NFT vs. Tokenization

This blog was originally published by TokenEx here.

Written by Valerie Hare, TokenEx.

When it comes to tokens, there are a wide range of types and use cases. For instance, people researching NFTs often get search results for other types of tokens and related processes, such as tokenization. Even though tokenization and NFTs both have to do with tokens, they have completely different meanings and purposes. Let’s take a closer look at what NFTs and tokenization are and how they are different.

What Is an NFT?

A non-fungible token (NFT) is a unique digital asset that is owned by a person or group. These assets represent real-world items, including everything from artwork to tweets. Non-fungible tokens have unique identifying codes, like Bitcoin or Ethereum cryptocurrencies. Every NFT has a special digital signature stored in a smart contract, which prevents it from being equally exchanged for something else. These signatures provide proof of ownership of an NFT. Indeed, NFTs are a more reliable way to buy and sell on the Ethereum blockchain market compared to other blockchains that do not maintain public transaction records for each token.

Creators have a great opportunity to promote their digital work, while buyers have access to owning one-of-a-kind artwork that no one else owns. As you can see, this creates a limited supply of digital assets. Indeed, this appeals to prospects that want to support artists and invest in NFTs. However, this may exclude those with less excess funds to purchase non-fungible tokens that range from a few dollars to millions of dollars. For example, this CryptoPunk NFT sold for a whopping $11.8 million, which is a randomly generated image of 10,000 unique pixelated characters.

Types of NFTs:

• Artwork
• GIFs
• In-game items
• Music
• Real estate
• Trading cards
• Tweets
• Video clips

What Is Tokenization?

Unlike NFTs, tokenization refers to a process of securing sensitive data, rather than representing irreplaceable digital assets. Specifically, a tokenization platform will exchange customers’ sensitive data for nonsensitive data known as “tokens.” Tokens contain randomly generated numbers that have no value or association with the original data. This is different from encrypted data, which can be deciphered by a skilled hacker. Indeed, tokens cannot be deciphered because there is not mathematical correlation between the token and the original data. Thus, tokenization is an effective security solution to protect customers’ sensitive data from cyber attacks, such as data breaches.

No matter what type of business you own, you likely store some type of sensitive data that needs to be safeguarded from cyber criminals. By partnering with a tokenization provider, your tokens can be safely stored and managed in a secure third-party database away from your internal systems. Thus, your business can continue to use the tokenized data for business purposes without the security risks associated with a breach or strict compliance requires of storing sensitive data in your internal environment.

Types of sensitive data:

• Credit card numbers
• Driver’s license numbers
• Passport numbers
• Personally Identifiable Information (PII) – name, address, banking information, birth date, telephone number, etc.
• Protected Health Information (PHI)
• Social Security numbers (SSN)

How NFTs Work?

An NFT is created or “minted” from various digital assets that represent tangible and intangible objects from the real-world.

• Artwork
• Antiques
• Collectibles
• Fashion items (i.e., clothes, shoes, bags, etc.)
• GIFs
• In-game items (i.e., gear, clothes, pets, skins, etc.)
• Memes
• Music
• Precious metals (i.e., gold, platinum, silver, and palladium)
• Stills
• Tweets
• Videos
• Virtual avatars
• Written work

Rather than owning a physical item, NFT owners receive a digital file, which they have full ownership rights of that token. A non-fungible token can only have one owner at a time. Both creators and owners can add information to the NFT’s metadata. For example, an artist can add their digital signature to an NFT. This can help people recognize the artist’s work and build brand awareness among the digital art community. Due to each token’s unique data, people can easily verify and trace ownership, as well as transfer tokens to new owners.

Additionally, non-fungible tokens are stored on a blockchain, which is a digital ledger that keeps track of transaction records. Buyers and sellers use the blockchain to see who has owned a specific NFT. NFTs are typically stored on the Ethereum blockchain but can be supported by other markets too. Ethereum is a cryptocurrency that supports tokens like bitcoins, dogecoins, and NFTs.

How Tokenization Works?

Tokenization is a data security method that involves exchanging sensitive data with equivalent nonsensitive information called a token. The token contains randomly generated numbers that do not have any value, thus do not contain any of the original data. This process can be conducted using various methods, which ultimately depend on the provider’s approach and organization’s needs.

• Use a nonreversible function, such as a hash function
• Use an index function or randomly generated number

No matter which method is used, the sensitive data will be replaced with the token until the original data needs to be used, such as when a merchant needs to process a payment. At that point, the token will be returned to reveal the original sensitive data, which can then be used for business purposes.

Which Type of Token Do You Need?

We hope this article helped clarify the differences between non-fungible tokens and tokenization, which can be confusing. The type of token you need depends on the type, size, and needs of your business. For those looking to own digital assets, you will want to research NFTs on the blockchain market. If you are a business that stores sensitive data, consider partnering with a reputable tokenization provider.