What is tokenization? Getting to know the concept of asset tokenization
In the noisy world of economy, people are always looking to convert their assets into other forms and gain profit in this way. Converting money to house, house to car and these days converting assets to digital currencies are all methods that people use to preserve the value of their capital. But these days we are with one A new method of asset conversion in the name of tokenize We are facing each other. If you are familiar with the concept of token and its uses, you definitely know that one of the most important uses of token is Interchangeability and in its newest functionality, people can convert anything into tokens. To learn more about the concept of tokenization and its applications, do not miss the continuation of this article.
What is tokenization?
Tokenization or asset tokenization is the process of replacing sensitive data (such as a bank account number) that preserves all essential information without compromising its security. In fact, tokenization is a type of encryption, with the difference that in encryption, readable data is converted into an unintelligible text, but in tokenization, sensitive data is replaced by non-sensitive values called tokens. Note that tokens do not contain the original data, but usually contain characters or similar formatting.
Tokens can represent ownership of tangible assets such as works of art, or they can represent ownership of intangible assets such as shares in a company or voting rights. But in general tokenization can happen for anything that is considered valuable.
Once assets are tokenized, tokens can be used to transfer ownership of an asset, make payments, and complete other financial tasks. The most famous example of tokenization these days is Bitcoin, the most popular cryptocurrency, which tokens represent the amount of bitcoin a person owns.
A tokenization system binds the original data to a token, but there is no way to decrypt the token and reveal the original data. The goal of this is actually to minimize the amount of data that a business must have. This has made tokenization a popular way for small and medium-sized businesses to enhance the security of their credit card and e-commerce transactions while minimizing the cost and complexity of complying with industry, standards and government regulations.
Where did tokenization start?
Digital tokens were first created in 2001 by TrustCommerce to protect customers’ credit card information. Before the emergence of this technology, banks or financial funds stored cardholder data on their servers; This means that anyone with access to their servers could see or use customers’ credit card numbers.
To solve this problem, TrustCommerce developed a system where Primary Account Numbers (PANs) are replaced with a random number called a token. With this system, cashiers could save payments as tokens and send them to the main authority when they accept payments. Also, each user needs access to the tokens that are attached to the originals to retrieve the tokens and view the secured data. Otherwise, neither the user nor anyone can find the password to view the data.
Over time, when everyone recognized the usefulness of tokens and realized the increasing concerns about the security of financial assets and regulatory requirements, many companies adopted the first generation of token technology and offered similar solutions.
What are the types and applications of tokenization?
In order to be able to get to know the types of tokenization, we must first divide it into two categories of tokenization in blockchain and non-blockchain, and then learn more about the application of tokenization.
Tokenization in blockchain
- Exchangeable Tokenization: The first type of tokens are standard blockchains. These tokens have the same values and can easily replace each other.
- Non-Fungible Tokenization: The non-fungible type, also called a non-equivalent token, has little use in the blockchain, but is instead used to own an asset, such as a painting or a house, and its value is determined by the respective asset.
- Sovereign Tokenization: These tokens represent voting rights and can be used to vote and collaborate in a blockchain system.
- Applied Tokenization: These tokens are used to access specific products and services in a blockchain. Therefore, they can be used to complete actions such as paying transaction fees or setting up a decentralized market.
- Vault: This type of tokenization is designed to protect transaction payment information and process transactions without requiring the original card number or other data.
- Vaultless: Vaultless tokenization is used for payment processing, except that it uses cryptographic devices and algorithms to convert data into a token.
- Language processing (Natural language processing): This type of tokenization breaks down information into simpler terms that can be understood by computers.
How does the Tokenization process work?
The Tokenization process requires payment processing to replace a credit card or account number with a token. The token generated in this way has no use other than security and is not linked to a user account or individual. Tokens can be randomly generated in a variety of ways using techniques such as reversible cryptographic functions, irreversible functions, or generated numbers.
In tokenization, since your sensitive information is protected in a virtual vault, it allows organizations to transmit their data over wireless networks in a completely secure manner. Of course, for tokenization to be effective, organizations must use a payment gateway that allows direct payment or credit card processing to securely store sensitive data. Tokens are connected to the main source of transaction information which is in a decentralized ledger called blockchain. This actually guarantees the ownership of an asset.
Benefits of tokenization
In short, tokenization can improve liquidity, facilitate financial transactions, and help secure ownership rights to assets. Non-blockchain data tokenization acts as a barrier against hackers accessing cardholder information and assets, and is more secure than older systems where credit card numbers were freely exchanged across networks in stored databases.
With blockchain tokenization, since tokens no longer need to be traded in traditional investment markets, much of the lengthy process involved in traditional securities investing or large asset purchases is also eliminated. For example, buying a token that represents ownership of real estate will be a much faster process than buying non-tokenized property.
In addition, eliminating investment parts not only helps reduce overall costs but also saves time. Also, tokens are available to a much larger audience and even those who do not intend to make large investments can use them. Therefore, the market can become more liquid and as a result users can get more investment opportunities.
Along with all the advantages we mentioned, tokenization can also increase the security of token histories in its transactions. For example, if someone wants to question the ownership of a token, since the blockchain has stored the history of all transactions related to it, they can confirm or deny it with a document of ownership.
In summary, the benefits of tokenization include:
- More compatibility with systems
- Requires less resources than encryption
- Increased customer trust due to an additional layer of security on paid websites
- Payment security
- Reducing the steps involved in complying with PCI DSS regulations
- Facilitating digital currency and other currency payments by advancing new technologies such as mobile wallets
Challenges facing asset tokenization
As the world devotes itself to blockchain technology and its applications, related projects such as tokenization also require more stringent rules and regulations. In fact, projects like Tokenization may have a similar function Traditional securities But they don’t have their rules and that can become a problem.
For example, one of the main concerns about tokenizing assets is how to manage them. Imagine thousands of investors collectively owning a tokenized hotel, who should manage that hotel?
Furthermore, what happens if the underlying assets behind a token are lost, for example a token backed by gold?
So as it is known, even though blockchain is known as a decentralized system, it still needs a third party or a centralized system. So we have to see what happens in the future and solutions for the shortcomings of asset tokenization.
Tokenization; A new way of investing and trading
In recent years, tokenization has greatly contributed to the security of business information, and now, with the expansion of the ability of businesses to own assets around the world, it has opened a new window in the field of investment. However, there are still many barriers to tokenization applications that prevent it from reaching its full potential as a form of investment.
With the emergence of tokenization and its increasing acceptance among people, many countries are also changing their strict investment laws and regulations and trying to adapt to this new technology. Also, people who are interested in investing in various fields who were struggling with many problems before, with the help of Tokenization of assets, they no longer see past obstacles in front of them and they also get big profits. In this article from the Wallex blog, we tried to take a comprehensive look at the field of tokenization and learn about future investment technologies. We hope this article was useful for you.
What is tokenization? Getting to know the concept of asset tokenization for the first time on Wallex blog. appeared.