Tokenization is the process of replacing sensitive data, such as credit card numbers, with unique identification data while retaining all the essential information about the data. Because tokenization is a non-destructive form of obfuscation, data is recoverable via a unique security key.

To help explain this, think of tokenization as a secret code that uses a key to retrieve the coded message. The tokenized version of the credit card number has maintained its last four digits; however, the remaining numbers in the credit card number are random. The token is now safe to store in your database. Anyone who has access to this token alone cannot use it to compromise a credit card account.

To use these tokens to run a credit card transaction, the token must be mapped back to the original credit card number. A secure third party usually does this mapping.

Asset-Backed Tokens (ABT) are tokens that represent investment which are collateralized by a pool of assets, such as intangible assets, real-estate, royalties, or receivables. We call them ‘real-world assets.’

On one side, we have corporations looking to finance their operations, and on the other, we have investors who want to participate in a wide variety of income-generating investments backed by “real-world assets”. Because the underlying real-world assets are often illiquid and hard to be sold on their own, pooling assets together allows the owner of the assets to make illiquid assets marketable to investors.

So the issuer will create a ‘special purpose vehicle’ (SPV) and reside real world assets into this vehicle. On the other side, investors will just purchase financial instruments (right to earn interest or royalty) of this vehicle in a tokenized form.

Usually these instruments are grouped into different tranches with similar characteristics, such as maturity, interest rate etc. This is why we use a hybrid token standard to model these securities on the blockchain. Just about any cash-producing situation or asset can be put into such an SPV.

As in traditional finance, management needs to assess and plan the management of risks unique to digital assets which can be pooled together and deposited as collateral. Some of the risks are as follows:

Counterparty risk: Who and how the asset is governed, as ultimately, even in blockchain form, these assets tie back to real world assets that are linked to real world events.

Market risks: The price volatility of the collateral requires regular monitoring.

Technology and smart contract risk: These risks can be mitigated by auditing smart contracts ahead of their deployment.

NFTs, or non-fungible tokens, are digital tokens that are being used to uniquely represent ownership of items. They let us tokenize things like intellectual properties, art, collectibles, and even real estate.

Unlike other digital assets, NFTs can only have one official owner at any time. They’re secured with blockchain technology, meaning that no one can modify the record of ownership of an NFT.

Where money is fungible, NFTs, and the items they represent are non-fungible, an economic term used to describe things that can be uniquely identified, such as a song file, or a trademark registration, these things are not interchangeable for other items because they have properties that make them unique.