Data tokenization is an advanced form of pseudonymization that protects users’ data while maintaining its original meaning. It turns sensitive data into a randomized token that can be sent over blockchain systems without revealing details about the original data.

Tokenized data is always randomized rather than a coded version of the original data. By this, when someone gains access to the token, they cannot decode it or convert it back to the original data.

Despite having no connection to the original data, tokenized data can function exactly the same way. They can replicate all the functions of the original data, thereby securing the data from any form of attack.

Source: Piiano

Although the precise details of the tokenization process can change with the network used and the type of data involved, tokenization typically follows the following steps:

1) The user provides data to a token provider

2) The token provider confirms the data and attaches a token to it

3) The token provider gives the user the token in exchange for the original data

4) If the user needs to distribute the data to a third party, they give the tokenized data instead of the original data

5) The third party works on the data, contacts the token provider about the specific token they have received

6) The token provider confirms the validity of the underlying data

7) The third party then validate their transaction with the user

Benefits of Data Tokenization

Source: Piiano

Data tokenization has been extensively used for purposes like transmission of healthcare data, confirming transactions, finalizing credit card payments, and others. As blockchain systems become more popular, data tokenization is getting more attention for the multiple benefits they offer.

Improved security

Data stored on a Web 3.0 network may exist as a token, enhancing the community's security. If a data breach happens to the system, the hacker cannot easily get access to sensitive data like private keys and wallet passkeys, they will only see undecipherable tokens. This protects the system adequately and decreases the risk of data theft. Data tokenization is so important that several regulatory mechanisms like GLBA and PCI DSS now require it as a standard for compliance with regulations.

Simplicity

Data tokenization simplifies numerous processes and reduces the number of security measures needed to be implemented on Web 3.0 networks. This makes it simpler to develop decentralized applications and blockchain protocols.

For users, tokenization makes it easy to handle and interact with their information. It also allows users to interact with multiple digital platforms without having to individually input their details into each.

Efficiency

Data tokenization allows for faster transactions and settlements through the automation of processes. It also reduces the need for paperwork and other manual processes, leading to simplified processes with efficient finality. This has helped in speeding up cross-border transactions removing geographical barriers to asset movement.

Enhanced traceability and transparency

By tokenizing the information on the blockchain, altering or manipulating records becomes almost impossible. This improves the transparency, visibility, and traceability of data, resulting in much more secure and reliable systems.

Reduced costs

Data tokenization can hugely decrease the cost of data breaches in individuals and businesses. The financial toll caused by data breaches is alarming and data tokenization can be one of the effective strategies to curtail this. IBM’s 2023 Cost of Data Breach Report revealed that the healthcare industry had the highest data breach in 2023 while the United States had the most expensive data breach cost globally.