Mental model for web3: 'Tokens' are loyalty points on steroids

Considering using tokens for your business? One way to thinking about it is the traditional loyalty points program. If that fits your business, then maybe tokens are interesting to explore.

Stop and think about loyalty points for a second. Where do you see them?

Start simple. Your local cafe probably has a stamp card for every cup of coffee you purchase. Buy 10 cups, get one free. That’s a ~9% return. Make that a bit more complicated and you get Starbucks Rewards. Think bigger, and now you get hotel point programs like Marriott Bonvoy or airlines like Singapore KrisFlyer. Make it more complicated and you get the credit or ‘gold’ system of most mobile or social games like Fortnite.

Fundamentally, the humble stamp card is no different to Singapore’s KrisFlyer. They are all just games to incentivize good things for the business in exchange for consumer rewards. Buy more coffee or airline flights, and get rewarded for it.

Tokens and tokenomics are just that—a system to create positive growth loops.

So what’s the big deal and crypto? Why are we reinventing the loyalty points system when it’s being done well already?

Correction. It’s done well-ish.

Reward systems are walled gardens

Airline miles programs are a good example

So you’ve got $1,000 worth of airline points. But, you can’t travel. Now what? It expires in a month and the only possible way to spend it is through the airlines ‘rewards shop’. For some reason, your points can only get you an ugly umbrella and a cheap-looking travel bag.

Gee… why can’t I just sell my points to someone who can use it? Or maybe just swap it for hotel points or Amazon credits so I can actually use it? Traditional point systems are a walled garden. Looks great on the inside, until you need to get out.

To be fair, sometimes the umbrellas are pretty good and sturdy. Usually quite big which are great for super rainy days.

But the same goes for other reward systems

Think about your credit card points. Depending on the partnerships your bank has with vendors, the 50,000 bank points you have could exchanged for tacky mugs or unwanted low tech earbuds. But if you don’t use the points, you just lose them.

Online games are another great example. Buy ‘gems’, ‘credits’, ‘gold’, or whatever you call it, but you can only use it within each game. When you get bored of playing? Too bad, that’s sunk cost. You can’t even just gift you character worth $500 of upgrades to a friend.

Your points are at the mercy of the boss

If your credit card, airlines, or local cafe decides to stop to honor your rewards points, then that’s it. There’s nothing you can do about it. They can even just constantly devalue the points you already have.

Value of Marriott Bonvoy Hotel Points decreasing over time (based on NerdWallet)

Where you can spend your points are also out of your control, even if a counter party was willing to accept it. For example if a competing hotel program wanted to steal you away from Marriott Bonvoy, they wouldn’t be able to accept your original points. (Well, technically they can just match your benefits. But this is highly manual and you’d be able to ‘double spend’ your points—get benefits from both sides)

And a bunch of other problems with existing rewards systems

Creating new integrations. Choice and variety is usually important for reward systems. People want different stuff to spend points on. Expanding the ecosystem has multiple challenges. One of which is the technical aspect of getting new partners on board. Each vendor has their own system. Often, it takes time and resources to get hooked up to the rewards network.

Ensuring transparency. What if your points provider just prints new points? What if they just create new rules like shortening the expiration date? The systems which run these reward programs are usually opaque and beyond the control of the consumer.

Enabling creativity and new use cases. Reward points are just that—points. Reward programs today are an unoriginal as you can get. Exchange your points for these one or two valuable things like flights or hotel stays. Then, there here are a bunch of random items fill up the webpage.

Think of web3 as one way to fix a lot of these traditional reward system problems

There are two key characteristics of web3 that fixes (and supercharges) traditional reward programs: Interoperability, and composability.

Interoperability. Since blockchain tech today generally follows the same standard way of building apps, it’s much easier to get web3 things to work together. For example, a point or ‘token’ of one reward program can easily be converted to another. (I say easy, but there are other challenges here which we can talk about another day)

No more walled gardens.

Composability. Blockchain tech is usually open source which means builders and new apps are free to create solutions that can accept your tokens or points out of the box. So your hotel tokens could be exchanged for a new streaming app subscription if the developers of that new app so allowed.

And then you can get creative…

A web3 banking app could come and allow you to deposit your hotel rewards tokens, and then they could offer to provide interest for that deposit—effectively treating it as cash. They could even give you their own reward tokens in exchange.

But why stop there?

The same banking app could let you borrow money and use those hotel reward tokens as collateral.

You know what’s crazy?

This isn’t even theoretical. These wacky combinations of different tokens and building on top of each other is already happening in web3.

Move to web3 where reward points are more fun.

If you thought this was interesting, share the fun and…

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I also post web3 stuff in Twitter: @nigelwtlee