Yes, your understanding is correct. I think it's
slightly better than you suggest... since instance identity authentication only works once per instance (by default) you'd probably have some other monitoring stuff in your stack that would notice if a VM went rogue. If a `foo` instance got a cert for `bar` your CD stack would presumably still consider it a `foo` instance and, for example, add it to DNS as `foo`. Then connections to that instance would fail (since it can't authenticate as `foo`) and, hopefully, you'd notice.
Still, this is hand-wavey and complicated and not ideal from a security perspective. It's a lot better than not having certificates at all, but it'd be even better if this gap were closed.
To close this gap we need some sort of enrollment process. The reason we didn't add this for MVP is it's kind of complicated. I think we'd need some policy at the CA that maps VM identities to the workload identities the VM is authorized to run. We need to figure out what would run this enrollment step to add the mappings (probably different for different stacks) and how that thing would authenticate to the CA.
We've also been a bit reluctant to add ad-hoc policy stuff to the CA because we have a generic policy solution that we've been working on. Once that's released it'll give us a much better foundation for this sort of stuff.
Finally, there are other ways to build a stronger enrollment mechanism today. We have a JWT-based one-time-token authentication mechanism[1] that you can use, where a "provisioner" (e.g., something in your CD pipeline like Puppet or Kubernetes) issues a one-time token for a workload to get a certificate from `step-ca`. In this flow the JWT contains the workload's identity, so whatever issues the JWT controls certificate enrollment. This flow has pretty much the same characteristics as an IID+enrollment flow.
Finally, we have ACME support coming soon (next week, actually). So that'll be another option if you want a stronger binding to an instance's FQDN.
Hope this makes sense. Happy to answer any additional questions!
[1] https://smallstep.com/docs/design-document/#jwk-provisioner