Academy Icon

Academy

Data Tokenization: How it Works and When to Use it

Apr 20, 2023
10m
Max FrilotCristiano Troffei

Data has become an increasingly valuable commodity, so it is of utmost importance that it’s safeguarded from hackers or individuals intent on stealing it. Data tokenization is one way in which this problem can be solved. Through this article, the concept of data tokenization, its key benefits, use cases, and implementation will be discussed to provide a clear understanding of how to use it to protect your assets.

What Is Tokenization? 

Tokenization is a process in which sensitive data like credit card information is replaced with a counterpart token that can be viewed publicly without revealing any of the data attached to it. This is accomplished by converting the data from text format into encrypted tokens, making unauthorized access theoretically impossible.

The tokens are then used instead of the original information in any transactions or information sharing. 

Tokenizing data is useful for enhanced security, as each token is unique and masks the original data. For example, if you’re conducting a payment via tokens, as opposed to the classic credit card, the merchant and their system would have no access to your credit card information. In turn, if the merchant’s system is compromised, your credit card information is safeguarded.

Generally, the code used to implement tokenization differs depending on the service provider and their respective encryption algorithms. Common programming languages used in the implementation of tokenization include Python, Java, C#, and JavaScript. 

Most service providers also use strong encryption methods to protect your data, most commonly the Advanced Encryption Standard (AES). This is widely regarded to be one of the most secure encryption algorithms in the world. It’s even adopted as a standard within the United States government. 

The Most Common Tokenization Use Cases

Tokenization of data is primarily used to safeguard sensitive data like credit card numbers. However, it has many other potential uses, including:

  1. Identity verification - Tokens can be assigned to individual users on a secure platform, so their Personally Identifiable Information (PII) is encrypted, and they can be identified without displaying any sensitive information.

  2. Asset management - Tokens can represent physical assets like real estate through a process called “asset tokenization,” in which digital tokens are backed by the physical asset. Each token represents fractional ownership of the physical asset, and the total number of tokens issued should correspond to the value of the physical asset they’re tied to. This allows enhanced liquidity and accessibility of such assets.

  3. Voting - Tokens may be assigned to a voter on a blockchain platform to allow them to anonymously and safely cast a vote. Aside from anonymity and security, transparency of the system is also increased and is overall easier to conduct.

What Is a Utility Token?

Utility tokens are a type of cryptocurrency designed to permit access to a product or service through a blockchain platform. Utility tokens are not created with the intention of storing value or being used for exchanges like digital assets such as Bitcoin. Instead, they allow individuals to access particular features, services, or applications within a blockchain platform like Ethereum. 

Utility tokens in crypto can provide people with: 

  • Discounts 

  • Voting rights 

  • Access to the cryptocurrency or blockchain project’s premium features

Utility tokens are dictated by smart contracts that determine the parameters of their use cases and distributions. These parameters differ from platform to platform, and as a result, the value of the token is ultimately based on its usefulness in that specific platform. 

For example, the Golem Network Token (GNT) operates on the Ethereum blockchain and allows you to rent computing power from other users on the blockchain who have spare computational resources. On the other hand, the PancakeSwap Token (CAKE) operating on the BNB Chain permits users to earn rewards for participating in a liquidity pool. This is ultimately an incentive for people to conduct transactions within the ecosystem.

Are Tokens a Cryptocurrency? 

Tokens can be a type of cryptocurrency, but it's important to note that not all tokens are cryptocurrencies. 

Cryptocurrencies like Bitcoin and Ethereum are used as a means of exchange that typically store a given value. On the other hand, tokens are digital assets designed and maintained on pre-existing blockchains. 

The key takeaway is that while some tokenized assets may be created to act as a currency, others are not. Instead, their purpose is to provide access to certain features within a blockchain.

How Data Tokenization Works

Although the process may seem daunting, it is relatively straightforward.

  1. Identify what asset you would like to tokenize. 

  2. Create a tokenomics model to provide an outline of the underlying economics of the project. 

  3. Next comes a critical decision: choose what blockchain platform you’ll tokenize the asset on. 

  4. Once this has been completed, you’ll need to develop smart contracts and integrate the crypto wallet you’ll use.

The Pros and Cons of Tokenization

Tokenizing a project presents several pros and cons. Each of these should be considered when you’re thinking about tokenizing data or a physical asset. 

Pros

  • Enhanced security: Sensitive data is replaced with tokens, permitting safer and increased reliability in data transmission.

  • Seamless payments: Faster and easier transactions are conducted through the use of tokens.

  • Better user experience:  Making payments via tokens is easier for users, as you no longer have to constantly re-enter your payment data every time you make an online transaction. 

Cons

  • Time-consuming: Setting up a tokenization project is highly resource intensive and slow, depending on the scale of the project.

  • Expensive: It can be expensive to implement, especially for smaller businesses with limited resources.

  • Ongoing maintenance: The underlying technology required for its implementation needs constant updates and maintenance to ensure adequate functionality.

  • Compatibility issues: Certain systems or applications may require additional resources or adjustments to account for proper tokenization integration.

  • Regional availability: Tokenization may not be available in certain countries or regions. This may be due to regulatory difficulties or uncertainties in the respective regions.

Which Industries Benefit Most from Tokenization?

Due to the wide-ranging benefits of scalability, cost-effectiveness, and security, all organizations can benefit from tokenization. However, financial services, healthcare, and retail industries benefit the most. 

Financial Services 

Tokenization technology allows for enhanced security while simultaneously minimizing fraud risk. Payment tokenization helps in more effective and streamlined payment processing. It can also help businesses to comply with regulatory requirements.

Healthcare

Tokenization can be adopted to safeguard sensitive patient information like medical records and payment information. By replacing this information with a token, privacy and data breaches are safeguarded against, and their risks are mitigated.

Retailers 

Payment tokenization increases, while decreasing the risk of fraud. As a result, customer trust is enhanced, which can even lead to better customer retention. 

As mentioned previously, tokenization allows for seamless transactions. By simply tapping their mobile phone on the payment processing device, customers can leave a store having paid for all the items in an extremely time-efficient manner, ultimately improving the overall shopping experience.

Is Data Tokenization Right for Me?

To adequately address this question, you should consider several requirements in establishing a tokenization project:

  • Security: The tokenized asset or piece of data should be encrypted and appropriate measures of access control should be implemented to account for theft and confidentiality of the data.

  • Consistency: The original data that is not tokenized should not be lost or corrupted upon tokenization, and it is imperative that it can be retrieved when desired.

  • Uniqueness: This helps to avoid any conflicts that may compromise the security of data.

  • Reversibility: It’s important that the token may have features of reversibility to ensure that the original data can be accessed. This is primarily used in cases of detecting fraud.

  • Compliance: The tokenization project should comply with any relevant regulations or data protection laws.

Aside from the requirements in setting up a tokenization project, there are numerous considerations that should be accounted for when making your final decision:

  1. Feasibility: Determine whether or not your project is suitable for tokenization. Since not all projects may benefit from tokenization, it is important to understand where tokenization may provide adequate value.

  2. Regulatory Requirements: Every jurisdiction has different legal and regulatory requirements when establishing a tokenization project. Therefore, it is important to determine if the project is compliant with all relevant regulations in your area.

  3. Technology: Since the use of tokenization involves blockchain technology, you need to understand the underlying technical requirements of the project. Is the network secure? How easy is it for users to navigate the platform?

  4. Token Liquidity: If you’re tokenizing data to trade it, the most important consideration is ensuring there is sufficient liquidity in the market for users to buy and sell your tokens. High liquidity is of utmost importance as this provides holders with increased flexibility and greater access value as tokens would be bought and sold more frequently.

Conclusion

Data tokenization is a powerful tool that can be used to transform real-world assets into digital tokens that are easily traded and exchanged on a blockchain. Enhanced security, liquidity, and improved transparency are just some of the benefits presented by tokenization. And its continued growth in various industries highlights its potential for revolutionizing the way assets are traded and exchanged.

Will you be tokenizing your project?

Private Sale Open ✨ ——— Join Now 🚀 ———

Watchlist
Save tokens you want to track over time
Beta Version: 0.5.1