Understanding Data Tokenization: Purpose and Significance

At present, when data has become increasingly important just like currency, it requires adequate safety and tokenization is a process to do so. In this procedure, the data is converted into a token which works as a distinct identifier, helping to retain the integral information without any exposure. This article explores the concept of data tokenization, its comparison with encryption, its benefits, and its limitations.

Data Tokenization: An Introduction

To comprehend the concept of data tokenization, one needs to know about tokens. A token works as a non-minable digital unit existing as a registry entry within a blockchain. There are diverse forms and use cases of tokens. For example, they can serve for data encoding or as currencies. Generally, tokens utilize blockchains like Ethereum for their issuance. The prominent token standards take into account ERC-20, BEP-20, ERC-1155, and ERC-721.

Tokens operate as transferable value units that a blockchain issues. However, they are unlike the crypto coins such as Bitcoin or Ether which are native to their blockchains. Several tokens can be redeemed to work as off-chain assets including property and gold. These tokens come within the category of real-world asset tokenization.

In the procedure of data tokenization, sensitive data is turned into tokens. This permits the transfer, storage, and processing of the respective data without revealing it. Such tokens are normally exclusive and unchangeable. Their verification can be done on the blockchain for improved data security, compliance, and privacy. Data tokenization can additionally be leveraged for accounts on social media. Consumers can tokenize the online presence thereof to matchlessly shift between social media platforms simultaneously to uphold the ownership of the data.

Difference between Tokenization and Encryption

Some people confuse tokenization with encryption however they are different concepts despite their common purpose of protecting data. Encryption denotes the procedure of chanting plaintext data to a format that is unreadable and needs a secret key to decrypt it. It takes into account a mathematical procedure to scramble the data. A few use cases of encryption include regulatory compliance, digital signatures, authentication, data storage, and secure communication.

On the other hand, tokenization comprises a procedure to replace sensitive data with unique and non-sensitive identifiers known as tokens. In this process, there is no need for any secret key for data protection. For instance, the personal information of a person may be exchanged with a token having no link with the original number. Tokenization is frequently utilized for regulatory compliance and data security. The well-known use cases of tokenization include payment processing and management of personally identifiable information.

Advantages of Data Tokenization

Some famous advantages of data tokenization include improved data security, protected data sharing, and regulatory compliance.

Improved Data Security

As data tokenization replaces sensitive data with some tokens, it minimizes the hazards of data infringement, fraud, identity theft, and so on. Tokens have a connection to the actual data based on a protected mapping system. Thus, the original data remains secure despite the leakage or theft of the tokens.

Protected Data Sharing

With tokenization, users can enable protected sharing of data across vendors, departments, and so on. As the parties getting the tokens cannot access the original data, this procedure can scale effectively to cope with the increasing requirements of the platforms. In this respect, tokenization saves the cost of significant measures for data security.

Regulatory Compliance

Several markets face stringent regulations concerning data protection. In such industries, tokenization can permit companies to fulfill such requirements. Moreover, the tokenization procedure can also decrease the complications related to security audits. It also streamlines the data management to a great extent.

Limits of Data Tokenization

Irrespective of the above-mentioned benefits, data tokenization still has some limits. They include data governance, data interoperability, data recovery, and data quality.

Data Governance

The process of data tokenization may trigger ethical and legal questions concerning the possession, control, use, and sharing of the data. Tokenization of a consumer’s personal information could change the way they consent to data collection and use. In some cases, this could suppress the users’ rights to intellectual property and freedom of expression.

Data Interoperability

Data tokenization may increase the difficulty of working together for diverse systems using or processing the data. For example, if a user tokenizes a phone number, it may obstruct their potential to receive or make texts or calls, based on the companies they use.

Data Recovery

In the case of failure of a tokenization system, users may face complications in redeeming data. Companies must reinstate the original data and tokenized data. Nonetheless, this increases the complications.

Data Quality

The accuracy and quality of the data might be impacted by tokenization. Hence, in this procedure, there is a chance for some information to get distorted or lost.

Conclusion

Many industries such as social networks, media, and healthcare finance have already adopted the concept of data tokenization. Powered by the surging requirement for regulatory compliance and data security, this procedure may keep advancing. The implementation of the respective approach efficiently needs cautious consideration. The data tokenization needs to be carried out responsibly and clearly, respecting the expectations and rights of the consumers while abiding by the relevant regulations and laws.