23 Sep 2023

    What Is Data Tokenization and Why It Matters


    Data is arguably one of the most precious commodities in today’s digital world. The prominence of our personal information, financial records, sensitive business data, etc., has increased substantially, and thus, it is extremely crucial to ensure their security. What adds to this concern is how growing reliance on data has paved the way for a fresh wave of cyber threats and vulnerabilities. Consequently, it becomes all the more vital for individuals and organizations to amp up their defenses against data breaches.

    Amidst this backdrop, data tokenization a prominent blockchain concept - emerges as a remarkably viable solution. In this guide, we will explore data tokenization in detail and why it is so important. We will also learn how tokenization blockchain development can protect your data from the ever-present specter of cyber threats.

    What Is Data Tokenization?

    Before we deep dive into the concept of data tokenization, let’s first understand what a token means in the realm of blockchain technology.

    Understanding Tokens

    A token is a non-mineable digital unit, essentially a registry entry within blockchain networks. It can function as a digital currency or encode data for specific use cases, making it a versatile digital asset that can take various forms and serve a multitude of purposes.

    Typically issued on a particular blockchain platform like Ethereum or BNB Chain, tokens adhere to specific standards like ERC-20, ERC-721, or BEP-20. Unlike native cryptocurrency coins, tokens are transferable units of value built on top of a blockchain. One intriguing aspect of tokes is their potential to represent real-world assets (RWAs) such as gold or property. 

    In essence, a token serves as a digital representation of either an asset or a utility, finding numerous applications within decentralized applications (DApps). These tokens are created and managed through smart contracts, ensuring trust, security, and traceability in digital transactions. 

    Data Tokenization

    Coming back to the core topic of discussion, data tokenization is a process of protecting sensitive data, such as credit card information or bank account details by replacing it with a “token” or placeholder. This token looks like gibberish and can be transferred, stored, and processed, without revealing the original data, keeping it safe from prying eyes. For instance, a bank account number can be tokenized into a random string of digits. Moreover, this token can be used for payment verification without exposing the actual number. Therefore, these unique and immutable tokens can be authenticated on the blockchain, bolstering data security, privacy, and compliance.

    However, data tokenization isn’t limited to financial transactions; it extends to social media as well. With the option to tokenize their online identity, users can seamlessly transit between social platforms while retaining control over their personal data. 

    How Data Tokenization Works

    The process of data tokenization involves multiple steps. Let’s explore them one by one.

    • Identification of Sensitive Data: First, sensitive data such as credit card numbers or social security numbers is identified for tokenization.

    • Tokenization System Creation: A tokenization system is established, which comprises secure databases, encryption keys, and token generation algorithms.

    • Data Mapping: A mapping table or database is constructed to maintain the connection between original data and tokens.

    • Token Generation: The tokenization system generates unique tokens, typically as numerical values or random letter strings, to replace sensitive data.

    • Data Substitution: These tokens are used to replace sensitive data either in batches or in real-time during data entry.

    • Tokenized Data Storage: Tokenized data, along with the related metadata, is securely stored in a tokenization database. Original sensitive data is never stored in its actual form.

    • Token Usage: Authorized systems or applications use tokens instead of sensitive data for tasks like transactions, analysis, or storage.

    • Token-to-Data Retrieval: Whenever necessary, the tokenization system can retrieve the original data linked to a token by referring to the mapping table or database.

    It is essential to implement robust security measures in order to maintain the security of tokens, mapping data, and tokenization infrastructure. These procedures allow authorized systems to interact with tokenized data while ensuring the protection of sensitive information, making data tokenization a secure method for handling sensitive data.

    To further explicate the process, consider the following example: 

    Imagine you have a credit card number, which is sensitive information. Instead of storing the actual number, you can tokenize it. Here's how it works:

    • Data Input: You provide your credit card number (a 16-digit number) to a system or application for processing.

    • Tokenization: The system uses a tokenization process to transform your credit card number into an alphanumeric string that appears random, like "AVF3856NKEN3958."

    • Secure Storage: This tokenized data is stored in the system's database. Even if a hacker breaches the system, they won't find anything valuable because they only have access to the tokens.

    • Decryption: When needed, the system can decrypt the tokenized data using a special decryption key to reveal the original credit card number.

    Difference Between Tokenization & Encryption

    While both tokenization and encryption are methods for protecting data, they work differently and have different applications.

    Talking first about encryption, it is like the digital equivalent of a complex lock and key system. It converts plain text into scrambled code (ciphertext) that can only be deciphered with the correct decryption key. So basically when you encrypt data, it undergoes a mathematical transformation, rendering it unreadable for anyone except for those with the decryption key, which is often a lengthy and intricate string of characters. Encryption is a two-way process, meaning you can encrypt and decrypt data, making it suitable for data during transmission or storage.

    Tokenization, on the other hand, replaces sensitive data with tokens, which are random and non-reversible. These tokens have no inherent meaning and are not mathematically reversible to the original data. Essentially it is a one-way process and a secure mapping table or database links tokens to the original data, ensuring data integrity.

    So if we compare both approaches in terms of strengths and weaknesses, encryption is versatile and can be used to protect data both at rest and in transit. However, it requires managing encryption keys and can be more complex to implement and maintain. Tokenization is straightforward and easy to implement. It segments data to ensure that sensitive information is stored separately from tokens. It often simplifies compliance with data protection regulations as well due to its irreversible nature.

    Ultimately, encryption is more viable where reversibility is essential and tokenization where data concealment and compliance are priorities.