What is data tokenization? Understanding its importance in Web3

Summary

• Data tokenization transforms sensitive information (such as credit card data) into secure tokens that can be transferred on the blockchain without exposing the original information.

• This process enhances security, privacy, and regulatory compliance, protecting against unauthorized access and misuse of sensitive data.

• The implementation of data tokenization requires careful planning to properly balance its benefits and limitations.

Understanding Tokens in Blockchain

Tokens are non-mineable digital units that exist as records in distributed ledgers within blockchain chains. These digital units come in multiple forms and serve various functions, from operating as currencies to acting as mechanisms for data tokenization.

Generally, tokens are issued on blockchains such as Ethereum and BNB Smart Chain, using technical standards like ERC-20, ERC-721 ( for NFTs ), ERC-1155, and BEP-20. It is important to differentiate them from native cryptocurrencies like Bitcoin or Ether, as tokens represent transferable units of value created on an existing blockchain, not native coins of the chain.

Some tokens have the ability to represent real-world assets such as gold, real estate, or certificates, a process known as tokenization of physical assets.

Data Tokenization: Technical Definition

Data tokenization involves the process of converting sensitive information such as credit card numbers, medical data, or personal information into symbolic representations called tokens, which can be processed, stored, and transferred without revealing the original confidential data.

These tokens possess fundamental characteristics that make them valuable for cybersecurity: they are unique, immutable, and verifiable on the blockchain, which substantially increases levels of security, privacy, and regulatory compliance. For example, a credit card number can be tokenized by transforming it into an alphanumeric sequence that allows for the verification of a transaction without exposing the actual card number.

This concept also applies in decentralized social network ecosystems, where users can tokenize their digital presence to fluidly migrate between platforms while maintaining ownership and control over their personal data.

Although tokenization has existed for years in the financial sector to protect payment information, blockchain technology has significantly expanded its implementation possibilities in numerous additional fields.

Differences between tokenization and encryption

Tokenization and encryption represent two distinct methodologies for data protection, each with specific functions and purposes:

Encryption is a mathematical procedure that converts readable data (plaintext) into an unreadable format (ciphertext) using cryptographic algorithms, being accessible only through a secret key. It is widely used in secure communications, protected storage, authentication, digital signatures, and to meet regulatory requirements.

On its part, tokenization replaces sensitive data with unique identifiers (tokens) that bear no mathematical relationship to the original data and do not depend on cryptographic keys for their operation. For example, a credit card number can be replaced by a token with no apparent correlation to the original number, but which remains functional for processing payments.

Tokenization is particularly effective when regulatory compliance and data security are priorities, such as in payment processing, medical information management, and protection of personally identifiable information.

Practical functioning of data tokenization

To illustrate the functioning of tokenization, let’s consider the case of a user who wishes to migrate between social media platforms. In traditional Web2 platforms, this process requires creating a new account and manually entering all personal data from scratch, losing the history of posts and connections.

With data tokenization in a Web3 environment, the user can link their existing digital identity to the new platform, automatically transferring their personal information. The process requires a digital wallet ( like MetaMask) with an address that represents their identity on the blockchain.

By connecting this wallet to the new social platform, personal history, contacts, and digital assets are automatically synchronized because the digital identity and user data are recorded on the blockchain. This means that the user does not lose tokens, NFTs, or previous transactions, maintaining full control over their digital presence without being restricted to a specific platform.

Advantages of Data Tokenization

( Enhanced security

Tokenization significantly enhances the protection of sensitive data. By replacing confidential information with tokens, it substantially reduces the risk of leaks, identity theft, and cyberattacks. Even if the tokens were compromised, the original data remains protected thanks to the secure mapping system that links tokens with the original information.

) Regulatory compliance

Numerous sectors are subject to strict data protection regulations. Tokenization facilitates compliance with these requirements by effectively protecting sensitive information, reducing the surface area of exposure to potential regulatory breaches. Since tokenized data is considered non-sensitive, this approach simplifies security audits and optimizes data management.

Secure information exchange

Tokenization allows for secure data sharing among departments, vendors, and business partners. By providing access solely to the tokens without revealing the underlying confidential information, this scalable technology efficiently meets the growing organizational needs while reducing the costs of implementing security measures.

Limitations in Data Tokenization

Quality of information

The tokenization process can affect the integrity and accuracy of data, as certain information may be lost or distorted during the conversion. For example, the tokenization of geographic location data could negatively impact the user's ability to access contextually relevant content based on their location.

Technical interoperability

Tokenization can create obstacles for interoperability between systems that process or use tokenized data. For example, if an email address is tokenized, the user may not receive notifications from certain platforms or services that require access to the original information.

Data Governance

The process raises legal and ethical questions regarding the ownership, control, use, and distribution of tokenized data. Tokenizing personal information, for example, could change the way a user consents to the collection and use of their data. In contexts such as social media postings, tokenization can complicate issues related to freedom of expression and intellectual property rights.

Information Recovery

Data recovery in the event of failures in the tokenization system can become more complicated, as organizations must restore both the tokenized data and the original sensitive information stored in the token vault, adding layers of complexity to the process.

Practical applications: social networks and NFTs

Traditional social media platforms collect enormous volumes of user data daily to create targeted advertising, filter content, and personalize experiences. This information is typically stored in centralized databases that can be sold without explicit consent or be exposed to security breaches.

Through tokenization, users can convert their social media data into digital assets and, if they wish, monetize them by selling them to advertisers or research groups. Users gain control over who can view or share their content, setting custom rules for their profile.

For example, they can restrict access to their content exclusively to verified users or set minimum token holding requirements for interactions, giving them complete control over their social graph, content, and monetization channels such as tips and subscriptions.

Future Perspectives

Data tokenization is already an established practice in sectors such as health, finance, media, and social networks. Its adoption is expected to expand significantly due to the growing need for cybersecurity and regulatory compliance in an increasingly complex digital environment.

The successful implementation of this technology requires meticulous planning and responsible execution. Tokenization must be carried out in a robust and ethical manner, respecting the rights and expectations of users while complying with all relevant regulations.

As blockchain technology continues to mature, data tokenization represents a fundamental innovation for establishing new paradigms of security and privacy in the digital age, providing tools for greater control over personal information in increasingly interconnected digital ecosystems.