A growing number of digital asset startups are offering airline-like loyalty points in an effort to attract more loyal users, but most are unsure what the perks actually mean. I haven't defined yet what to do.
Loyalty programs were born in response to token airdrops, a once-popular marketing strategy in which projects distributed cryptographic tokens to users. But while regulatory scrutiny of the tokens themselves has increased, many airdrops have done little to retain users, causing the industry to reconsider the effort.
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The nascent points program already has its critics, with many users bemoaning a lack of transparency (most users don't explain what their points are used for) and experts saying the program itself has regulatory implications. It warns that it may pose a risk.
The trend started in November when a new blockchain project, Blast, lured users by awarding points. Even without a live blockchain, Blast has since collected more than $1.3 billion worth of cryptocurrency from users who can only guess what their points can be used for later. In a thread of posts on social media platform X, Blast simply said the points would be redeemed on May 24th.
The cryptocurrency community has criticized the Blast Points program as a marketing ploy to get people to commit tokens and refer new users. Some critics have even said that this approach is reminiscent of a pyramid scheme, but Blast founder Tishun Roquere denies this. X did not respond to a direct message seeking comment.
Despite the initial backlash, Blast’s success has inspired other new blockchain projects to launch loyalty points programs, including Manta and Mantle. Both projects have seen a dramatic increase in the total amount of crypto sent to their platforms over the past few months, with Manta gaining traction. Mantle received $312 million in tokens worth $1.59 billion, according to L2beat data.
Rookie points programs may be a sign that the industry is maturing, said Christopher Newhouse, an analyst at digital asset venture fund Cumberland Labs.
Marketing changes
“This is kind of a shift in that the product, strategy and marketing side of crypto is really starting to take over,” Newhouse said in an interview. “People are starting to think, 'Oh, yeah, how can we actually gamify this and get more people interested in using our protocol?'”
Loyalty points programs are not new outside of the cryptocurrency world, but they have not caught on in digital assets due to the popularity of token airdrops and the ability to easily bootstrap new users.
However, airdrops of tokens have some undesirable consequences, namely that some users known as airdrop farmers use the project just to get free tokens and then move on. This also led to low loyalty. Regulators are also paying attention to them.
The problem is hitting hard. The number of major token airdrop events decreased in 2023 compared to the previous year, according to data compiled by tracker CoinGecko.
The question is whether tokens are considered securities, and according to the U.S. Securities and Exchange Commission, most are. But none of them are registered as required by regulators. Switching to point rewards via airdrops makes things a little more ambiguous.
Emily Myers, general counsel at cryptocurrency venture fund Electric Capital, said, “If it really is Point, there are fairly well-established rules that projects can follow,” adding that Point's launch would be subject to U.S. securities laws. for token launches, he added, adding that it could be cheaper and faster than trying to comply. But if points are designed as a cryptocurrency without existing on a blockchain, “there is no difference in regulatory risk,” she says.
In fact, many projects that started loyalty programs were vague about the role of points. This has led to further speculation by crypto traders about the true value of cryptocurrencies. Platforms like Whales Market allow users to exchange points for different projects. For example, people can buy and sell points on the Whales Market for crypto project EigenLayer, which is worth an average of $0.1 each, without even knowing what the points can be used for. Project documentation states that EigenLayer points are a measure of a user's contribution to the project.
Matt Kuhnke, a research analyst at digital asset investment firm GSR, said they're basically saying, “We want to incentivize people, but we don't know what that incentive actually is and what they actually get out of it.'' “We haven't really committed to what we'll get,” he said. .
At the same time, past successful token airdrop events have proven to be a quick way to decentralize a project's token supply, something Loyalty Points has not been able to do. Additionally, most loyalty points programs are not recorded on the blockchain, making them more confusing. Therefore, unlike airdrops, it is difficult to estimate the size of the points market.
“Tokens are meant to convey ownership, are bearer assets, and can be operated in a decentralized system without relying on an issuer,” said Electric Capital’s Meyers. “However, points are under the exclusive control of the issuer and may be withdrawn or their value changed at any time.”
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