Understanding Blockchain & Crypto-tokens — and why Loyalty Programs need a Makeover

Let’s be real — loyalty programs today suck. For far too long, retailers and customers have been caught up in a web of complicated and meaningless points and rewards systems, non-personalized incentives, and outdated paper coupons that only end up in the bin.

Not anymore.

Future-focused brands and retailers today realize the importance of innovation, and are utilizing digital innovation and technologies to modernize their loyalty and rewards programs. After all, customer loyalty and engagement can make or break companies, and it only makes sense to retain existing customers, than to constantly invest into acquiring new ones. From experimenting with artificial intelligence to personalize and tailor rewards for customers, to using disruptive technologies like blockchain to streamline processes- brands and retailers understand that the loyalty space is ripe for innovation, and are trying to find solutions to the inefficiencies faced by programs today.

Rewards programs today are clunky, costly to operate, and extremely fragmented. What’s worse is that customers are more disengaged today than they ever were before…

Blockchain Technology is here to change that.

But before we talk about how blockchain technology can revolutionize traditional rewards programs, let’s dive into what exactly it is, and how it works

We all know that blockchain is “hot”, “disruptive”, “game-changing” (which it is), but what the heck is it really?

Blockchain, in a nutshell.

Think of a blockchain as an unchangeable and continuously growing list of records, where data can only be added, and it is nearly impossible to alter any previously entered data. For this reason, the technology is ideal for processing transactions, managing records, tracing assets, and recording events as they occur. The main thing to remember is that there is NO central party or authoritative figure controlling this list of records.

Very generally speaking, blockchain is a network of computers (also referred to as nodes) that all share the same history of transactions. Instead of a single database or party holding on to all the data, the information is shared across the entire network. Together, these computers form a decentralized database (also known as a digital ledger) of transactions that anyone who is a part of the network, can see. In order for any of these transactions to be completed, verified and recorded, all these computers (or nodes) must approve the transaction. Since the database is decentralized, it is not located in just one place, and is instead distributed across all the nodes in the network. Whenever a transaction takes place, it is validated by all participating nodes and is put ahead in that history of transactions within that network. This technology is revolutionary because it eliminates the need to have a trusted middleman or a third party, and enables all parties to safely conduct activities with each other without ever needing to trust one another. Because copies of every transaction exist and are simultaneously updated with each participating node in the network, the chances of fraud are greatly reduced.

Many people wrongly think that blockchain = Bitcoin. Simply put, Bitcoin is just a digital currency that is built USING blockchain technology. And there are thousands of these currencies out there. You can, in fact, trade any asset on the blockchain — not just digital currencies. It can be applied to all sorts of transactions that involve value and require transparency.

Think of blockchain as a new internet (it’s often known as Web 3.0), or a brand new set of technologies. You could visualize it as an immutable public ledger that records and validates all transactions in a chronological manner. The way in which this suite of technology can be used varies immensely, depending on the objectives and the purposes behind its implementation.

What is a cryptocurrency, and what is a token?

We can’t really have a discussion about Blockchain, and not mention cryptocurrencies or tokens, because of how closely associated they are. Cryptocurrencies are decentralized virtual/digital currencies that are secured using cryptography and reside on the blockchain. Bitcoin was the first decentralized cryptocurrency, and undoubtedly the most well-known, as it pioneered the distributed and decentralized model for digital currencies. Note that all coins and tokens are regarded as cryptocurrencies, even if they do not function as a currency or as a medium of exchange.

Generally speaking, tokens represent any tradeable and fungible asset or utility that resides on the blockchain. These digital assets can range from representing commodities, to loyalty points.

Utility tokens are tokens that can be used for specific functions in specific systems, and often represent future access to a company’s product or service. For example, last year, a company sold utility tokens that provide users with access to a decentralized cloud storage platform.

Now that we’ve covered the basics of blockchain technology and tokens, let’s explore how this technology has the potential to revolutionize current Loyalty and Rewards programs.

Traditional loyalty programs are facing a severe lack of customer engagement

Customer loyalty and engagement can make all the difference in determining how successful (or unsuccessful) an organization is. Brands understand this, and that’s why they pump billions of dollars into their rewards and loyalty programs, every year.

Then why is it, that more than half of the loyalty memberships in the US are inactive, while annual point redemption stays at a measly 3%? And are rewards programs even rewarding, considering that about 30% of consumers have abandoned a program without ever redeeming a point or a mile?

I mean, if the entire purpose of building a loyalty rewards program was to better the customer’s experience and get them engaged, then isn’t the exact opposite happening? What is causing this serious lack of customer engagement?

One word: Inefficiencies.

Traditional loyalty programs are extremely fragmented, highly expensive to operate and manage, lack digitization resulting in delays, are prone to fraud, and are very restrictive — all contributing to a very unfavorable customer experience.

I don’t want this getting too long, so I’ve broken this post up into two parts.

Click here to Read Part Two — where I go into detail on how blockchain technology can transform loyalty points programs — for both brands AND customers