Lately, when a bank or service provider wants to assure you that all information about online transactions and payment cards is safe, they usually use the word ‘tokenization.’ On the other hand, we prefer to use a more precise explanation.
Tokenization is a way to secure your customers’ card and transaction information by converting it into tokens. Tokenization ensures that no sensitive card information is stored in your database. It’s especially important that, with tokenization, you don’t need to develop expensive and complex data encryption systems.
To get to the heart of tokenization, we need to explain the basis of the word – token.
What are Tokens?
People often get confused when talking about ‘tokens’ and ‘cryptocurrencies.’ Although they are often used as synonyms and are related to blockchain technology, they differ.
Cryptocurrency can be used for payments, while tokens can’t. On some blockchain networks, tokens are designed via smart contracts and have a variety of uses. On any blockchain network, the number of tokens is limitless.
Both cryptocurrencies and tokens can be transmitted inside the blockchain network. But, only a particular cryptocurrency on a particular blockchain can pay fees associated with activities conducted with tokens.
We can increasingly see the use of tokens in decentralized finance (DeFi). Tokens in this category help decentralized apps (dApps) do everything from automating interest rates to selling virtual real estate.
Types of Tokens
There are different types of tokens. We are going to divide them into four groups.
Fungible tokens are tokens that can be exchanged or traded mutually. They aren’t unique and are interchangeable. Each has the same value as the other being traded at a given time.
The opposite of fungible tokens is non-fungible tokens (NFTs). They represent ownership rights to a unique digital or physical asset. It can’t be copied or duplicated. NFTs can be used to release limited numbers of digital artwork or sell unique virtual assets, such as rare items in a video game.
Security tokens are a new class of assets that aim to be the crypto equivalent of traditional securities such as stocks and bonds. Their main use case is selling shares in a company (much like shares or fractional shares sold through conventional markets) or other businesses (for example, real estate) without the need for a broker.
It has been reported that major companies and startups are exploring security tokens as a potential alternative to other fundraising methods.
They are usually issued to raise capital for a specific project (e.g., startup projects). In return, investors are given the right to use future goods and services.
What Is Tokenization?
Tokenization can be defined as a digitized process of issuing blockchain tokens containing a right. It’s the method of swapping out sensitive data for one-of-a-kind identification symbols, or ‘tokens,’ that have no usable value and can be safely stored by an organization. Since the data is only ever held by the card acquirer, they are now ‘out of scope.’
Where Did Tokenization Come From?
To assist a client in safeguarding customer credit card information, TrustCommerce developed digital tokenization for the first time in 2001. The fact that merchants were keeping cardholder information on their servers made it possible for anybody with access to those servers to read or misuse those customers’ credit card details.
A system created by TrustCommerce uses tokens instead of primary account numbers (PANs). This made it possible for businesses to keep and use tokens as references while accepting payments. TrustCommerce processed the payments using the original PANs after converting the tokens back to PANs. Since merchants no longer had any genuine PANs kept in their systems, it reduced danger to cardholders.
This first-generation tokenization has proven technology’s value and positive aspect, where regulatory requirements and security concerns slowly diminish. It encourages other firms to follow the same path.
Goals of Tokenization
The goal of tokenization is to protect the business system’s original personal and payment data.
In banking, for instance, tokenization protects cardholder data. Only the original credit card tokenization system can swap the token with the matching primary account number (PAN) and transmit it to the payment processor for authorization when you process a payment using the token stored in your system. The PAN is never transmitted, stored, or recorded by your systems; just the token is.
But no defense has ever been shown to be impenetrable. Cybercriminals use various methods for targeting weak businesses, including human mistakes, phishing emails, malware, and brute force. The benefit of cloud tokenization is that no information is accessible to steal when the inevitable breach occurs. It basically gets rid of the possibility of data theft.
What is Tokenization Used For?
As we mentioned, tokenization plays a big part in protecting different kinds of sensitive data.
- Passport numbers and numbers on a driver’s license
- Phone numbers
- Bank account details and email addresses
- Personal details such as name, address, and date of birth
Organizations find tokenization an ideal solution, especially because data breaches are increasing and data security has become more crucial.
What Is Asset Tokenization?
Asset tokenization is a process by which any real-world asset is digitalized on a distributed ledger or blockchain and divided into smaller components that take the form of tokens.
Due to the unchangeable nature of blockchain, once you purchase tokens representing an asset, no authority can change or erase your ownership of that asset.
What Can Be Tokenized?
Since tokenization supports proof-of-ownership and fractional ownership, the options are virtually limitless. Companies worldwide utilize blockchain technology to tokenize nearly everything, from conventional assets like commodities, venture capital funds, real estate holdings, and bonds to unusual assets like a racing horse, sports teams, celebrities, and artwork. But we’ve divided them into four major groups instead:
An asset is anything of value that can be converted into cash. It can be separated into two categories: business and personal. Business assets are listed on the balance sheet, while personal assets are considered money and real estate.
Equity (shares) can be tokenized, but the assets remain as security tokens kept online in a wallet. Investors can often purchase shares on a stock exchange.
To raise funds or do better business, a company can offer services or goods, where investors use tokens to pay for the supplier’s services or goods.
One asset that investors might tokenize is an investment fund; these tokens reflect a shareholder’s share of the fund. Each investor gets tokens that represent their fund share.
Benefits of Tokenization
What’s the benefit of tokenization, you might ask. Let’s say you are doing a fundraising campaign. There are 1,000 different investors from different countries, and each invests a different amount of money. They all pay from different bank accounts to your account.
Here comes the problem: the bank asks for an explanation of who is depositing money into your account. The bank even might decide to block your account, which means your campaign is dead instantly. However, to continue the campaign, you must go to the bank often, which is a big hassle.
When you finally solve the problem with the bank, another problem pops out. It gets a bit tricky at the end of the year when you have to distribute the dividend to 1,000 different investors. In addition to all this, every transaction comes with a fee that must be paid.
It already sounds too much, doesn’t it?
We forgot to mention how you have to keep track of each investor and record everything in order to know how much you are paying out to whom. All this is probably causing you dizziness.
Well, here comes the good part. The beauty of tokenization is that the system knows who paid how much. The money doesn’t go directly to the bank account but goes to the protocol.
Another good thing is a protected escrow account that can be set up there, where the account user can’t withdraw money from the account until pre-agreed conditions are met.
For example, the campaign aims to collect 80% of the requested funds. If this is achieved, only then can the money from the protocol go directly to the blockchain wallet of the campaign owner. If this doesn’t happen, the smart contract returns the money to the investor.
The whole thing you are reading about, and much more, is defined on the protocol within the smart contract on the Dev3 platform.
It should be noted that there are only two transactions with Dev3 – to and from the blockchain wallet. All funds are received altogether from all investors, and the same way, are paid directly proportionally from the wallet.
The money that comes in the form of tokens can later be converted into local currency through a brokerage company for cryptocurrencies.
After we finally demystified tokenization, we can claim it is gaining popularity as a way to protect data and can be very important in future data privacy protection solutions. Even though different offers can help you secure the data and enjoy it in peace by knowing nobody can misuse them, using the Dev3 blockchain-based solution can save time, save money, reduce overhead, and increase the security level. Try it out, and you’ll see how we have overcome all difficulties and solved all potential problems.