Shared-secret authentication is common. In particular, password-based authentication is still the most common way to authenticate a user to website. Gmail, Twitter, Facebook -- all major Internet services still use some type of password-based login.
Shared-secret authentication is an authentication approach based on sharing secret information between Alice and Bob prior to the start of the authentication. For example a password (or pin code, Mifare UUID, credit card number etc) is shared between Alice and Bob.
The inherent flaws of shared-secret authentication are:
- Impersonation. Since Bob knows the password of Alice, Bob can impersonate Alice if Alice reuses the same shared secret when authenticating with other parties.
- Proliferation of secrets. To avoid the problem with impersonation, Alice may choose to use one password for each party she would like to authenticate with. The obviously leads to a problem of remembering the passwords and having password-recovery mechanisms for all of them.
- No real identity. Shared-secret authentication can only be used among the parties who know the secret. Alice cannot use the same credential to prove her identity to others if she wants to avoid the threat of impersonation. Therefore, she cannot build a single identity between, for example, Internet services. The identity really only exists between Alice and Bob. Alice is not able to prove her identity to some one else using the same credential she is using to authenticate with Bob.
Let's call this public-key authentication. Alice and Bob generates key pairs and exchange their public keys with each other. Bob cannot impersonate Alice, Alice can safely reuse her credential for authenticating with multiple parties, and she can (if she chooses to) maintain a single identity between multiple parties.
The principle is: secret credentials should never be shared! The key pair should be generated by Alice and the private key should not leave the place where it was generated (except for backup purposes).
One could also call this type of authentication: zero-knowledge authentication. This is because Alice proves possession of her private key without revealing any information about the private key itself. She needs to reveal zero information about her secret credential to Bob or any one else.
If Alice wants real, secure authentication, she should use public-key authentication. This requires a credential that can do public key crypto computations and handle a digital dialogue with Bob. To generate the key pair, a source of random data is also required.