Blockchain Tokens vs. Points Programs — 9 reasons why companies and customers should care
One of the clearest use cases for blockchain tokens is as a replacement to the points systems used in loyalty programs worldwide. (Note: In this article “blockchain tokens” refers to public blockchain tokens on a decentralized trustless network, not private-chain tokens).
In this article I present 9 big differences between blockchain tokens and traditional loyalty programs, and why blockchain tokens represent the future of customer loyalty.
Everyone reading this article has probably experienced ‘earning’ air miles, hotel reward points, or grocery store rewards. Many points programs have been running for decades, and countless millions of people have benefitted from them.
So why do I put the word ‘earning’ in quotes?
Today’s points programs are centralized black boxes designed to favor the issuing company, not the consumer. The points you ‘earn’ are stored in the issuing company’s database. It is true that the company owes you some value for these points, this is evident on the company’s balance sheet, where there is a deferred liability representing the fair market value of all the outstanding points issued to their customers. (In non-accounting speak this means that the company is acknowledging that they do indeed owe a certain amount of value for each point that a customer holds.)
Most people reading this have probably also experienced when an issuing company decides unilaterally to devalue each point that you ‘own’.
The points you thought you had earned, and that you probably thought you owned, can be devalued, or even worse taken away from you, depending on the company’s program rules. If you read the Terms of Service for the points program of any large company you will see an almost limitless number of caveats, get outs, and flexibility that the company has over ‘your’ points.
They can devalue them, retire them, reduce the number of ways you can redeem them. They can in almost every case do whatever they want.
When an airline emails all their supposedly valued customers to inform them about some impending changes to their points system, do they admit that they are devaluing the value of a point? Or do they make it so complex that one cannot begin to work out what the overall effect will be?
Most companies do the latter.
Most programs also retire your points after a certain point in time.
Would you accept your bank retiring some of your hard-earned money if it sits in your bank account for over a year?
This would, of course, cause widespread outrage, however, it’s exactly what most companies do, and have done for decades with their points systems. Most points programs have closed, centralized, non-public databases.
With blockchain tokens, there’s a key underlying principle: You earned it, you own it.
Once blockchain tokens are in your wallet, they belong to you. The issuing company cannot expire them nor revoke them.
Even if the company were to change the redemption value of your tokens or even end the program altogether, you still have ownership of the value of your tokens, and you can always redeem the tokens for that value.
Key difference #1: Ownership
● Points: User does not own their points and has no rights to any value of the points except on the issuing platform.
● Tokens: Once someone owns a blockchain token, it is theirs, and it can never be taken away from them
Key Difference #2: Expiration
● Points: Most points systems reserve the right to expire points after a period of time, or a period of inactivity
● Tokens: Cannot be expired by the issuing company, your ownership of your token is recorded on an immutable (i.e. cannot be changed) blockchain
Key Difference #3: Open
● Points: The issuing company has a closed database that records points ownership
● Tokens: Your ownership of your token is openly recorded on a public blockchain, no one can decide to make ‘behind the scenes’ changes that cannot be tracked
At OST we believe that legacy points and loyalty systems are a relic of a centralized age.
We believe they are extremely non-customer centric, and lead to a reduction in customer loyalty metrics like Net Promoter Score™, a metric used by almost the entire Fortune 100.
We also believe that blockchain technology can be used to solve this situation in a far more customer-centric manner.
The most customer-centric companies tend to win vs. their competitors, just look at Amazon as a great example (Amazon, renowned for its customers-first policies, now drives more than 50% of all U.S. e-commerce sales).
So surely companies should be crying out to launch more customer-centric programs?
Before we dive into this, let’s look back at the last 25 years of the Internet.
In the 1990’s web 1.0 allowed anyone with an internet connection to consume online content, and then in the mid-2000’s web 2.0 allowed anyone to contribute User Generated Content (UGC) to the web — increasingly on a mobile device too.
We are now set for the web 3.0 revolution which will give power back to the people, whether your data, your content, or your points: You will own it and you will decide how it is used.
Blockchain technology lies at the heart of the coming customer-first loyalty revolution
Imagine a web 3.0 world where you are not rewarded with points, rather with Branded Tokens. For instance, “Unsplash Token,” from the Unsplash photography website, or “Hornet Token” from the Hornet app. These tokens are different from points in that once issued they have real-value that the company cannot arbitrarily change. And, once given to you (for instance for loyalty), they are entirely yours. The issuing company cannot take it away from you. They cannot retire it.
With a blockchain token, the company cannot arbitrarily change the rules on its customers.
There is an added benefit to blockchain tokens having real world value, and that benefit is interoperability with other loyalty programs that are powered by blockchain tokens.
Key Difference #4: Interoperability
● Points: Loyalty points can only normally be used only with that business
● Tokens: Branded Tokens could be swapped for other cryptocurrencies. For instance, Branded Tokens launched using OST technology can always be swapped for the OST token and for ETH, BTC, other cryptocurrencies
When Branded Tokens are added to websites and apps, users will be able to earn tokens for their contributions and loyalty. Depending on the app or business, many users could even earn enough in tokens to pay their rent or to provide them with supplemental or full income.
And, again, since the blockchain tokens have real value, users would be able to not only convert them to cryptocurrencies, but even to their local “fiat” cash currency such as $USD or €Euro that they pay their bills with.
This is in sharp contrast to most points programs which either make it exceptionally hard if not impossible for their users to obtain cash for their points, or provide just a small fraction of the points’ real worth in exchange for converting them to cash.
Key Difference #5: Cash out (liquidity)
● Points: Loyalty programs do not normally provide a mechanism for earners to convert points into fiat currency without giving up considerable value
● Tokens: OST is building capabilities for Branded Tokens to be “cashed out” for cryptocurrencies and for fiat (e.g. USD, EUR, etc)
Transforming Points From Liabilities to Assets
Why do points programs go out of their way to erode the value of their points, to make it hard to spend them, and if you convert them out of the system the value you receive is often vastly lower than it should be?
The answer is simple, most companies think in a centralized manner, a manner where they want to be in control, and in the case of points, they have a genuine and often sizable balance sheet liability that they want to reduce. The world’s largest airlines have literally $Billions of liabilities from their points programs.
That is a lot, it’s material to the company, and Executives want to reduce it.
That speaks to the next major benefit of using tokens instead of points. Blockchain tokens — once issued to a company’s customers — are owned outright by the customer, therefore there is zero liability on the company balance sheet.
We have in one fell swoop removed this ugly consequence of centralized points systems.
Key Difference #6: Financial accounting treatment
● Points: Loyalty points normally form a balance sheet liability and associated deferred revenue for the company
● Tokens: Branded tokens do not impact the company balance sheet as the users directly own the tokens
So several company departments should be rejoicing over Blockchain tokens:
● Finance, as they can clean up their balance sheet
● Marketing, as they can have a much more customer-centric loyalty program, giving the power back to the people
● Operations, as the interoperability of tokens is vastly more simple and automated than points (large companies have armies of humans manually processing points redemptions)
Towards a More Transparent Future
Another benefit is that the total blockchain token issuance is on a public blockchain, therefore anyone can see how many are outstanding at a point in time, and there is full transparency into the program and its history. Likewise, any customer can easily view and audit their own token transaction history.
Key Difference #7: Transparency
● Points: Users have to trust the system and have limited visibility into the ledgers and transaction history
● Tokens: Transactions are recorded on public blockchains. Users have full, open, transparent access to the entire transaction history
Key Difference #8: Trust
● Points: Ownership is recorded on the business’s central database. Users have to trust that the entity will not change the rules
● Tokens: Ownership is recorded on the public blockchain in a decentralized manner, trust is naturally present as the rules cannot be unilaterally changed
Finally, corporates having their databases hacked is a far too common occurrence.
In a decentralized world, where there are 1,000s of copies of each blockchain around the world, it becomes incredibly hard to hack and alter the data.
This further cements the principle that when you have earned a token, it is yours, you decide what to do with it, and no one can take it away from you (not even a hacker).
Key Difference #9: Security
● Points: Databases regularly get hacked, customer data is stolen, privacy is breached and can even be erased or altered by hackers
● Tokens: Ownership data is replicated across many ‘nodes’ around the world, which is a highly secure system
Putting Customers First
Not all companies may initially like all of these benefits of Blockchain Tokens, but customers will love it.
I believe that progressive companies will lean in and embrace it, heralding a new era for customer-centric loyalty programs, and ultimately help such companies transform their communities into dynamic ecosystems.
Which type of company do you, the customer, want to do business with?
I hope this article has helped outline some of our thinking about points vs. tokens, and why we believe a token-based loyalty system makes more sense for consumer-centric companies.
Please feel free to replicate this content and use parts (or all) of this article, we just ask that you attribute us fairly if you do.
If you are interested in exploring the benefits of tokenizing your business then please email us at email@example.com
OST blockchain infrastructure empowers new economies for mainstream businesses and emerging DApps. OST leads development of the OpenST Protocol, a framework for tokenizing businesses. In September 2018 OST introduced the OpenST Mosaic Protocol for running meta-blockchains to scale Ethereum applications to billions of users. OST KIT is a full-stack suite of developer tools, APIs and SDKs for managing blockchain economies. OST Partners reach more than 200 million end-users. OST has offices in Berlin, New York, Hong Kong, and Pune. OST is backed by leading institutional equity investors including Tencent, Greycroft, Vectr Ventures, 500 Startups.