Passports and money are quote complex to be forgery-resistant. With internet existing it turns out, it's easier to discard the physical form altogether and only leave pure chain of trust digital form.

It already happened to money, it is slowly happening to passports and ids too.

> I’m wondering how they will manage to upgrade them - for future algorithms without breaking compatibility.

The same way as always -- introduce a new version of the passport, which can as well be verified through a completely different system altogether.