I don't think the identity service works at all. There is some project code floating around but I don't think we have it setup. you can still log into worlds through multiplayer. I don't think there is any implcit use for the identity service yet.
The identity service is definitely not necessary to play the game. It's meant to identify as the same player, both on different servers ("Hey, that's the same person I saw the other day on another server!") and to be able to re-join a server from a different device as the same player (keep your inventory, sync spawn points, that kind of things).
As @Michael said, the backing service is currently in maintenance mode. I've created issue #4104 on Github to track the UI/UX part of this problem. Fixing the backing service and making the login work again is another topic, though.