without sacrificing this. For example, maybe you don’t keep all your funds in the same address, you participate in token sales using multiple addresses, or you move tokens out of the address you used to participate in a sale.

In this situation, an identity that encompasses all these addresses and their past activities would be really useful. Proving that they exist by submitting them directly to the company doing the token sale, however, would undo all the work you’ve put in to obfuscating your data and maintaining pseudonymity. This company would suddenly have a detailed dossier on you, and if they performed KYC, that information is connected to your off-chain identity. An Enigma contract can allow the company running the token sale to create a contract where your inputs — the wallet addresses you own — are secret but can be computed on. This contract can determine whether you qualify for the token sale or not.