The strength of loyalty points and the importance of correcting them

Notable DeFi projects such as Uniswap, Curve, Aave, and MakerDAO are down ETH terms since at least the first quarter of 2021. Some see this as a fundamental failure of the DeFi protocols to capture value and the inability to create trenches. There are questions about whether the configurable and open nature of cryptocurrencies prevents enough moats from ever being created.

I do not agree with this. I think DeFi projects have done a poor job of creating proven rewards and interest with their tokens.

In traditional markets, rewards and utility programs are called loyalty reward programs. In this article I will argue that loyalty rewards programs can not only create moats, but also become a core business of DeFi projects. The reason we haven’t seen this yet is because of a failure to understand how to properly use loyalty rewards programs. To support both parts of this argument I will examine the aviation industry.

Air Miles Rise

Modern frequent flyer programs (FFPs) were first introduced in the late 1970s. Although airlines have had customer tracking programs before, the main innovation of modern frequent flyer programs has been the use of mileage tracking to award rewards to their passengers. It was a smart marketing tool designed to create loyalty for the most profitable customer – the frequent flyer.

Since then, it has become more than just a tool to increase customer attraction. FFPs have evolved into a major revenue stream for airlines. For example, according to This paper is about frequent flyer programsIn the 2017-2018 fiscal year, Qantas Airways’ frequent flyer program accounted for 23.2% of profits entire Qantas Group.

Food for food programs now extend beyond the air travel industry to include tourism, banking, telecommunications, insurance and retailers. Air miles have become an economy of their own, acting as a virtual currency. looks familiar?

Why crypto loyalty tokens are superior to traditional tokens

Air miles are the most money-like loyalty points of any tradfi loyalty points, however they are only accepted with participating partners, and have minimum redemption, expiration dates, etc. The main innovation of loyalty tokens in the cryptocurrency world is that, since you can easily exchange them for cash, they are equivalent to real money. This means that loyalty points in the crypto world have the same power as real money to gain customers and motivate customer behavior. For projects that can’t reach the hundreds of millions of dollars in the VC runway, loyalty programs present a great opportunity.

Crypto Loyalty Programs Fail

My reasoning for this was partly derived from this Harvard Business Review article in loyalty rewards programmes. This quote summarizes the mistakes that some loyalty programs make in legacy and almost all crypto markets:

“[T]Many companies treat bonuses as short-term promotions or special offers for the month. In this way, rewards can create some value by motivating new or existing customers to try a product or service. But until they are designed to build loyalty, they will at best return a fraction of their potential value…a company must find ways to share value with customers in proportion to the value that customer loyalty creates for the company. The goal should be to develop a system in which customers are constantly educated about loyalty rewards and the motivation to earn them. Achieving sustainable loyalty, measured in years, requires a sustainable strategic approach.”

Important lessons

These are the highlights that I took from the Harvard Business Review article mentioned above. I am confident that if more projects start absorbing these lessons, they will be able to create and retain value in their project.

The value generated must exceed the cost of the rewards offered.

This seems obvious, but many (perhaps most) DeFi projects that have an element of loyalty break this first principle. Typically, the APY presents a very high risk profile in the hope that liquidity will remain enhanced and the project will achieve critical mass. However, the truth is that mercenary participants will dump your token and move on to the next APY project the moment your rewards dry up.

The only way to avoid this is to match the good old product to the product market. You can pave growth with loyalty tokens as incentives, but customers need a reason to stay.

Rewards should reinforce beneficial behavior of customers.

High-risk APY rewards are a common example of a maladaptive stimulus. In fact, multi-billion dollar crypto companies are putting hundreds of millions of dollars into new crypto projects, sucking up all the value, and moving on to the next stage. Your rewards are teaching participants to harm your project. Make sure that your rewards encourage beneficial behavior for the project.

Do you want your best customers to actively participate in governance, and thus feel more psychologically invested over time? You can consider the feasibility of rewarding them for their suggestions, votes, and outreach to the community.

Customers are not equal.

It is common for DeFi projects to integrate tiered reward systems, but rewards are often distributed linearly. The most effective model is to make graded rewards heavy. This provides a compelling reason for your most valuable customers to stay with you, but it also provides a strong incentive for your less valuable customers to climb the ranks – which leads to the last point:

Rewards must be ambitious.

From the HBR article:

“A company that offers mediocre value products and services to everyone wastes resources in excessively satisfying the least profitable customers while not satisfying the most loyal customers. The result is predictable. Highly profitable customers with higher expectations and more attractive options are a disadvantage.”

I’ve been amazed time and time again by some pedestrian bonuses on certain projects, such as one-month subscriptions to Netflix, Hulu, or Amazon Prime. Does this motivate people, not to mention users of high-end crypto? It certainly does not suit me.

How about rewards like a bottle of 12-year-old Yamazaki whiskey, or the new M1 MacBook Pro? Some quality rewards seem more attractive than the constant drip of mediocre rewards.

It is often jokingly said that crypto is the speed that runs the entire history of the ancient financial system. I think this is not limited to the financial markets. Work done in legacy markets on loyalty programs provides a proven path to loyalty and profitability. I am confident that in short term crypto projects they will be run quickly to victory.

Dennis Jarvis CEO

Dennis is an accomplished CEO who is passionate about building excellent teams of people and promoting economic freedom through cryptocurrency adoption. Dennis joined in 2018 as Chief Product Officer, and became CEO of in 2020.

Since 2015, has been a world leader in introducing newcomers to crypto. By offering accessible educational materials, objective and timely news, and intuitive, self-guarded products, we make it easy for anyone to buy, spend, trade, invest, earn, and stay current on cryptocurrencies and the future of finance.

photo credits: Shutterstock, Pixabay, Wikicommons

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