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Non-Fungible Tokens (NFTs) vs Verifiable Credentials (VCs)

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Affinidi
Nov 15, 2021

Non-Fungible Tokens (NFTs) and Verifiable Credentials (VCs) are often used interchangeably because they uniquely identify entities in the digital world.

But in reality, they are vastly different and we’ll see how they stack against each other across different aspects. First off, let’s take a brief look at what each is.

What are Non-Fungible Tokens (NFTs)?

Non-fungible tokens are a type of token that is unique and not interchangeable. For example, if you own a $100 currency note, you can exchange it for another $100 note, and there’s no difference at all in terms of its value or appearance. Such tokens/items are called fungible.

On the other hand, let’s say you have an original Van Gogh painting called “The Starry Night”. You can’t exchange it for another painting, even by Van Gogh, as there will be a difference in both value and appearance.

In this sense, this token represents a unique object, and replacing the value of this token with anything else changes the value of the token itself. Such items are called non-fungible.

When you extend it to the blockchain, an NFT is a cryptographic token that’s stored on the blockchain network and cannot be replicated. This token is used to identify the authenticity of an object and prove that a particular entity owns it. In our above example, if John says he owns “The Starry Night”, the NFT is proof that this painting is indeed the original Starry Night by Van Gogh and it is owned by John.

What are Verifiable Credentials?

Verifiable credentials, on the other hand, are tamper-proof credentials that can be verified cryptographically to prove an entity’s identity. You can learn more about VCs here.

Similarities between an NFT and a VC

VCs and NFTs have many things in common, and this is often why they are confused.

Leverages the Digital World

A common thread that connects both NFTs and VCs is that they leverage the potential benefits of the digital world to give users more security, flexibility, and freedom to monetize.

NFTs, in particular, give owners new revenue streams and ways to monetize. For example, a music band can create an exclusive single and sell it as an NFT, so the new owner has the rights to all royalties arising from it.

VCs also leverage the digital infrastructure to eliminate the frauds that arise in the physical world by converting all important credentials into an easy-to-share digital format. A startup company, for example, can take the responsibility of converting the physical identities into secure digital ones, and in turn, charge a fee to the owner of the credential for this service

Unique Identification

Both NFTs and VCs are used to uniquely identify something that belongs to an entity. NFTs are often implemented to represent a unique piece of art or a collectible that belongs to an entity. It proves that a particular item is authentic as claimed and belongs only to an entity. For example, an NFT can be used to prove that Lisa is the owner of a collectible Pokemon card.

VCs are also used to prove that a claim made by an entity is true. This claim can be credentials such as PII, university degree, and more. In this case, a gaming club can issue a VC to Lisa to claim that she is the head of their pokemon meetup club.

In fact, here is a list that compiles some of the possible use cases and the credentials that can be verified by VCs.

In this sense, both NFTs and VCs prove that something belongs to an entity and this could be anything from a PII to a piece of art.

Immutable

The implementation of both NFTs and VCs ensures that the records are immutable, and hence, this adds another layer of security to these tokens and credentials.

Thus, these are some of the similarities between NFTs and VCs

Differences Between an NFT and a VC

Moving on, let’s look at some of the differences.

Implementation

A key difference is that VCs use public key infrastructure and digital signatures to prove a claim. There are three entities in a VC — the issuer (the entity that issues a credential), the holder (the entity that owns the credential), and the verifier (the entity that verifies the credential).

For example, an issuer issues a driver’s license verifiable credential that belongs to a holder. Both the issuer and the holder digitally sign the VC using their respective public keys, and these signatures are verified by the verifier to authenticate that the driver’s license belongs to the holder.

NFTs, on the other hand, are based on blockchain and are time-stamped, and this makes it easy to verify the digital ownership of the token. Any change in ownership is known to all the parties in the network.

Transferability

Another difference is the ability to transfer the credential that it represents. To elaborate, VCs represent the credential of an entity that will always be owned by the holder. Though the holder can decide where and how it can be shared, the ownership of a VC never changes hands.

NFTs, on the other hand, are transferable. For example, let’s say an NFT that represents a rare album by Michael Jackson was owned by Sony and was sold to Ashley. So, the NFT has changed hands and Ashley is the new owner of it.

Blockchain Implementation

Furthermore, NFTs are implemented only on a blockchain whereas VCs can be implemented on blockchain or any other Distributed Ledger Transaction (DLT) network. There are even some implementations like IRMA that stay away from DLTs altogether.

In fact, one of the disadvantages of NFTs is that it is tied to a platform as this is where the link between an NFT and its owner is established. If that platform becomes non-existent in the future, information about the NFT’s creator could be lost forever.

But VCs have no such dependency since they are not platform-specific.

Scarcity/Availability

The value of an NFT depends on the scarcity or availability of the digital asset it represents coupled with its fair value, so the fewer the NFTs, the greater will be its value.

But in the case of a VC, the scarcity or availability does not determine its value because it represents the identity of an entity and this identity never changes.

The VCs’ financial value depends on how it is used in a marketplace and its financial mechanics would be very different from an NFT. Eg: a VC shared can be paid for by a verifier (small amount) and part of it can go back to the issuer.

Indivisibility

An NFT is indivisible because the digital asset it represents has no value when divided. Imagine, can you break a sculpture into two and sell it to two different people? Makes no sense, right? While more than one entity can own an NFT, the NFT itself cannot be divided.

In the case of VCs, they can be divided while sharing. For example, let’s say a VC contains the date of birth and the driver’s license number of an individual. The holder can choose to share just the driver’s license number with one verifier and the date of birth alone with another. In this sense, VCs are divisible.

Here’s a summary of the differences between NFTs and VCs. 1_lfIKs4sy8bsMYocHWMCFmA.png

And a bird’s eye view of these differences. 1_SQxFteogQX5jwf-yC_y8eA.jpeg

In all, NFTs verify the ownership of an object while VCs uniquely identify an entity. However, NFT’s ability to prove authorship and identity is limited to the network in which it is implemented and VCs could be used to extend its usability beyond the network.

Here is an example of how VCs are implemented in the real world.

Affinidi provides building blocks for an open and interoperable Self-Sovereign Identity ecosystem. Check out our developer resources for more information.

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