Identity Pre-Shared Key (Identity PSK) allows for the use of a single SSID to authenticate devices with different passwords. It is a feature that enables individualized PSKs for different clients on the same SSID. When using Identity PSK, each IoT device can have its own unique PSK while connecting to the same SSID, which is managed through Cisco ISE (Identity Services Engine). This setup enhances security by providing unique credentials for each device and simplifies management by reducing the number of SSIDs needed.