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Tokenization of Digital Assets: Emerging Applications

Banking and carbon credit trading are two of the major emerging applications of tokenization.
  • Innotech
  • |
  • January 3, 2022

Tokenization is the process of protecting sensitive data by replacing it with an algorithmically generated number called a ‘token’, thereby turning the sensitive data into non-sensitive data. Tokenization is a form of digital security and unlike encrypted data, tokenized data is undecipherable and irreversible. Tokens cannot be returned to their original form because there is no mathematical relationship between the token and its original number. The primary function of tokenization is to swap out sensitive data with a randomized number in the same format but with no inherent value of its own. It works by removing any original sensitive payment or personal data from a business system, replacing each data set with an undecipherable token, and storing the original data in a secure cloud environment, separate from the business system. Through De-tokenization, one can exchange the token for the original number which can only be done by the original tokenization system.

Tokenization has various applications depending on the way that it is used. For instance, single-use (low value) tokenization is used for operations such as one-time debit card transactions that do not need to be retained whereas persistent (high-value) tokenization is used for items such as a repeat customer’s credit card number that needs to be stored in a database for recurring transactions.

Applications

BankingTokenization protects cardholder data. When a payment is processed using the token stored in the system, only the original credit card tokenization system can swap the token with the corresponding primary account number (PAN) and send it to the payment processor for authorization. The system never records, transmits, or stores the PAN-only the token.
Carbon Credit Trading Tokenization of carbon credits creates a global environmental conservation market. Tokenization facilitates secure carbon credit transactions and creates a completely transparent system where the transactions are trackable and free of manipulation. The interest in Carbon Credit tokens is supported by the adoption of blockchain for advanced programmability.

Tokenization has enabled Moss, the largest player in the world’s carbon credit voluntary market, to purchase and sell over 900 thousand tons of CO2, directly contributing towards remunerating the prevention of 2,000,000 tons of greenhouse gases. Moss issues MCO2 Tokens (the first global Carbon Credit Token), with 1 MCO2 token being equivalent to 1 Carbon Credit. This equivalency ensures that the issuance and distribution of this digital asset democratizes carbon offsetting via smart contracts. The MCO2 Token makes carbon credits accessible, programmable, and composable.

Challenges

  • Difficult to scale securely and maintain performance as database increases in size
  • Difficult to exchange data since it requires direct access to a vault mapping token value
English (UK)