How Do Decentralized Identifiers and Verifiable Credentials Work?

How do decentralized identifiers (DIDs) and verifiable credentials (VC) work and how a decentralized identity system is different from a federated model?

Further Reading:

• Decentralized Identifiers (DIDs) Explained
• Overview of Decentralized Identities
• Verifiable Credentials Explained
• Decentralized Identifiers and Verifiable Credentials: The Building Blocks for Self-Controlled Identities