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Physical tokens are used in many authentication schemes, usually in combination with other methods. In general, we can identify four methods of authentication:
|Something you know||PIN, password|
|Something you have||housekey, token|
|Something you are||Biometrics: fingerprint, iris scan|
|Something you do||The way you write your signature|
A single method is relatively weak, but two or more methods in combination give a much stronger assurance of identity. Thus, your bank ATM card is something you have, and the PIN is something you know - a theif cannot withdraw your money by just stealing your card (unless you wrote the PIN on the back of the card, most security schemes will fail when faced with user stupidity).
Tokens are also used for key storage - encryption algorithms depend on the secrecy of the keys, unfortunately, people are bad at remembering random 1024-bit binary numbers. By storing the key on a secure token, so that a password must be used to access it, the problem of remembering a long, random number is converted into the simpler problem of keeping the token and remembering a simpler password.
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