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Background: Cryptocurrencies have evolved into two distinct types: coins and tokens. Coins like Bitcoin and Ether are regarded by most regulators and tax authorities as equivalent to fiat money. They are convertible units of exchange and a store of value. Almost every other cryptocurrency (but especially the ones that do not run on their own blockchain) are described simply as digital payment tokens and they are typically regarded as securities, like stocks or bonds.
In early 2021, the cryptocurrency community went wild over Non-Fungible Tokens or NFTs. Non-Fungible simply means that each token is unique and indivisible. Compare this with units of BTC or ETH, which can be split into any fraction agreed by buyer and seller. NFTs were seen as a new and valuable asset type - a digital token which serves as a proxy for a real asset, such as work-of-art.
When an artist mints an NFT, they are assigning rights such as non-commercial exhibition rights to the owner of the token. If they keep the token, the rights remain with them, and of course they still hold all the copyrights. But if they sell the NFT then the buyer acquires these rights.
At the height of the NFT hype cycle, relatively unknown artists were producing high-resolution digital files, converting them into salable NFTs and commanding huge prices on marketplaces like OpenSea. Soon, other NFT markets sprang up and major art auction houses such as Christie's and Sotheby's started selling these tokens.
NFTs were seen as a new and valuable asset type and spawned a genre known as 'generative art'. Crypto Kitties, Crypto Punks and Bored Apes serialised the same characters in multiple guises, then sold for ever-increasing prices based on planned scarcity. Well-known brands like Nike jumped in with their own 'limited editions' and sales driven by influencers and brands has largely characterised the NFT market since. But fraud has become common and real artists complained that their work was being tokenised by others, without their permission.
While NFTs are great for trading and create royalty streams for creators, they do not actually provide a guaranty of authenticity. An NFT is created as a smart contract. When an NFT is created, it captures essential information about the artwork such as who is the artist and what is the medium (eg- photography, collage or animation) and it stores this info in a metadata file which is recorded on a decentralised file server network along with a copy of the image. The problem of course is that there isn't any confirmation that the creator is actually the copyright holder. Also, for various technical reasons, the artistic image or metadata can be unrecoverable in the future.
If an artist or asset owner produces a Certificate of Authenticity (COA) in the form of a Verifiable Credential, then the certificate can be used to assure buyers that a particular NFT is genuine. The COA can be referenced in the NFT metadata and will thus be available to any future buyer. This is an obvious solution for art authenticity yet its even more compelling if the asset is a piece of real property or a crate of rare wines.
The connection between Verifiable Credentials and tokens is not very obvious. Most VCs represent personal status or achievements, such as the attainment of a university degree. One cannot envision a marketplace in which such certificates are bought and sold (unless they're forgeries).
But supposing that you produce a coupon for goods and services in the form of a verifiable credential, and want to trade it in a marketplace like Groupon. In that case, you'd want to convert the certificate to a tradable token.
Suppose that the token is going to represent ownership of a crate of rare wines. The certificate layout can mimic the wine label and that image can be stored with the NFT, so that a token in the owner's wallet not only proves which wines are owned, but it also displays the wine label as a further demonstration of authenticity. The applications are limitless.