Token Roles and Rewards — From Fintech and AI to Supply Chains
Tokenization is predicted to grow into a $13.53 billion industry globally by 2030. With a growth rate of 24.09% CAGR, tokenization is one of the fastest-growing markets in the world. Despite their innovation and growth in recent years, tokens are hardly a new innovation. In fact, tokens were ubiquitous in the analog world too.
For instance, long before digitization, a trip to the hospital would have you picking up a token and waiting for your turn, as determined by the number on the token. Every patient would receive a token slip of the same size, shape, and material. Only the number on it would be different, and based on that little detail alone, your turn could be fifth or fiftieth. Likewise, tokens in casinos, aka chips, may represent $100 or $10,000.
In these contexts, tokens performed a simple task — representation. In hospitals, they represented a patient’s position in the queue so that patients didn’t have to stand in a line physically. The tokens abstracted the physical queue. Meanwhile, in casinos, tokens represent different denominations of money, so players don’t have to carry wads of cash to each game table. Convenience was the purpose of tokens in these use cases. In the digital world, tokens have taken on more serious and vital roles.
Digital tokens offer a variety of benefits, including security, privacy, transparency, data reliability, and so on. Even as their use cases proliferate, they already form the mainstay of many digital technologies you use daily. Here’s a quick overview of how far tokens have come and some common use cases where they are employed. We’ll also better understand tokenization in different contexts as we explore them.
E-commerce Payments
Every year, millions of credit card details are stolen and sold. These stolen credit card details fetch a pretty penny on the dark web. For instance, in December 2021 alone, roughly 4.5 million stolen credit card details were sold on the dark web for anywhere between $1 to $20.
Since credit card transactions have become ubiquitous, leakage sources have also proliferated. ATMs, in-store POS devices, online e-commerce databases — hackers invade every device and platform looking for sensitive information, including but not limited to credit cards. One nifty layer of protection against them is tokenization.
A typical digital financial transaction involves multiple parties, including payment issuers, payment processors, e-wallets, merchants, banks, etc. Since your payment is executed collectively by all these players, they all need to have “unbreakable” systems to prevent hacking by malicious actors, which is practically impossible.
The solution? Make sure that none of them have any useful data at all!
Tokenization converts sensitive data like your credit card information (credit card number, expiration date, CVV, etc.) into a unique token right at the source, i.e., your merchant’s payment gateway. When the payment service provider (PSP) forwards this token to the next party in the payments flow, the other party has none of your credit card information. On top of it, they generate a new token based on the PSP’s token, forward it to the next party, and so on. This way, even if a hacker manages to steal data in the middle of the payment chain, all they have is gibberish on their hands.
Now, if all of this feels familiar, that’s because it is. This is how encryption works, too. However, one advantage tokenization has over encryption is that the original token generator, i.e., the merchant’s PSP, deletes your credit card info as soon as it’s tokenized. In the case of encryption, a hacker with access to the encryption key can use it to unencrypt the encrypted data. On the other hand, tokenization is irreversible. It cannot be decoded to uncover your original credit card info. Since the first layer in the payments chain, the merchant’s PSP does not store your credit card info; hackers will never be able to pick up your credit card info from any sources involved in processing your payments.
Tokens have proven to be so effective in securing customer data that almost every banking and fintech player now uses tokens, whether they are banks, wallets (Apple Pay, Google Pay), payment services providers (Stripe), networks (PayPal, Amazon), etc. If you’re in fintech, either you are or should be using tokens.
Artificial Intelligence
Artificial intelligence is another area where tokens are all but indispensable. In the AI context, tokenization takes on a different form. Here, it refers to breaking down sensitive information into bits and pieces, which are then replaced with non-sensitive placeholder information to be fed into AI. This way, the AI works with tokenized data and not directly with the original sensitive data, thereby bolstering data security, privacy, and regulatory compliance while ensuring seamless data accessibility and processing. In summary, it converts the words into a vector data structure that the machines can understand.
The ultimate goal of tokenization in the AI context is to create a language the AI can “understand.” However, this only applies to text-based AI. For text content, this is made possible by breaking paragraphs into sentences, words, or even characters. Each character, word, or an entire sentence can be a single token. All data fed into AI’s algorithms is vectorized. Additional steps like segmentation, vocabulary mapping, encoding, etc., help the AI get a firmer grasp of the data it is being fed, but the building blocks are all tokens for the text-based AI. Token RegRadar, an AI-powered legal expert, has already realized this in practice and is being offered to clients worldwide.
ChatGPT 3 was trained on a massive trove of 300 billion words (requiring 300 billion tokens or more), constituting 570GB of data scoured from the internet. This data included, among other things, the personal information of millions of users published on their blogs, social media, and other platforms. In the future, as AI regulation becomes more stringent, AI creators will be under increasing pressure to implement strong safeguards to protect consumer data and offer consumers more control and transparency over how and who uses their data. By removing sensitive content or words that are tokens, it is possible to improve security in some scenarios (remove last names from all personal information crawled on the internet, for example)
Asset Tokenization on Blockchains
Once again, tokenization is helping blockchain platforms represent one thing with another. Here, the ownership rights of a physical or a digital asset are converted into a blockchain-based token. Doing so brings the advantages of blockchain — improved transparency, permissionless liquidity, open access, and ease of transactions — to real-world assets. It doesn’t matter whether the assets are digital, physical, fungible, or non-fungible — they can all be tokenized. Fiat money, private securities, gold bullion, house deeds, intellectual property — you name it. Suddenly, the entire world becomes a potential market for the assets. Platforms like OpenSea, Polymath, Securitize, ADDX, and others have already made this a reality, albeit for a limited variety of assets. Since blockchains are designed with decentralization at their core, the asset ownership records are safe and immutable. So, trust in the system is high. Moreover, the public nature of record-keeping ensures complete transparency for auditing by any party. And transactions cost a fraction of what they’d do in traditional systems.
Tokenization Frontier: Space Assets
One of the most creative and visionary applications of asset tokenization has been proposed in the space industry. Fractional ownership of space assets — accelerated by blockchain-based tokenization — opens up a new world of opportunities for developing economies, universities, private R&D organizations, small businesses, and others. From space exploration to space research, tokenization can trigger a revolution of collaboration between globally distributed parties with relatively small budgets.
Additionally, satellite tokenization can help track space assets, space debris, and their ownership to encourage responsible space exploration and environmental responsibility.
Tokenization Frontier: Sourcing and Manufacturing
The modern consumer is increasingly invested in the sustainable sourcing of their purchases, such as food, household products, etc. They want to know whether their food is vegan, organic, sustainably sourced, and using fair market practices. It could be coffee beans sourced from Brazil, diamonds from South Africa, cobalt from the Congo for their smartphones, or anything manufactured by cheap labour in a specific country. However, keeping track of everything from its source to its final destination takes time and effort. That’s where blockchain-based tokenization helps.
Besides providing consumers with improved transparency in sourcing every component that went into making their purchases, tokenization helps brands promote their commitment to sustainability and the environment. It’s a win-win for everyone involved.
Rapidly Expanding Use Cases
Wherever there’s a need for immutable records, transparency, fractional ownership, data compliance, or simply the convenience of transactions, tokenization can be a powerful enabler. Consider the following advanced use cases for the future:
Certifications
Tokens simplify credential authentication, verification, and sharing.
Fractional Ownership of Risky Projects
This is on the lines of crowdfunding, but for projects with environmental impacts that incumbent traditional organizations generally shun. It could be for a renewable energy project in a developing economy or organic farming closer home.
Data Monetization
Since data protection laws like GDPR and CCPA have given users more control over their data, tokenization of that data can help users monetize it in a safer, more secure way. This was tested in the web3 world in emerging markets, but I don’t have a live example to share today.
Electoral Systems
The tokenization of electoral systems can revolutionize governance for billions across the globe. By making voting systems transparent, secure, and tamper-proof, tokens can build trust in the election process and improve voter turnout.
Healthcare
Besides the expected benefits of security, safety, and privacy of patient data, tokenization also allows seamless data exchange between relevant parties to ensure smoother patient services. On top of it, patients will be able to sell their tokenized, i.e. anonymized, data for research purposes in exchange for a payment.
Entertainment
Once again, following the lines of crowdfunding, music artists, movie directors, and other artists can directly involve their fans or small investors in producing their works while sharing fractional ownership over the project with them. This way, they can bypass production houses and save on costs.
Own a Fraction of the Future
Tokenization can disrupt a wide array of industries, and it’s already happening. As this proven tech and innovation finds its way into other domains, it will become the mainstay of the respective sectors. The question is: will you lead the change and reap the rewards as a pioneer in your niche, or play catch up when everyone has passed you by?
— Christina shares candid insights and ideas based on her work, network, and passion for mobile, payments, and commerce. As a frequent speaker by invitation to international events, from entrepreneurial and educational to executive audiences and settings, she has been recognized as a ‘Top B2B Influencer’, ‘Who’s Who in Fintech', and ’40 Under 40 in Silicon Valley’. She focuses on the latest product innovations and growth for people during the day while teaching students and mentoring entrepreneurs at night. Connect with her on LinkedIn or Twitter/X. All views are my own. —