Types of Tokenization for Commerce, NLP, and Blockchain

Tokenization is the process of representing something of value with a physical or digital token. The many types of tokenization in use all spur from a basic human need to exchange goods.

Humans once relied on the bartering system to obtain goods. The system had a few glaring issues. For example, let's say one person had lots of animal furs and wanted milk, but their local dairy farmer had plenty of furs. The fur trader couldn't get milk without trading his furs for something else first. Coins, or tokens, were created so humans could buy and sell goods more efficiently.

Nowadays, we use tokenization in many ways. In this article, we'll look at the types of tokenization that relate to distributed ledger technology, finance, and natural language processing.

Blockchain tokenization types

Nowadays, blockchain technology is likely the first thing that comes to mind when you hear the word "tokenization."

Blockchain tokenization is the process of representing physical and virtual assets as tokens that live on the blockchain. Asset tokenization has various use cases for industries such as real estate, art, insurance, and agriculture.

NFT tokenization

Non-fungible tokens (NFTs) have gained a lot of attention over the past couple of years, with some selling for millions of dollars. Still, this concept has practical applications outside of creating digital versions of artwork. For example, an NFT can be used to represent individual real-world assets like properties, diamonds, and collectibles. Representing these assets with immutable tokens ensures seamless transfers between individuals.

NFTs could also be used to create a virtual identity token that could be used to pay taxes, renew licenses, or receive medical attention. These processes could be automated if the user had their digital identification NFT in their wallet. The provider's website could use a smart contract that immediately recognizes the individual based on their unique ID NFT.

Governance tokenization

Governance tokens allow stakeholders, such as investors, to make decisions about managing a particular project. Decentralized autonomous organizations (DAOs) often use these tokens to drive their decision-making process. In many cases, a user's voting power is determined by the number of governance tokens they own.

Many projects reward users with governance tokens if they participate in the project's ecosystem. Still, in most cases, these tokens can be bought on cryptocurrency exchanges and traded to other users.

Governance votes are generally managed with smart contracts that automatically count the total token balance committed toward a specific vote.

Utility tokenization

Blockchain protocols or ecosystems create utility tokens to serve a specific purpose within that ecosystem. The applications range from unlocking perks in decentralized applications to tipping creators. For example, a web3 game developer can release its own tokens for players to buy upgrades and in-game items. In many cases, utility tokens are built on a pre-existing blockchain and aren't mined into existence.

Platform tokenization

Platform tokens are built on top of other blockchains. They can also fall into the utility or governance categories. For example, Brave's Basic Attention Token (BAT) is a platform token built on the Ethereum blockchain network. Still, it's also a utility token used for tipping creators and rewarding users who view ads within the Brave Web Browser.

NLP tokenization types

Natural language processing (NLP) is a branch of artificial intelligence that uses machine learning algorithms to understand and interpret human language and text data. Tokenization plays an essential role in the NLP pipeline. Computer programs carry out several NLP tasks, including dissecting words in different ways to understand their meanings and sentiment analysis to determine emotional context.

Sentence and word tokenization

Sentence tokenization is the process of splitting textual data into the sentences that make it up.

Word tokenization is the most common form of NLP tokenization. It involves taking natural breaks from pauses in speech or text and splitting them into words using delimiters. The accuracy of this method is based on the number of words loaded into the AI's vocabulary.

Subword tokenization

Subword tokenization breaks words into smaller chunks that help indicate their meaning. For example, suffixes like "est," "ing," and "ism" are broken off to help programs understand a word's function. This method makes it easier for machine learning programs to understand terms outside their vocabulary since it can break unknown words into an unknown word token and a second token indicating the word's function.

Character tokenization

Character tokenization breaks each word into the characters used to spell it. This method eliminates problems that arise when an AI is missing words in its vocabulary. That comes at the cost of dramatically increasing the number of tokens in the program's output. For example, if a machine learning program used word tokenization to interpret "I love pizza," it would break the sentence into three tokens. But if it used character tokenization to interpret that same sentence, it would break it into 10 tokens.

Whitespace and punctuation-based tokenization

Whitespace tokenization is a straightforward way for developers to separate words in written text. Instead of using characters like commas or semicolons as delimiters, they simply use the white space between words.

The punctuation-based tokenizer method is similar to whitespace tokenization but uses white space and punctuation to split sentences into words.

Tokenization for payment processing

Traditional payment processing includes the use of cash, checks, credit cards and debit cards. Payment tokenization offers increased speed and security for ecommerce businesses and many other enterprises. It's a process that protects sensitive data by generating a temporary code that's used in place of the original data. When you pay with a debit card at the grocery store, for example, tokenization can be used to authorize the payment.

First, your payment information, including a primary account number, is collected at the point of sale. Next, the checkout platform generates a payment token, a series of random characters, that is sent to the payment processor. Your original sensitive data is stored in the payment processor's vault, where it can be used to verify the token in the ACH (Automated Clearing House) network. Once the ACH network authorizes the payment, the merchant, payment processor, and customer are notified that the payment is complete.

These steps happen almost instantaneously. Still, vault tokenization can slow down the processing time a little. It also can make customers' sensitive information vulnerable to data breaches. Many payment processors now use a vaultless tokenization process that generates tokens based on an algorithm. That eliminates the need to store the actual payment data anywhere.

Explore the types of tokenization

Distributed ledger technology has accelerated tokenization, making it accessible to nearly everyone. The Hedera Token Service (HTS) makes it easier than ever for project owners to configure, mint, and manage fungible and non-fungible tokens. HTS eliminates the unpredictable fees associated with many DLTs. Tokens can be transferred quickly and securely for less than a penny.

Asset tokenization on Hedera offers performance, security, stability, and low, predictable fees as you work with native fungible tokens and NFTs.