Data Tokenization: Exploring Its Use In Enhancing Data Security

Data security is one of the biggest challenges in the modern world. Each day, countless people send and receive highly sensitive data. Finding a way to keep this data secure — while also letting the right people access —it can be tricky. Data tokenization is one potential solution that could help to minimize the risk of data breaches. However, this helpful feature does come with some potential cons. Before relying on data tokenization, it's important to fully understand how it works. Keep reading to learn about the details of data tokenization.

Key Takeaways:

• Data tokenization is a type of security system that involves turning sensitive data into a randomized token. 
• Data tokenization can be used for social media, NFTs and gaming. 
• While tokenization and encryption may seem similar, there are significant differences. 

What Is Data Tokenization?

Data tokenization is a type of security system that involves turning sensitive data into a randomized token. This token can be sent over a blockchain without revealing any details about the original data.

How Does Data Tokenization Work?

Data tokenization revolves around the key idea of substituting a token for actual data. To properly protect the data it contains, data tokenization needs to meet several standards. Most importantly, this token must be random, instead of a coded version of the original sensitive data. This way, if someone gains access to the token, they’re unable to decode it and convert the token back into the original data. 

Despite having no obvious connection to the original data, the token can function in place of it to finalize transactions and confirm agreements. Proper data tokenization requires the original sensitive data to remain securely stored in the original organization.

Data tokenization has many applications, ranging from sending healthcare data to confirming payments. The precise details of the tokenization process can vary slightly, depending upon the network being used and the type of data being sent. In order to tokenize and use data, systems typically need to follow the following steps:

1. A user provides their sensitive data to an organization or tokenizing agency.
2. The organization confirms this data, and creates a token attached to it.
3. The user is given a token to use in place of their original data.
4. When the user needs to give their data to a secondary organization, they input the token instead of the actual data.
5. The secondary organization performs data analysis, contacts the token provider and specifies the token they’ve received.
6. The token provider confirms that the underlying data is valid
7. The secondary organization then validates its transaction with the user.

Benefits of Data Tokenization

Data tokenization has long been used for purposes such as finalizing a credit card transaction online. As blockchain systems become more common, people are realizing that data tokenization also has multiple benefits for crypto and decentralized finance (DeFi).

Improved Security

The main benefit of data tokenization is that it enhances security for any community. Every time data is used on a main network, it only exists in the form of a token. The actual data itself is stored only on a single secure server with very stringent security protocols.

In the event of a data breach, scammers can’t easily get their hands on sensitive information, such as crypto addresses or wallet passwords. Instead, all they get is a useless token. For example, if data is tokenized and a hacker breaks into a crypto exchange, they won't get users’ actual credit card numbers. In fact, data tokenization is so useful for security purposes that certain industry standards, like PCI DSS or GLBA, even require tokenization to remain compliant with regulations.

Reduced Effort for Organizations and Users

Tokenization simplifies a lot of processes. On the client side, it reduces the amount of security a blockchain has to have. Instead of needing strict security for every single part of their organization, they just need security for the part where the data is stored. This makes it simpler to develop decentralized applications (DApps) and other associated blockchain tools.

Tokenization also makes it easier for users to handle their details. Many web3 developments let users attach multiple blocks of data to a single token. This lets people input a large amount of data in a brief amount of time. For example, a tokenized wallet can let you move your entire digital identity between platforms without having to individually input details on each token or NFT you own.

Challenges of Data Tokenization

While data tokenization is quite useful in some situations, it's not entirely perfect. There are a few potential issues that people may face when using data tokenization for crypto applications.

Interoperability Issues

Due to the nature of tokenization, tokenized data can become less usable on certain platforms. For example, if you tokenize your email when signing up for one service, another platform that lets you send emails to fellow users might not be able to send your mail to the right email address. There are a lot of different blockchains, crypto exchanges, DApps and DeFi ecosystems, and not all of them work on the same system and use data in the same ways.

Scalability

Tokenization works very well, but it's only as secure as the storage system you use. This can become a problem when a blockchain's tokenization needs suddenly spike. If a system has only invested in a certain amount of storage space, it won't have room to add more data. Furthermore, the constant back-and-forth between the tokenization storage server and other platforms can put a lot of strain on an unprepared network.

Use Cases of Data Tokenization

Because of existing financial industry regulations, data tokenization already has a place in any DeFi organization that uses credit cards or bank accounts. However, it can be used for a lot more than just securely storing credit cards. The crypto industry has already noticed many other intriguing uses for data tokenization. Following are three of its primary applications in this area.

Social Media

Social media platforms built on blockchains have many opportunities to include more theoretical forms of data tokenization in their systems. For many users who prioritize anonymity, tokenization provides a simple and effective way to create a digital identity. People can design a token that links back to their real identity without actually revealing any identifying factors. This token can then be used to interact anonymously with others, while still letting people formally validate a user’s identity.

NFTs

NFTs are a valuable form of investment, but they can also be risky. Since an NFT token’s value can be high, it's essential to protect its data carefully. If a scammer gets a user's wallet keys or NFT ID, they’ll have sensitive data that they can use to craft a highly targeted scam.

Tokenization provides an additional layer of security. By tokenizing NFT IDs, users can confirm their token’s value and NFT ownership without sharing potentially risky information. The less actual information about your NFTs is known, the safer your investments are.

Gaming

The new genre of play-to-earn crypto games typically focuses on players earning game assets that can be converted to cryptocurrency or NFTs. However, many games currently make it tricky to transfer your in-game funds to your real-world account. Tokenization can potentially make this transfer a lot easier. Participants can use a token that refers to their real-world PayPal address or other forms of payment, and then enjoy the convenience of connecting their game account and crypto funds straight to a credit card or bank account.

Data Tokenization vs. Encryption

When discussing data tokenization, it's important to understand how it differs from encryption. Encryption is another popular security method that also turns a basic piece of data into a string of random numbers, letters and symbols. Both of these techniques allow organizations to obfuscate data, making it more secure to store and transfer.

Despite these similarities, tokenization and encryption aren’t identical. In encryption, data is altered according to a mathematical pattern. To use the data, encryptors send the encrypted data to another party, and then send them a key they can use to decode the complex algorithm. Meanwhile, the new symbols associated with tokenized data are completely random, and secondary parties only receive validation of the data, instead of being told how to perform data analysis and retrieve the original data.

Encryption tends to work better than tokenization for large amounts of data. You can encrypt a large block of data at once, or lock multiple files into a single encryption. However, encryption is more vulnerable to data breaches because a hacker who gets the key can look at all of the data. Unlike tokenized data, encrypted data leaves the original organization, so it's vulnerable to anyone who can view it.

The Bottom Line

Tokenized data is an essential part of maintaining security in web3 environments. Not only is it an ideal way to protect data during a data breach, but it also has some intriguing applications for DeFi products like NFTs. Those who prioritize user convenience and data security can greatly benefit from the data tokenization process. Once you grasp the concept and see how it works, data tokenization is incredibly easy to use.

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