Data Tokenization in Blockchain Technology

Introduction

You store your cash in physical wallets in pockets, closets, safes and lockers at home or in your bank accounts. The storage of data in today’s ever-evolving digital landscape has become a substantial headache for everyone. Those who sought solutions came up with the ideas ranging from using floppy disks, compact disks (CDs), digital video disks (DVDs), portable hard disk drives to SSDs. Leading companies started offering cloud storage to safeguard your memories in the form of images, and sensitive data in the form of files. The advent of blockchain technology has introduced a novel concept of data tokenization to save and transfer your data.

Data Tokenization Explained

Data tokenization is the process of converting any kind of information, sensitive as well as non-sensitive, into digital tokens that one can transfer to blockchains without disclosing the data which the token stands for. Tokenization not only facilitates the user but also preserves data security and privacy. For instance, you can convert all your social media information into a token and shift it to a blockchain. In case of switching to a different platform, you will not need to enter your credentials manually. However, it needs Web3 services like smart contracts, virtual wallets and blockchain networks.

These tokens are usually unique, unchangeable, and can be verified on the blockchain to enhance data security, privacy, and compliance. You can also take an example of a credit card number, which can be tokenized into a random string of digits that can be used for payment verification without revealing the actual card number.

Tokenization vs Encryption

At first glance, one might think that tokenization is a form of encryption. But these two processes are radically different in nature. Encryption changes a text to code language or cipher and then assigns a secret key to the user in order to decipher or decrypt the encrypted data. Encryption is basically a mathematical process to scramble data in such way as to make it unreadable without a key. Encryption is used in various scenarios, including secure communication, data storage, authentication, digital signatures, and regulatory compliance.

Contrarily, tokenization transforms data into a token, which is just an identifier. We can say that the specific token merely stands for some particular data. Neither does it need any key, nor it can be used to restore data with a key. Despite having no direct relation with the tokenized data, the token can still fulfill the purpose which the original data was supposed to fulfill. Remember the example of the credit card. You cannot unlock the credit card number by viewing the token, yet the token can be used to carry out transactions in the same way as the credit card itself.

What is a Token?

Before proceeding in the article, it is imperative to have an idea of what a token is. A large majority uses the words “token” and “coin” interchangeably, but they are not the same. A coin has its own blockchain chain, and it can be mineable. But a token can be created on any pre-existing blockchain, and it is not mineable. Many, but not all, tokens have their uses cases as digital assets. Data encoding is one of the other use cases of tokens.

Creators can issue tokens on blockchains like Bitcoin, Ethereum, Solana, Binance Smart Chain, etc. Some popular token standards include ERC-20, ERC-721, ERC-1155, and BEP-20. Real World Assets like gold, silver or even real estate can have their tokenized forms. This group of tokens fall under the category of Real World Assets (RWA).

How Data Tokenization Works: A Step-by-Step Guide

Extending the example already stated, if you want to switch over from one social media platform to another, the ordinary web requires you to enter your username and password for registration. Even then you are unable to import your connections from one to another platform, let alone your posts activity. You will be doing everything from scratch.

Suppose you are on Web3. You can use the following steps to tokenize your data:

1. At the outset, decide what your token is going to represent. It might represent identity verification, ownership of the posted content, viewership permissions, etc.

2. Choose the type of token. It can be a fungible, or a non-fungible token (NFT). Use an NFT when you want something unique that belongs only to one person or one piece of content.

3. Select a blockchain and the token standards from the options mentioned in the preceding lines.

4. Create and secure a Web3 wallet to hold the tokens and to sign proofs of ownership. Record the seed phrase safely and never share it with anyone because the wallet will be your single point of control over the tokenized identity.

5. Prepare metadata that links the token to your social account. Add a clear note or link that shows that the token represents your identity or content.

6. By signing a message with your wallet and posting that message on your social profile, prove that the account is yours.

7. Mint the token through a trusted Web3 platform and attach the prepared information so that the token always points back to you.

8. Save all important details like contract addresses and proofs. Make sure your token follows basic rules of privacy and security.

Limitations

Despite all the benefits mentioned or implied so far, data tokenization also comes with some loopholes that you cannot afford to ignore. The first drawback is the quality of the preserved data. From the steps mentioned in the previous section, it is clear that the technical or user-specific mistakes while entering and assigning the data can occur. Some evidence also suggest that attaching location to the data causes the tokenized data to malfunction. Similarly, data recovery can be problematic later on.

Reports and news confirm that tokenizing emails and phone numbers can bar the users from receiving notifications. Notifications stop because the real contact information is no longer available to the system. When an email or phone number is turned into a token, other platforms cannot recognize or read it.

Conclusion

Data tokenization introduces a powerful way to store, verify, and transfer information without exposing the underlying data. By leveraging blockchain’s transparency and immutability, it gives users greater control over their digital identities while improving security. Although technical challenges and usability limitations still exist, ongoing Web3 innovation is steadily addressing these gaps. As standards mature and adoption grows, data tokenization is likely to become a foundational layer for secure data in the decentralized internet.