ETH values have fallen for DeFi-related projects MakerDAO, Curve and Curve in a range of cryptocurrencies since Q1 2021. This is a result of DeFi protocol’s inability to generate moats and capture value. Some question whether crypto’s open-source nature and its composability make it difficult to build enough moats.
I don’t agree with this. DeFi projects did a terrible job creating sticky rewards for tokens and utilities.
Loyalty reward programs are used to describe utility and rewards schemes in traditional markets. This article will show that DeFi’s core business can be made more profitable by loyalty reward programs. The reason we haven’t seen this yet is because of a failure to understand how to properly use loyalty rewards programs. Both sides of the argument can be supported with a look at the airline industry.
Air miles are on the rise
FFPs (frequent flyer) are a new type of frequent flyer program that was introduced in late 1970s. While airlines have programs that track their customers, modern frequent flyer programmes use miles tracking to reward its passengers. It was a clever marketing tool designed to create loyalty in the most profitable customers – the frequent flyers.
FFPs have evolved to be more than just a way for customers to stay loyal. Airlines have made FFPs a significant source of revenue. According to This paper focuses on frequent flyer programmes, in the financial year of 2017-2018, Qantas Airways’ frequent flyer program accounted for 23.2% of the profit for the Complete Qantas Group.
FFPs extend beyond air travel into banks, tourism, banking, telecommunications and insurance. The virtual currency of air miles has become an economic entity. Are you familiar with this?
Crypto loyalty tokens outperform traditional ones
While Air Miles are most similar to money, they can only be accepted by participating partners and have minimum redemption thresholds, expiration dates, etc. Because you can quickly cash them out in fiat, the loyalty tokens of crypto are equal to real money. Loyalty points can also be converted to fiat currency for real money, which allows them to have the same effect as real cash in order acquire customers and encourage customer behaviour. For projects that don’t have access to hundreds of millions of dollars in VC runway, loyalty programs present a huge opportunity.
Failure of crypto loyalty programs
I have partly gotten this information to inform my thoughts about it Harvard Business Review ArticleReward programs for loyalty. This is a summary of the errors that many loyalty programs in legacy and all crypto markets make.
“[T]A lot of companies consider rewards to be short-term promotions or month-end specials. Reward programs can be used to motivate customers (new or existing) to use a product or service. But until they are designed to build loyalty, they will return at best a small fraction of their potential value… A company must find ways to share value with customers in proportion to the value the customers’ loyalty creates for the company. Customers must learn about loyalty rewards, and be motivated to get them. This is the goal. Achieving sustainable loyalty, measured in years, requires a strategic sustainable approach.”
Important lessons
These were the main ideas that I took from the HBR article. I’m confident that if more projects begin to internalize these lessons, they’ll be able to create and retain value in their project.
The value created should be greater than the reward received.
It may seem obvious but DeFi projects with loyalty components break this first principle. In order to ensure that enough liquidity is available for the project, it’s common practice for DeFi projects with a loyalty component to provide staking at a very high rate of return. However, the reality is that most mercenary members will abandon your token in exchange for the next project with a high APY.
This can only be avoided by good product-market match. Bootstrap growth can be achieved by using loyalty tokens, but customers have to feel compelled to stick around.
Customer behavior should be reinforced by rewards
The pervasive use of high-APY staking reward rewards is an example of a maladaptive incentifu. Enormous crypto firms invest billions of dollars in crypto projects. They then take all of the money and transfer it on to another project. You are encouraging participants to do harm to your project by rewarding them. Be sure to reward behavior that benefits the project.
You want to make your customers feel more invested in the future by encouraging them to participate actively in governance. It might be possible to reward them for their votes and contributions.
Customers do not all have the same needs.
It’s common for DeFi projects to integrate tiered rewards systems, but all too often rewards are distributed linearly. Tiered reward systems should not be distributed in a linear fashion. A better model would be to place tiered rewards at the top. This provides a compelling reason for your most valuable customers to stay with you, but it also provides strong incentive for less valuable customers to climb the ranks – which leads to the final point:
It is important to have aspirational goals for your rewards.
HBR Article:
”A company that offers average-value products and services to everyone wastes resources in over-satisfying less profitable customers while under-satisfying the more valuable loyal customers. It is easy to predict the outcome. Highly profitable customers with higher expectations and more attractive choices defect.”
I’ve been repeatedly struck by some of the pedestrian rewards in some projects, such as Netflix, Hulu, or Amazon prime 1-month subscriptions. Do you think that this motivates people? It certainly doesn’t for me.
You could get a Yamazaki 12 Year whiskey or a brand new M1 MacBook Pro. It’s more attractive to have a few high-quality rewards than just a steady stream of low quality ones.
It’s often joked that crypto is speed running the entire history of the legacy financial system. I think this isn’t limited to financial markets. Legacy markets have a track record of loyalty programs that has proven to be profitable and loyal. I’m confident in short order crypto projects will speed run through them to victory.
Dennis Jarvis
Bitcoin.com’s Chief Executive Officer
Dennis is an experienced executive and is dedicated to building great teams of people, as well as promoting economic freedom via cryptocurrency adoption. Dennis became the Chief Product Officer of Bitcoin.com and was promoted to CEO in 2020.
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