How does Digital ID work?

I'm curious to know, could you please explain in simple terms how a Digital ID system actually functions? I've heard it's used for verification and authentication purposes in the world of cryptocurrency and finance, but I'm still a bit hazy on the specifics. Is it like a digital passport or something? How does it secure transactions and protect user identities? I'd appreciate any insights you can offer to help me better understand the mechanics behind this technology.