💸Economics
Last updated
Last updated
Economists have a unique way of observing and evaluating human activities based on produced economic surplus. Although excessive reliance on this viewpoint can prove myopic and amoral, it is nevertheless a useful tool for assessing the underlying reality of things.
Here we focus on a detailed understanding of the economic realities of identity systems, in terms of their contribution to value creation, their usage of specific processes, artifacts, and tools, and their relation to the most common economic activities. This will help us understand how and why such systems have become ubiquitous, as well as provide us with a framework to approach future-facing identity system solutions.
Looking through the economic lens, we can generally organize human activities as hierarchic structures, ultimately meant to support transactions with positive value creation. This can result in the oversimplified yet helpful notion that all sustainable forms of activity directly or indirectly contribute to value creation.
At a high level, transactions generally go through the following stages:
Establishment of information, identity, and reputation.
Preparation of resources including objects or relationships for access.
Acting to establish agreements through personal interaction and resource access. Also completing preparations preceding an upcoming transaction.
Creating value through completion of a beneficial transaction.
Activities supporting transactions can generally be categorized into the following groups (see appendix for full definitions):
All stages and activities may contain additional security and administrative sub-activities, designed to facilitate operation and to mitigate against negative outcomes. For example, a user may have to maintain user name and passwords securely, in order to prevent hacks, fraud, or theft. Identification (self) — In multi-party transactions each party needs to determine the scope and context of their identity and express it to other parties. For example a customer may present their driver’s license.
Similarly, in multi-party transactions, each party needs to establish the expressed identities of others, verify their identity claims, and assess the level of trust they are willing to extend. For example, a business may ask for and verify a customer’s driver’s license.
Similar to above, each party is aware of certain portions of their identity and personal information, which they would not like divulged. They may have to take action to keep said identity information private. For example, a user may set up and use a pseudonymous identity for completing some sensitive transactions.
Similarly, each party involved in a transaction, will have to ensure other parties extend a minimum level of trust. To do this, they can build and express their reputation, through presentation of credentials, or present other promotional information. For example, a job applicant may advertise their education degree, and be required to follow up with sending a copy to employers.
As part of preparations for a final transaction, a given party may have to build and prepare a set of relationships, that would help them make progress towards completion of said transaction. For example, a first time customer, may have to establish a new account with businesses, and add their app to their phone.
Again, as part of preparations for a final transaction, a given party may have to store and prepare certain resources, that would help them make progress towards completion of said transaction, the most common of which is monetary value in the form of money. For example, a customer may have to get a checking account and maintain good standing, in order to be able to use it for commercial transactions.
Any given party would have to interact with other parties or resources, that are involved in a given transaction. Often, part of this activity is establishing agreements between the different parties. For example a buyer may have to contact and communicate with a seller, to establish mutually agreed upon terms, before the final transfer of product and monetary value, followed by transaction execution.
This represents the final step of above-mentioned activities, resulting in the execution of agreed upon transaction terms, where value is exchanged, and hopefully mutual positive surplus is created. For example, employees communicate acceptance of a job, by signing the employment contract, and subsequently providing services to their new employer.
There are various examples of large-scale systems created by communities, nations, companies and other large actors, that help reduce costs of economic activity for large numbers of people an organization, in many of the above categories. The public internet is just one notable example of an information system fulfilling the above, others could be different types of infrastructure, such as highway for transportation, telephone for communication and courts infrastructure for legal dispute resolution.
The most common types of large scale systems used to reduce cost of transaction supporting activities are information systems, payment systems, identity systems, communication systems, transportation systems, and legal (governance) systems. Our focus is specifically on identity systems, including their digital and legacy variations.
A typical example of an economic transaction between two parties involves a sequence of steps involving activities from a number of these categories. There are a number of independent preparatory steps such as, setting privacy rules, operating and securing money and goods, etc, that can happen before this sequence. Steps 0 to 3 in the diagram below which lead to establishment of a connection, involve activities from the establish and access stages mentioned above. The subsequent steps 4 and 5, leading to transaction finalization, involve activities from the act and value creation stages.
The diagram above also highlights the role of third party independent verification and reputation rating, involved in the mutual verification processes.
Much of the activities related to identity systems, or general security efforts that lead up to a final transaction, exist to prevent, or mitigate against, undesirable outcomes in favor of a final and productive outcome. Think reducing the chances of fraud, or outright theft.
Identity systems are commonly used by larger groups of people to optimize social interactions between people and organization. These systems function by securely representing the identities of people, organizations and things, as well as by allowing people to more easily identify, verify, connect, access, and interact by reducing the cost of these activities at scale.
For example, it is common for businesses to use driver’s licenses to identify people and verify their personal information such as name, age, address, etc. And so, the identity system created by the department of motor vehicles, and supported by the issuance of driver’s licenses, provides the tools for people and businesses to reduce the supporting costs of transactions.
In reality there are multiple layers of these identity systems (such as naming, birth certificates, licenses, passports, employee identification, social networks, etc) working together to create a hybrid identity system, which all people and organizations benefit from. The sheer scale of this hybrid system’s usage and value mean that any improvements in efficiency, has the potential to disrupt current economic activities, as a result of significant reduction of costs. One opportunity that stands out here is the potential to improve efficiency by the combination of digitization and reducing fragmentation of these systems.
We can dive a bit deeper into specific examples of supporting activities and the systems and tools that power them in order to tease out patterns and insights.
Following are the common supporting activity verbs denoted by their [categories] in brackets (see appendix for for full definitions):
Identify [identification (self)]
Verify [identification (perceived)]
Restrict [privacy]
Claim [promotion, identification]
Promote [promotion]
Secure [security administration]
Operate [security administration]
Connect [connection]
Store [ownership]
Access [ownership, connection]
Communicate [interaction]
Agree [interaction]
Transfer [interaction]
Execute [transaction]
Trends of digital transformation have already resulted in significant changes in many parts of the economic landscape, including in the identity sub-systems we use everyday, even though legacy systems also remain heavily in use today. Thus, it is helpful to organize identity system and artifacts into legacy and digital, and observe their form and function, in search of common patterns, and insights, as well as to shape our approach to future-facing solutions.
[identification (self)] — Is an act of expressing one’s identity information, like the example of presenting another party with your driver’s license.
[identification (perceived)] - Is an act of verifying an identity presented to you, as well as any accompanied claims. For example, an establishment can verify a patron’s age by reviewing their driver’s licenses and confirming its authenticity.
[privacy] — An economic actor can take steps to keep personal information private. For example a customer can explicitly ask a service provider to not record or forget their national identity number.
[promotion, identification] — Actors make certain claims about their identity when they see it as a requirement for, or advantageous to, completion of a transaction. For example, applicants may claim to have a college degree as part of their application and subsequently be required by the employer to prove it with copies of diploma certificates and transcripts.
[reputation] - To produce leads or to increase the likelihood of deals, economic actors part-take in the act of promoting their personal or business brands. This is essentially the act of highlighting desirable portions of one’s identity information. For example, a job applicant may highlight specific desirable brand associations, experiences, degrees or certificates, with the aim of promoting their personal brand, thus increasing their chances of employment.
[security administration] - Is an act of making a system or its resources safer in face of undesirable outcomes such as breach, exploitation, fraud etc. For example having to use a strong password every time one accesses a system is an act of securing the system by mitigating against unauthorized access by malicious actors.
[security administration] - Any operational act of running a system as expected. For example, users often have to take care of maintenance tasks such as backups, renewing security passwords or certificates. Such actions are always taken with the aim of maintaining the productivity, reliability and security of a system.
[connection] — The act of connecting with other people and organizations, by forming relationships based on trust and mutual benefit or understanding. Networking activities are great examples of individuals forming new connections, which they intent to access in the future for benefit.
[ownership] — Economic actors take ownership of resources and store them for safe keeping. The act of storing is meant to prevent loss of valuable resources be they due to natural circumstances or malicious actors. For example one can store their valuables in a safe in order to decrease the chances of them being stolen.
[ownership, connection] — This is the act of accessing resources, people or organizations one has a connection with or control over. For example one can invoke and access their contacts from a conference to learn about a new development in the industry. One can similarly access their personal income documents to address a tax inquiry.
[interaction] — An act of notifying, requesting or responding to a person or organization one is affiliated with. This is essentially an information-based interaction with a connection. For example one can use email to communicate with a business in cases where their service has not been satisfactory.
[interaction] — An act of confirming that a proposed agreement is in fact mutually beneficial and should be executed as described. For example signing a commercial deal between two businesses indicates that all parties have agreed to the terms.
[interaction] — is the act of moving resources between the actors involved in a transaction. For example a retail customer can transfer their money to a retailer in form of a payment, while the retail transfers merchandise to the customer by shipping it.
[transaction] — is the act of finalizing the transaction that was agreed upon, leading to that obligations of all parties being realized. For example as part of the retail purchase process, the customer commonly executes the transaction by confirming their purchase, either by clicking a button, swiping a credit card, or signing a document, followed by transferring their payment.
