What is Tokenization?

You may have heard of the term ‘token’ in discussions related to blockchain technology and cryptocurrency. Tokens have the power to transform the way that data is transferred whilst also offering innovative new avenues for investment.

In this article, we’ll explore tokenization in-depth, discussing what it is and how it works. We’ll also touch on tokenization’s potential uses in various industries and highlight its benefits compared to current systems.

What is Tokenization?

Tokenization can be used to secure sensitive data by replacing the original data with an unrelated value of the same length and format. These replacements are known as ‘Tokens’ and in the world of blockchain, they exist to represent sensitive data in a non-sensitive form.

Tokenization doesn’t just exist in the world of blockchain – the concept has been around for a long time. When you tokenize something, you’re taking sensitive data, like a share or security and storing it securely – all whilst using a digital representation in your day-to-day operations.

What are Tokens?

These are the entities that represent sensitive assets or data points in another form (usually digital). To conceptualise this, we can look at an example of tokens in a physical form, such as casino chips. These chips are used to tokenize the actual money behind them – enabling ease of use when playing casino games.

The casino chip completely replaces the underlying asset and can only be used in a pre-determined situation – in this case, the casino itself. If you held £500 worth of casino chips, you could exchange them for £500 of legal tender – you couldn’t take them to buy groceries.

Over the years, the concept of physical tokens has been implemented into digital systems across various industries. One of the most popular ways to use this process is when making card payments, as an alternative to encryption. This works through users storing their card information as ‘tokens’, which are substitutes for the sensitive card information found on physical credit and debit cards.

These tokens act as a ‘stand in’ for card information and are commonly expressed as a random string of numbers. As this token links to the underlying credit or debit card, merchants don’t need sensitive card information to process payments – all they need is the token.

At the other end of the transaction, banks will receive the request from the merchant for the funds to pay for the goods or services requested by the payor. Banks also incorporate elements of tokenization into their service offering, as customers’ money is stored in a tokenized digital format. This format digitally represents the customer’s money, allowing for quick transfers to be made between parties.

This process eliminates the risk of sensitive card details being stolen or duplicated. However, using tokenization during payments processing is just one example of this process. When combined with blockchain technology, tokenization opens pathways to change how businesses operate in today’s world.