The adoption challenges of wallets & decentralized ecosystems
- Antti Kettunen
- May 29, 2024
- 9 min read
(This is a migrated post from my old blog: Identifinity, originally written on May 30th 2024.)
Digital identity wallets and decentralized ecosystems have adoption challenges, that require understanding of three types of value chains.
You’ve probably heard about the latest developments in the Digital Identity & Digital Wallets. The new eIDAS has recently come to effect in EU, making the adoption of EU Digital Identity Wallet (EUDIW) mandatory, making their adoption a reality during the next 2-3 years.
But there are challenges in adoption, which are not understood or spoken too often. Even though the potential impact of the wallet & credential exchange paradigm is huge, the reality is that the wallet ecosystem not simple to realize.
The reason why it’s not simple, lies in its decentralized nature. The wallet paradigm is based on separating the issuance of identity credentials and their use to separate interactions across different digital platforms. This means, that all of its interactions are individual business transactions with potentially very different business motives and incentives. Compare this to our currently mainstream platform model, used by Youtube, TikTok, Twitch, etc., that invites producers and consumers as part of the same singular value chain, controlled by the same platform. To create interest to consumers, the platform provider is able to focus on enabling the producers to create interesting content, and making the platform more accessible to consumers. Both ends of the value chain is within the control of the same platform and business.
This is completely opposite in decentralized ecosystems. The producers (e.g. credential issuers) do not by design have any access or knowledge of who will use the data later on. Moreover, all possibilities to correlate and connect that information by sharing information on the background is difficult and even forbidden on regulatory level in EU. Don’t get me wrong, this is very good for privacy, and this is exactly where we should be moving towards. But it doesn’t mean the move is easy or painless.
The coming of identity wallets will lead us to a new problem: how is adoption incentivized in identity wallet ecosystems? To understand the challenges, let’s explain it through a use case most of us are familiar: receipts.
Example use case: Verifiable eReceipts
Digital Receipt is a use case that is piloted with wallets. It’s worth noting that Digital Receipts (a.k.a. eReceipts, like we call them in Finland) are already digitalized using receipt platform providers in many countries, so the point is not provide value for digitalization of eReceipts, more on how the incentive structure works.
Receipts are frequently used as a fraud mechanism in insurance, accounting, taxation, reimbursements, etc. To combat receipt fraud and enable easy access to them, eReceipts are currently delivered (or in some cases stored) by eReceipt operator platforms. With the arrival of Digital Identity Wallets, eReceipts can also be issued as verifiable credentials to the identity wallet. We’ve named this flavor of eReceipts as Verifiable eReceipts or vReceipts. The difference between an eReceipt and vReceipt is that the Verifiable eReceipt is a credential, not bound to a single platform for verification, but it contains the verifiability as a feature of the credential.
The diagram below presents an overview of the Verifiable eReceipt ecosystem. The receipt ecosystem consists of sellers (aka merchants), who issue vReceipts to the buyer, or directly to the organization that the buyer represents, based on the buyers request. The buyer is able to use the vReceipt with relying parties that require the information to provided services, such as employers, accountants, tax administration or financiers.
The three value chains affecting adoption
Distributed ecosystems are affected by three different value chains: technology value chain, individual business value chain and the ecosystem value chain. As adoption in practice happens always on individual and business level, the value chains are to be evaluated and understood from the adopters perspective.
Ecosystem value chain describes how value is created, distributed, and realized throughout the ecosystem. For example, the vReceipt ecosystem includes the merchants as the issuers, the buyers as the holders, and the various businesses as relying parties utilizing the vReceipt.
Business value chain describes how individual businesses produce value through their business and how their value chain works for this particular use case. This layer focuses only on what is the value of the activity for the business without any specific technology or ecosystem added value. In this example, the business value chain is the merchant selling a product, and producing an effective and speedy customer experience.
Technology value chain describes how value exchange occurs using the selected technology framework, with the roles and responsibilities of the framework. In this example, it is the identity wallets and especially the credential exchange model.
Each value chain has a relationship with each other. An ecosystem must have businesses creating value through their activities, and businesses use technology to execute their business operations. If ecosystem and technology do not help the business to produce higher value, it’s unlikely to continue using them.
Technology: The credential exchange value chain
When dissecting the technology value exchange, we want to understand how and where the value potential is being created and realized.
For example, in social video platforms, the value potential is created when a producer creates the content. The content may be extremely insightful or entertaining, and would potentially create a lot of value for its viewer. However, the value of the video is never realized if the consumer cannot find it.
It is within the interest of the platform provider to connect the value potential with the value realization, because succeeding in both is critical for their platform’s success.
With Digital Identity Wallets, the Value potential is created when a credential is issued by the issuer. But it’s realized only once the Relying Party verifies the presented proof and gains benefits from it. The challenge of decentralization is seen here: the issuer doesn’t get any benefit from the value realization step. They are not incentivized to issue credentials, or potentially guide the holder to using the proof, because they do not inherently receive any benefit from it. The relying party is the one that realizes the value if the issuers created potential. This leads the incentives to adopt the technology very unbalanced at the beginning and end of the value chain.
Excluding the legally mandatory credential issuances (like we will see through eIDAS), solving how issuers will benefit from participation is critical for adoption.
Business value chains
The business value chain describes the value creation & realization from an individual business perspective. It focuses on how the value chain is part of the businesses unique offering. This is naturally very different for each business and business scenarios. In the receipt ecosystem example, this could be a merchant creating a fluent checkout process and issuing a receipt as part of it. Or an employer wanting to create a smooth reimbursement for its employees to minimize excess administrative costs.
Business value chain of the merchant (issuer):
The merchant‘s business value chain with the buyer revolves around the checkout process. It is where the buyer executes the purchase transaction and makes the ultimate decision to buy the chosen products. Following the transaction, merchant is mandated to provide a proof of purchase: receipt. For the business, the checkout process is perhaps the most expensive customer interaction, as it takes up human resources, includes risks, and creates a throughput bottleneck during rush hour.
One can imagine that the merchant does not want to increase the checkout time with a single second, as that will accumulate to lost minutes and hours during long time periods. This is why a business must evalute the technology from their own business value chain perspective: if it doesn’t make the checkout better, it will harm the overall business.
Business value chain of the employer (relying party)
An example of the relying party value chain is employer reimbursing the employee for business purchase. The reimbursement process checks that the receipts is authentic and whether or not the seller is VAT registered.
For the employer, the goal is to minimize administrative costs, reduce manual labor, and keep employees happy and producing value for the employer’s business. A fluent and automatic processing of vReceipts will enable all of this, if the receipt is available in a format that enables this.
Ecosystem value chain
Ecosystems are not zero-sum business. The value proposition of the ecosystem is dependant on its ability to produce value to each one of its participants, or enable other incentives for organizations to participate in it. This is why ecosystem models should be evaluated through the relative value that each party can gain from it. No well-run business will participate long in an ecosystem that has a negative net impact, and is essentially a cost.
A simple way for evaluating adoption likelihood for businesses in a value chain, is deducting the relative cost from the relative benefits for each participant. This will provide the net impact and likelihood for adoption.
When mapping the relative value that each party in the ecosystem value chain receives, it’s usually clear that there may be some imbalance, as other parties gain more than the others. This may be an indication that the ecosystem is not designed optimally.
The vReceipt ecosystem value chain
When looking at the ecosystem & business value chains for Verifiable eReceipt in the image below, we can see that the relative impact for different parties are very different.
Employees as the buyers in this use case, would receive positive benefits, and the employer likely a lot of benefits through automation and cost benefits. Conversely, the merchant does not really receive new benefits from participating in the ecosystem, as they would not benefit from issuance of the vReceipt to another wallet. Instead the merchant would need to include a new step to the checkout process to accommodate the identity wallet and credential exchange. This leads to only costs, and no benefits, leaving the merchant to negative impact, while other parties have a positive net impact.
An ecosystem succeeds only if all participants receive positive benefits.
(Note that the value chain and benefits for receipts may be different for each country, as regulation, market maturity and business models are different.)
But one thing is certain: an ecosystem succeeds only if all participant s receive positive benefits. If any step of the value chain is not positive, it will not be adopted, and the ecosystem’s value potential is lost. No benefit = no value to implementor = no adoption.
No benefit = no value to implementor = no adoption.
To realize the value for all, we need to solve the problems of the few
In order to ensure a sustainable ecosystem, we need to ensure that each step of the ecosystem has net positive impact. This is why it would be beneficial for the ecosystem participants to solve the problems of the few blockers, to realize the value for themselves.
The true challenge of the Verifiable eReceipt ecosystem is to turn the negative impact of the merchant into positive. This can be made for example by utilizing the digital identity wallets to make merchant checkout faster & frictionless.Digital identity wallets have capabilities that could be used for other purposes than receipt delivery. Some of these include:
Payment type agnostic buyer identification
Customer identification (e.g. loyalty)
Product delivery address (online delivery)
Age verification
Receipt delivery information
Payment request
If all of this could be done with a single interaction, this would make the wallet adoption much more interesting to merchants, because of the added incentives and benefits. The new capabilities would potentially cut off checkout process time and possibly lower total costs.
Value chain restructuring may improve the ecosystem value chain
If the ecosystem value chain is unbalanced, and includes negative steps, it is likely to not succeed. It doesn’t mean that the ecosystem will never work, but that it requires more help to get things started.
For an ecosystem to be attractive to its participants, all of them will need positive relative benefits.
If the initial ecosystem design doesn’t seem to be attractive enough to get the ecosystem off the ground, there are possibilities to enhance the situation by reconfiguring the ecosystem.
The ecosystem value chain (also called ecosystem blueprint) can be reconfigured with at least five different ways:
Relocating elements from one partner to another, offloading some of the costs and risks, or producing them more efficiently.
Combining elements from multiple parties to one, to increase efficiency and relative benefits.
Separating capabilities from one element to multiple, to help optimize business and create better opportunities for increased benefits.
Substracting elements to simplify the ecosystem, remove excessive middlemen and provide efficiency
Adding partners that mitigate possible risks or disadvantages.
The goal of the ecosystem reconfiguration is to create a more balanced, yet successful ecosystem. It’s better to enable the success of the ecosystem with lower relative benefits, than to let the ecosystem fail because the existing configuration didn’t provide positive value for all.
Summary
This article wants to highlight that ecosystems need to consider the three value chains in its design. The value chains are interconnected, with technology choices and ecosystem configurations affecting the overall attraction and adoption interest to businesses.
Decentralized technologies, like credential exchange with wallets, have a challenge in the distribution of the value potential creation and realization. This could be mitigated by designing the business ecosystems to share value through other means.
Decentralized ecosystem adoption is an ecosystem design issue. Ecosystem design needs to be done from the standpoint of value creation for all ecosystem members. Successful ecosystems do not just happen through good ideas. They need careful design, extensive collaboration, and sometimes even compromises to create a pathway to success.
Many of the ecosystem value chain ideas are discussed more in “The Wide Lens” by Ron Adner. Icons used in the images by Umeicon & Icongeek26 on Freepik.
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