Digital Credentials vs. Traditional Federation: What’s the Difference?

tl;dr: Traditional identity federation has enabled digital identity with centralized, third-party logins, for decades. Its limitations in security and user control, however, are becoming a problem, especially when there are alternatives being developed. Digital credentials offer a decentralized, user-empowering alternative that enhances privacy and enables offline authentication. We’re looking at a brave new world with the future of identity federation.

Let’s Get Started

If you’re reading this post, you, along with around 4.88 billion of your fellow humans (that’s just over 60% of the global population), have a smartphone. You’ve probably used that phone to purchase goods or services, log in to social media, check your bank balance, or access your work or school account to get something done. In the early days of digital identity, you’d have used a username and password and not thought too much about it. But as hackers began finding ways to copy those usernames and passwords, banks and businesses recognized the need for more secure methods for verifying identity.

Organizations started to externalize identity verification, relying on third parties to manage accounts and authenticate users. Although this change made the experience more efficient and secure for most users, once you initiated the action, you lost control over how the system shared your identity information. And as our dependence on digital transactions grew, so did the demand for offline experiences to match the convenience and security of online interactions.

This post explores two different paradigms in digital identity management: traditional federation and digital (or verifiable) credentials. I’ll talk a bit about how traditional federated authentication works, why the industry is shifting towards verifiable credentials, and how offline authentication is emerging as a vital component of the future identity framework.

Understanding Traditional Federation

First, let me just say that calling this “traditional” federation feels weird. Since it developed in my lifetime, it doesn’t feel that old. And yet, some of you may never have seen the Internet function without it. So I’ll use “traditional” because “old-fashioned” is worse. Also, get off my lawn.

Traditional Identity Federation: More Than Just a Third-Party Login

Traditional identity federation isn’t simply about “logging in with Google” or other familiar third parties. It’s built on a robust trust fabric that ties together Identity Providers (IdPs) and Relying Parties (RPs) through formal, negotiated agreements.

According to the REFEDS, the Research and Education Federations organization, this ecosystem is maintained through a set of shared policies, legal contracts, and technical standards. These elements ensure that every party involved adheres to common guidelines for security, privacy, and operational best practices. In essence, when you log in through a federated service, you’re participating in an intricate web of trust where the IdP and RP have already agreed on the rules of engagement. It’s a combination of technical trust (i.e., computationally enforceable) and contractual trust (i.e., yay, lawyers). This trust fabric guarantees that the identity assertions provided by the IdP are reliable and acceptable to the RP. The result is secure and efficient digital transactions without the need for every party to reinvent the wheel each time.

This model simplifies the user experience by reducing the need for multiple credentials. It also reinforces the overall security posture by holding each participant accountable to a standardized set of expectations and responsibilities. This framework of collective trust makes traditional identity federation a viable and widely adopted approach in various sectors.

How Does It Work?

In a typical federated model, a third-party IdP redirects you when you attempt to access a service. This provider confirms your identity (often using a username and password, hopefully augmented with additional factors) and then sends a secure assertion back to the service. This process not only simplifies user experience by reducing the number of credentials you need to manage but also centralizes the security controls. Basically, the service provider doesn’t have to manage your account or your affiliation, nor do they need to go through any kind of elaborate identity verification process. They effectively outsource all that to the identity provider. 

Benefits and Limitations

While traditional federation offers efficiency and ease of use, it comes with trade-offs:

• Centralized Trust: You rely heavily on the IdP’s security measures. A breach or failure on their side can expose your personal data.
• Limited User Control: Once the authentication process begins, the user has little say over how their identity data is managed or shared.
• Single Point of Failure: If the IdP is compromised or goes offline, access to multiple services can be affected.

For many sectors, especially in research, education, and enterprise, these limitations are increasingly prompting the search for more resilient and user-empowering alternatives.

Introducing Digital Credentials

Hello, digital credentials that can be cryptographically verified, my new friends.

Defining Digital (Verifiable) Credentials

Digital credentials, also called verifiable credentials (I have a blog post about the terminology problems), represent a shift in how we think about identity. Rather than relying solely on centralized third parties, these credentials offer cryptographically secure, tamper-evident proofs of identity or specific claims. By storing credentials on personal devices like smartphones, users gain greater control over their information and can present verified data directly to service providers without always involving an intermediary. In other words, they can prevent your IdP from tracking you.

Underlying Technologies

At the heart of digital credentials lies a suite of modern technologies:

• Cryptography: Ensures that credentials are secure and tamper-proof.
• Decentralized Identifiers (DIDs): Provide a way to assert identity without a central registry.
• Digital Wallets: Serve as the interface for managing and presenting these credentials, similar to how a physical wallet stores your driver’s license, credit cards, and other proofs.

If you’re curious about specific standards, you have several options. I went into a comparison study a while back about W3C Verifiable Credentials versus ISO/IEC mdoc. I also expanded it a bit to talk about IETF SD-JWT VCs. Suffice to say, there’s a lot going on and various reasons to choose a protocol.

Advantages Over Traditional Federation

Digital credentials offer several improvements:

• Enhanced Security: By reducing reliance on centralized password databases, digital credentials mitigate the risk of mass breaches.
• Greater Privacy: Users can engage in selective disclosure, sharing only the specific information required by a service rather than an entire identity profile.
• User Empowerment: The control over credentials shifts back into the hands of the user, ensuring that they decide how and when to share their identity information.

The Shift: From Sign-Ins to Digital Credentials

Why the Transition?

There isn’t any single reason, but we can start with:

• Security Needs: As cyberattacks become more sophisticated, the industry is moving away from centralized password stores to more secure, decentralized systems.
• Privacy Concerns: Users increasingly demand solutions that allow them to share only what’s necessary, preserving their personal data from unnecessary exposure.
• Efficiency Gains: Digital credentials streamline the process of identity verification, making transactions both faster and more reliable.

Use-Case Scenarios

Consider a few real-world examples where this shift is already underway:

• Financial Services: Banks are exploring ways to onboard customers using digital credentials that confirm identity without storing sensitive data in one centralized location.
• Travel & Hospitality: Mobile driver’s licenses (mDLs) and digital passports can enable secure, offline verification when connectivity is poor or non-existent.
• Healthcare: Institutions are piloting systems where patients’ vaccination records or other health records are stored digitally, ensuring privacy and easing cross-system verification. This had a surge of popularity with COVID-19 vaccination records.

Digital wallets play a crucial role in these scenarios, acting as secure repositories for your credentials. In posts like “The Wallets Are Coming—but Are We Ready for What’s Next?”, the conversation focuses on how these tools will soon become mainstream, everyday interactions.

Offline Authentication in the Digital Age

There’s a lot to be said here. For one thing, believe it or not, Internet access is not ubiquitous. For that matter, while 60% of humans today have smartphones, that means 40% do not. Unless something changes drastically, there will ALWAYS be a need to support offline services and physical credentials.

What Is Offline Authentication?

While online systems dominate much of our current authentication landscape, offline authentication is becoming a Really Big Deal. It allows for secure identity verification without a constant Internet connection, relying on local cryptographic verification methods.

Why Offline Matters

Offline authentication addresses several critical challenges:

• Resilience: In areas with unreliable connectivity or in emergency situations, being able to verify identity without an online connection is invaluable.
• Privacy: By minimizing data transmission over networks, offline methods reduce exposure to interception or misuse.
• Complementarity: Offline authentication doesn’t replace online systems; it supplements them, ensuring that users have a seamless experience regardless of connectivity.

Real-world applications are already in motion. For instance, mDLs in many states in the U.S. can be verified locally on your device, and some health records are designed to be accessible even when you’re off the grid. This dual approach, online for day-to-day transactions and offline for specific scenarios, creates a robust, flexible identity framework.

Comparative Analysis: Digital Credentials vs. Traditional Federation

People seem to love comparison tables, so let’s start with one of those:

Aspect	Traditional Identity Federation	Digital Credential Model
Authentication	Uses established protocols (OIDC and OAuth, SAML) to handle authentication and (sometimes) authorization.	Relies on cryptographically secure, user-held credentials that you control on your device.
Security	Centralized systems create a single point of failure; a breach at the provider can impact many services.	Decentralized, with security anchored in cryptography, reducing the risk of mass breaches.
Privacy	Third parties manage and often store your data, which can lead to oversharing or tracking across services.	Starting to enable selective disclosure, allowing you to share only the necessary information without overexposing your data. (There’s still work going on in the standards and implementation spaces to make this happen.)
User Control	Once you log in, you have little control over how the provider manages or shares your data.	It puts you in the driver’s seat (driver’s seat, mDL, ha!), letting you decide what to share and when. That’s the goal; some technical challenges are still being worked on.
Offline Capability	Primarily requires an online connection; offline verification is generally not supported.	Supports offline verification (as long as you have a phone and the local business has the tools to consume what you display), ensuring secure authentication even without connectivity.
Trust Model	Trust is placed in centralized authorities to safeguard your identity data.	Trust is distributed through verifiable proofs and decentralized identifiers (DIDs). That said, some trust is centralized when it comes to trusting the issuer of the credential.
Adoption	Widely implemented across sectors like education, research, and enterprise.	Gaining traction in areas like finance, travel, healthcare, and beyond as the technology matures.

Future Trends and the Road Ahead

This is an incredibly active space. That said, people will have to figure out how to deal with the technical debt of the previous generation tech stack. Interesting times.

Digital credentials are gaining ground, but does that mean traditional federation is on its way out? If your organization is trying to make sense of the shifting standards landscape, I can help you track the changes and find the right approach. Explore my digital identity standards consulting services.

Evolving Standards and Innovations For Digital Credentials

Several new initiatives and standards are setting the stage for a more decentralized and resilient identity ecosystem. The W3C Digital Credentials API, for example, is pushing for interoperability and security in digital credential frameworks by offering a secure connection between a browser and an operating system for digital wallets and their credentials. (As an aside, there’s some very late-breaking news as of February 2025 regarding the DC API – the roadblock has been cleared for this API, referenced by the EU Digital Identity Wallet Architecture and Reference Framework (EUDI ARF), to move into the next step of the standardization process within the W3C Federated Identity Working Group.) Similarly, a new ISO/IEC standard is enabling remote identity verification through mobile devices; the tech stack is building for using digital credentials in all aspects of life.

Predictions for the Future

Looking ahead, I think we can expect:

• Increased Adoption: More industries will experiment with and adopt verifiable credentials as a secure alternative to traditional sign-ins.
• Convergence of Online and Offline Systems: Hybrid models will become the norm, ensuring that identity verification remains robust regardless of connectivity.
• User Empowerment: As control shifts back to the user, there will be greater emphasis on privacy, selective disclosure, and decentralized trust networks.

Implications for Businesses and Users

Organizations will need to weigh the benefits of maintaining legacy federated systems against the potential advantages of transitioning to digital credentials. For users, the promise of enhanced security and control over personal data is a compelling incentive to support these changes. However, the transition requires careful planning, standardization, and a willingness to experiment with new technologies. I’m putting together a talk for the upcoming EIC in May 2025 to talk about this very thing: “The Challenges and ROI of Verifiable Credentials in Enterprise Use Cases.” 

Wrap Up

So, traditional federation, while providing initial efficiency and security through centralized third-party authentication and with an extensive deployment base, comes with inherent limitations such as offline-use issues and potential single points of failure. Digital credentials offer a promising alternative by decentralizing control and empowering users with cryptographically secure proofs of identity, though the tech stack for using them securely is still building.

As digital credentials become more prevalent and standards for offline authentication mature, we are going to see a hybrid identity landscape where both online and offline mechanisms coexist and complement one another. This shift not only enhances security and privacy but also paves the way for a more resilient, user-centric digital ecosystem.

I wish there was a perfect solution for everything, but so much depends on the problems you’re trying to solve. You’ll notice that I didn’t even try to bring in passkeys to this conversation; if you’d like to read more on that, I suggest you start here.