What is data tokenization and why is it important?

What is a token

Tokens are digital units not created through mining but recorded in the blockchain. They have diverse applications, serving as currency or encoding data. Typically issued on blockchains like Ethereum and BNB Chain, they adhere to standards such as ERC-20, ERC-721, ERC-1155, and BEP-20. Unlike cryptocurrencies like Bitcoin or Ether, tokens represent value units issued atop the blockchain and can be exchanged for real-world assets through the process of Real World Asset (RWA) tokenization, including assets like gold and real estate.

What is data tokenization

Data tokenization is the process of transforming sensitive personal information, such as credit card details or medical records, into unique tokens. These tokens can be transferred, stored, and processed without revealing the original data, enhancing security, privacy protection, and compliance. For instance, tokenization can replace a credit card number with a random string of digits, ensuring secure payment verification without disclosing actual information. This approach can also be applied to social media accounts, enabling users to move seamlessly between platforms while maintaining control over their personal data. The concept of data tokenization is widely utilized in the financial sector and finds applications across various industries to safeguard information security and confidentiality.

How is tokenization different from encryption?

Encryption and tokenization represent separate strategies for ensuring data security, each characterized by its own set of principles and goals.

Encryption involves transforming plain text into an unreadable format (encrypted text), requiring a designated key for deciphering. This mathematical procedure finds application in diverse areas such as securing communication, storing data, authentication processes, digital signature generation, and meeting regulatory requirements.

Conversely, tokenization introduces uniqueness by substituting personal data with distinctive identifiers known as tokens. In contrast to encryption, tokenization doesn't depend on a specific key for safeguarding data, adding to its distinct nature. For example, a credit card number can be replaced with a token lacking any connection to the original number while remaining functional for transaction processing.

Tokenization is widely deployed in sectors where maintaining robust data security and adhering to regulatory standards are critical, spanning realms like payment processing, personal information management, and healthcare.

How data tokenization works

Let's suppose a user decides to transition from one social network to another. On conventional Web 2.0 platforms, they would typically need to create a new account and input personal data anew, while their posting history and followers would remain on the old platform.

However, with data tokenization, the user can link their current digital identity to the new platform, automatically transferring personal data. To achieve this, a digital wallet, such as Metamask, with an address representing their identity on the blockchain, is required.

By connecting the wallet to the new social network, the user can migrate their history, followers, and assets to the new platform. Metamask retains the digital identity and user data on the blockchain.

Tokenization enables the preservation of all tokens, NFTs, and previous transactions when moving to a new platform, providing users with complete freedom of choice without the need to be confined to a specific platform.

Benefits of Data Tokenization

Enhanced security stands out as a key advantage of data tokenization. Replacing personal data with tokens helps mitigate the risks of unauthorized access, theft of personal information, fraud, and other cyber threats. Tokens are linked to the original data through a robust mapping system, providing an additional layer of protection in the event of token leakage or theft.

Compliance with regulatory requirements is another significant benefit of data tokenization. Many industries have strict rules regarding data protection, and tokenization aids organizations in strengthening the security of confidential information, reducing the risk of breaches. Since tokenized data is not considered confidential, it also facilitates security audits and data management.

Tokenization also facilitates secure data exchange between departments, suppliers, and partners. It grants access to tokens without revealing confidential information, making the data exchange process more secure. The scalability of tokenization effectively aligns with the growing needs of organizations, reducing costs associated with security measures.

Disadvantages of Data Tokenization

Tokenization of data is not without drawbacks, including its impact on the quality and accuracy of data. During tokenization, information loss or distortion is possible, which, for instance, may complicate the accurate display of location-based content if the user's location information is stored in a token.

Tokenization also introduces compatibility issues between different systems, leading to challenges in the collaboration of platforms and services, especially if tokenized data restricts access to notifications or complicates the processing of calls and messages.

Data management issues associated with tokenization encompass legal and ethical aspects of data ownership, control, use, and transfer. For example, the tokenization process of personal user information can alter how they express consent for data collection and usage, and tokenizing messages on social networks may limit freedom of expression and intellectual property rights.

In the event of a tokenization system failure, data recovery becomes problematic, as it requires the restoration of both tokenized data and the original personal data.

Example of Data Tokenization: Social Networks and NFTs

In centralized social networks, a substantial amount of user data is actively collected daily for targeted advertising, personalization, and content recommendations. This data, often stored in centralized databases, may be at risk of being sold, hacked, or compromised without user consent.

Tokenization provides users with the opportunity to tokenize their data on social networks and, if desired, sell it to advertisers or researchers. This gives users control over who has access to their content, allowing them to set rules for their profiles and content.

For instance, they can restrict the viewing of their content to verified users only or require a minimum token balance for interaction. This approach gives users complete control over their social graph, content, and monetization channels, such as tips and subscriptions.

Conclusion

Data tokenization is increasingly being utilized across diverse sectors, including healthcare, finance, media, and social networks. As the demand for data security and compliance with regulations continues to rise, the popularity of tokenization is expected to grow.

It is crucial to emphasize that the effective implementation of this strategy necessitates thorough research. Tokenization should be introduced transparently and responsibly, considering the rights and expectations of users, while also ensuring adherence to all applicable laws and regulations.