There are 8 billion people on the planet. Each of us is distinct. We all have different likes, activities, and goals. Our identity is who we are, a collection of characteristics that identify us. This is something we take extremely seriously. Our digital identities, or how we present ourselves and behave online, can differ from our physical identities. And it is frequently far more critical.

Today, massive centralized organizations – Google, Apple, Meta, Twitter, YouTube, and so on - own and govern our digital identities. They know what we want to view and what we have done in the past based on our online activity. This leads us to a new path for the future: decentralized identities. This article intends to give a market overview of reputation-layer protocol utilization and adoption in 2022.

Decentralized identities and reputational identities

Decentralized identity is distinguished from Web2 digital IDs by two essential premises:

Instead of the enterprise, the user controls their identity.
The identity is mobile and interoperable, allowing users to use it anywhere and whenever they wish.

As a result, the concept of a decentralized identity is appealing. It is an essential part of the Web3 technological stack. As it evolves, it will open up a whole new set of applications in DeFi, NFTs, and future crypto paradigms.

In Web3, identity may be handled in a variety of ways, all of which can be merged to produce a complete image of an individual. I like to envision a bunch of blind guys and an elephant - everyone attempts to imagine what the elephant is like when they touch it, but everyone's interpretation is different. The elephant only appears when all of the information is combined. Some of them are as follows:

Transaction history on the blockchain
Possession of assets
Biometric authentication
Web3 social networks

We concentrate on reputational identity, which represents identity via track records and accomplishments. Consider a Web3 LinkedIn-style résumé. This is usually done using NFTs and soulbound tokens.

Verifiable credentials (VCs), a W3C standard that makes credentials digital and interoperable, are essential for reputational identification. Credentials have been used for identifying purposes in the real world for a very long time. Examples include diplomas, vaccination records, and driver's licenses.

Tamper-proof credentials that can be confirmed cryptographically on the blockchain and include all the same data as a physical credential are known as verifiable credentials. The same thing that crypto has done for cash, VCs are doing for physical credentials. Verifiable credentials entail the following three parties:

Issuers: These generate VCs and distribute them to holders. VCs can be given out to mark noteworthy events, achievements, and milestones. Many of the projects we'll look at have issuer roles.
Holders: Holders carry VCs in their wallets and hand them off to other people. They might be an entity or a person.
Relying on parties or verifiers: These accept the VCs from the holders and use the credentials to authorize access or carry out transactions.

In the procedure, the blockchain, which serves as an unchangeable, verifiable information registry where all the data is recorded, is used by all three parties.

Non-transferability is an important aspect of reputation. Consider the possibility of transferring your university degree to someone else; this would raise concerns about the authenticity of the individual holding the certification. VCs are not assets that can be traded, like stocks or Bitcoin. In most circumstances, VCs are attached to an identity and should not be moved. Vitalik elaborated on this in his blog article on soulbound tokens.

Although VCs on the blockchain are open and visible to anyone, there are several scenarios in which this is not desirable and presents a monitoring problem. Many conventional companies are also hesitant to bring their off-chain data on-chain as VCs for fear that their competitors would use it to gain customers.

>>> You may also concern: Self-sovereign Identity - Web3's Missing Identity Layer

Reputational credentials use cases

Marketing

Users receive credentials after completing basic operations such as bridging cash into a new blockchain or making modest trades on a protocol. The idea is to get new users to join a protocol by providing incentives. These credentials can be used by protocols to identify early, active users and qualify them for later retroactive airdrops. Galxe and RabbitHole are two examples.

Education

Web3 Education Users take online courses and exams connected to Web3 to demonstrate that they have attained a basic level of expertise in a certain topic. DeFi, NFTs, DAOs, and data analytics are examples of common topics. These credentials, like the education and skills, that are on LinkedIn, might be presented on a profile page.

Gaming

To gamers, gaming skills and victories are everything. They incentivize and inspire gamers to keep playing while also playing an important part in player social interaction. Credentialing gives important data to game developers and helps user acquisition more efficiently – for example, by targeting certain player periods on-chain. DeQuest's Guild Advancement Program and Yield Guild Games' Guild Advancement Program are two examples.

Community engagement

Projects may leverage reputation to classify their users more precisely. Members who are extremely involved or frequent users might be given special credentials that grant them greater rights. This serves as the foundation for loyalty programs and focused activation activities. Example: DegenScore, POAP.

Before future use cases for reputation credentials may take off, additional work in design, curation, and infrastructure is required. Here are a few examples of future use cases:

DAO Administration

Most DAOs base voting power on the number of tokens held, resulting in a plutocracy. What if influence in government was instead based on individual reputation and previous contributions? This would necessitate a thorough reconsideration of present governance systems and methods. People's skills and certifications may be transferred to various DAOs.

Lending

Credentials from both on-chain and off-chain sources might be used to evaluate risks and assign a credit rating to the user. This would make undercollateralized loans possible. In contrast to the existing reality, where credit ratings are frequently geographically constrained, credit ratings might be visible and portable. JPMorgan, for example, is investigating the application of digital identification in finance.

Fandom Proof

Offline channels allow brands to collect a wealth of information about their clients. They might reward and benefit their biggest followers by connecting consumer actions to NFTs. For example, a sports brand may grant a non-transferable NFT to all clients who frequently purchase tickets to their matches, which could enable discounts on future purchases. Friction in onboarding new employees into NFTs, as well as brand opposition to placing their consumer data on-chain, would be barriers.

How are top projects doing?

Galxe

Galxe is an open and cooperative network for credential data that enables developers and businesses to use credential data to create better communities and solutions. It is now one of the biggest providers of Web3 credentials.

Galxe credential indentities

Source: Galxe

Galxe's architecture now allows for the issuance of credentials through a variety of on- and off-chain data sources. These consist of:

On-chain: L2s, Solana and EVM blockchains.
Off-chain: GitHub, Twitter, Discord and Gmail.

For instance, a project might designate a credential NFT that is given to users that conduct transactions on Arbitrum, join the project's Discord channel, retweet its tweet, and vote on one of its Snapshot proposals.

According to Galxe's website and newsletters, the number of partner organizations and Galxe ID users has been continuously increasing since May, with over 1,100 partners and 7 million or more Galxe ID users across all chains. It should be noted that this data is off-chain. Many Galxe ID users have registered on the website but have yet to get their NFT. As of Oct. 26th:

There have been 9,762 credentials generated.
7,255 credential-based initiatives have been deployed.

Galxe's top chains are Polygon and BNB chains. The polygon dominates, but the BNB chain had a considerable increase in usage in October due to multiple initiatives. Both the BNB chain and Polygon are well-established gaming chains.

In comparison, the number of clients and transactions on the Ethereum mainnet is negligible, most likely due to substantially higher gas prices on Ethereum. This demonstrates the importance of scalability and low transaction costs for on-chain reputation credentials to grow.

Arbitrum Odyssey

Arbitrum Odyssey is an eight-week campaign conducted by Arbitrum and Galxe to increase the number of users in the Arbitrum ecosystem. Users can experiment with various Arbitrum projects and earn credential NFTs from Galxe. Ratwell and Sugoi, two well-known crypto artists, created the artwork for the NFTs.

Arbitrum Odyssey's first week began on June 21st. To claim a "Enter the Odyssey" NFT, users have to bridge or transfer tokens into Arbitrum via one of sixteen distinct protocols. Claims were accepted beginning on June 28th.

Week 2 began on June 28th and included GMX and Yield Protocol. It was, however, immediately terminated on June 29th due to a high volume of transactions and a surge in gas fees from NFT claims. Despite only being available for a week, over 400,000 NFTs had already been claimed. Eligible users could receive the week 1 "Enter the Odyssey" NFT from June 28th to October 31st.

Arbitrum Odyssey was supposed to restart following Arbitrum's Nitro upgrade, which considerably increased the network capacity of Arbitrum. Despite the fact that the Nitro update has already been done, no specific date has been announced.

Arbitrum new users

Source: Dune Analytics

We can witness a significant increase in new and active users on Arbitrum in late June, peaking at over 40,000 daily new users on June 29th. Previously, Arbitrum averaged roughly 5,000 new users every day. This surge in activity coincided with the time when Arbitrum Odyssey was active. When it ceased, the number of new daily users returned to its previous level.

Another intriguing finding is that there was no notable rise in Arbitrum's daily active users a month after Arbitrum Odyssey ended, which had been hovering around 20,000 in June, July, and August. There might be several causes for low user retention:

The campaign was far too short. It will be fascinating to revisit this after Arbitrum Odyssey resumes and all eight weeks have passed.

The Arbitrum Odyssey NFTs have no use other than conjecture that they may be considered for a potential Arbitrum token airdrop.

>>> Read more: Arbitrum Autumn is coming

Optimism quest

Arbitrum's footsteps were followed by Optimism, who launched an ecosystem expansion effort in collaboration with Galxe. Optimism Quests are a risk-free method to gain NFTs while experiencing 18 different dApps based on Optimism. Reading project documentation, taking brief quizzes, joining project Discord channels, following project Twitter accounts, and conducting protocol-related on-chain actions are all activities.

Users who accomplish protocol-specific actions earn a matching NFT. Users who transfer >$20 worth of tokens on Uniswap (Optimism chain) on at least two transactions, for example, will earn a Uniswap NFT. Over 350,000 Optimism Quest NFTs have been collected since the program's inception on September 20th. It will run till January 20, 2023.

Uniswap and Stargate have the most NFTs claimed, with over 40,000 each.

Optimism Quests have been available for more than a month. We can see that quests contribute to 10-40% of Optimism's daily new users. This is really significant. It remains to be seen if these new users will be active in the long run.

Looking into Arbitrum Odyssey and Optimism Quests, it is apparent that credential NFTs may entice many new users to join an ecosystem. Because NFTs are inexpensive to manufacture, it is a low-cost way of user acquisition and onboarding.

The retention of users from these efforts is questionable. As protocols develop functionality around these credentials, this will increase over time. Credential holders, for example, might benefit from lower transaction costs or better returns by implementing the protocol.

These credentials will become extremely strong marketing tools over time. They identify a user's interest (for example, a Perp Protocol user's interest in derivatives) and enable them to be targeted by suitable programs in the future.

POAP

POAP is intended to be a trustworthy, dependable record of life events — a service for attestation of participation and attendance. Event organizers can design their own POAPs (digital badges) and distribute them as prizes to participants. POAPs are frequently used as status symbols and are maintained for remembrance. This all takes place on the blockchain (xDAI or Ethereum).

Poap quest

Source: POAP

POAPs peaked at around 700,000 monthly mints in the second half of 2021, coinciding with the NFT boom. Since the beginning of 2022, the volume of mints and new users has progressively fallen, mirroring the overall drop in pricing and interest in cryptocurrency. Nonetheless, POAP has a high level of usage: over 15,000 new users per month.

Despite the fact that 99% of POAPs serve no use, they can be an important component of Web3's reputation layer:

POAPs are entertaining and appealing to a wide range of viewers. They are free to mint and easy to collect with a smartphone app. Without any technological knowledge, anyone may make and utilize POAPs. Yield Guild, for example, organized a party at Mainnet 2021 with special guest Disclosure and distributed POAPs to participants.
POAPs capture a distinct dimension of reputation – verifiable proof that something occurred, typically off-chain. This might include attending a meetup or concert, contributing, purchasing an item, or voting.
POAPs can help with Sybil resistance since some are difficult to obtain or forge.

POAPs have been used to create over 80 apps. POAP has reached a tipping point in terms of awareness and will continue to expand.

Rabbit hole

RabbitHole is intended to be the finest site to "learn and earn" in cryptocurrency. Users may receive credentials that demonstrate their understanding of crypto and Web3 principles by completing curated short courses, or "skills." These credentials cannot be transferred.

Rabbit hole quest

Source: Rabbit hole

With these credentials, users may earn valuable tokens and NFTs by completing quests, which are protocol-specific activities. Quests are used by projects to get new users onto their platforms. RabbitHole collaborates with project teams to develop and operate these quests, charging a fee of 20% of token incentives.

Users have access to four distinct credentials from May 2022. Depending on gas fees, it normally costs $10-$20 to perform all of the tasks necessary to acquire a credential.

RabbitHole may employ credentials to simplify user targeting for Web3 projects while also assuring that their new users are educated crypto citizens. Because users must first achieve one of the top-level credentials before qualifying for quests, RabbitHole's approach to user acquisition is more focused than Galxe's. This weeds out lower-quality users who are less driven and informed.

RabbitHole's mission is to assist in the allocation of labor to decentralized markets and protocols, therefore becoming one of the most efficient methods for anybody in the world to earn cryptocurrency based on their on-chain track record.

Degrees and other off-chain academic credentials may also become on-chain credentials in the future. A few educational institutions are currently experimenting with this, but it will most certainly take years before it becomes mainstream. Because this information is accessible and available to the public, blockchain-mediated recruiting will be faster and more efficient.

De-quest

In gaming, reputation is everything. It is an important motivator and forms a big part of a gamer's digital identity. Being a top-ranked DOTA2 or Fortnite player is a huge social flex and a source of pride. However, these accomplishments are presently dispersed. They can't be removed from Steam, XBOX, or Playstation profiles. There is no stable, interoperable reputation layer in gaming.

Reputation data defines a gamer's preferences and talents in a more fundamental way, allowing for far more focused player acquisition and marketing. In order to encourage players to participate, reputation can be introduced into game hierarchies and mechanisms. It is a valuable data source for game designers and developers since it allows them to acquire detailed insights into their games.

DeQuest is one protocol that creates this reputation layer for gaming by collecting off-chain and on-chain data (such as social media and gaming accounts on various platforms). Gamers on DeQuest may take part in quests arranged by various Web3 games and gain accomplishments through experience points and SBTs. Illuvium, Sandbox, Pegaxy, and more games are among those taking part.

The fact that reputation credentials are portrayed in a gamified manner, comparable to a role-playing game, distinguishes DeQuest. Quest completion experience points may be utilized to level up your character in three skill paths: wizard, warrior, and miner. As you progress through the skill tree, you will get access to new weapons and armor.

All of your achievements are stored in DeQuest's metapassport, making it simple to analyze and comprehend your progress. As more data is collected and game agreements are formed, players with a good reputation will be able to gain access to special game betas, tournaments, and discounted drops. This generates a positive feedback loop and strengthens the bond between gamers and creators.

According to the team, DeQuest has between 20,000 and 40,000 monthly users. According to Similarweb, the DeQuest website has 25,000-35,000 monthly views and 12,000-14,000 unique users per month. Web3 games will flourish in the future, and reputation protocols like DeQuest will help them get there.

What’s next to expect?

Curation

This year, millions of credential NFTs have been issued. Over 9,000 distinct credentials were issued on Galxe alone. The majority of them are easy to get on their own. The more costly and challenging it is to earn a credential, the more value it should have. A university education is valuable precisely because it is costly and time-consuming.

A curation layer is required to filter, collect, and show these credentials in a way that gives rich information about users. Some issuers (for example, DeQuest and RabbitHole) offer extensive curating, whilst others are open platforms with a focus on accessibility but little curation (Galxe, POAP).

Utility

Better curation will make it simpler for products to successfully employ VCs to develop and retain customers. New products will be developed, and users will be able to use their credentials for important purposes like applying for employment or participating in DAO governance.

As additional utility is built out, it will attract more users who value the benefit of having a decentralized identity, resulting in increased network value. This closed loop allows for the formation of a virtuous cycle.

Off-chain and on-chain Data Integration

Today, the information in our crypto wallets is largely financial. It provides information on a person's wealth, on-chain activity, and value transfers. The actual value comes from being able to on-ramp data that enterprises already have, such as marketing data, user profiles, and interests, while protecting individual privacy.

Ease of use

For this to happen, people and organizations must find it simple and painless to create, issue, and verify credentials. An excellent user experience should require as little technological work as possible. The reputation procedures that are the easiest to design and utilize will most likely win.

Industry standard

The decentralized identity and reputation layer is currently tremendously fragmented. Many well-funded Web3 businesses are developing protocols centered on identity and VCs by issuing credentials in a variety of methods. Everyone is still experimenting to determine the optimal method. An agreed-upon set of industry and data standards centered on Web3 VCs will assure interoperability while also encouraging innovation.

Conclusion

The year 2022 will be remembered as a watershed moment. A handful of reputation-layer protocols have debuted and attracted millions of users. However, we are still in the early stages and have only scratched the surface of the actual potential of reputation in Web3. Many new use cases will develop.

It is very likely that some of the most important Web3 protocols and enterprises will be founded on decentralized identity in the coming years.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

The current state of reputational identity protocols