Loyalty Points

Unlike static points, on-chain loyalty points are governed by smart contracts that define their behavior. This enables:

• Automated distribution based on predefined rules (e.g., trading volume, liquidity provision).
• Conditional logic for unlocking rewards or governance rights.
• Composability with other DeFi protocols, allowing points to be used as collateral or staked in yield-generating strategies.

A core design feature is soulbinding, which restricts transfer between wallets. This ensures:

• Sybil resistance by tying rewards to unique user behavior, preventing farming by bots.
• Accurate user attribution, as points reflect the genuine economic activity of a single entity.
• Regulatory clarity, as non-transferable assets may not be classified as securities in some jurisdictions. Transferability can be enabled later via a governance vote or token migration event.

Points often function as a provisional governance token, granting holders the right to vote on protocol proposals before a formal token launch. This creates a meritocratic system where voting power is earned through protocol usage. Key mechanisms include:

• Snapshot voting using point balances as weight.
• Delegation of voting power to representatives.
• Proposal thresholds based on minimum point holdings.

Points typically represent a claim on future value, with a predefined redemption mechanism. Common models are:

• 1:1 conversion to a native protocol token upon its launch (a "token airdrop").
• Tiered redemption where point totals unlock different reward baskets or NFT badges.
• Burn-and-mint mechanics, where points are destroyed to mint the final token, with the exchange rate potentially influenced by governance.

All point accrual and distribution is recorded on a public blockchain, providing full transparency. This allows any user or analyst to:

• Audit the issuance schedule and total supply via block explorers.
• Verify their own balance and calculation methodology independently.
• Track whale accumulation and potential centralization of future governance power.

Point programs often operate in discrete epochs or seasons, which are fixed time periods (e.g., 30-90 days). This structure enables:

• Campaign-based rewards for specific behaviors during a promotional period.
• Progressive dilution where points earned later may be worth less to incentivize early adoption.
• Clear reset periods for recalculating user rankings and distributing rewards, preventing infinite inflation.

The foundational mechanism where users earn points as a direct reward for transactions. This is often automated via smart contracts that mint or transfer tokens based on purchase confirmation.

• Direct Minting: Points are minted on-chain upon payment settlement.
• Tiered Multipliers: Higher spending tiers unlock increased earning rates.
• Example: A coffee shop DApp mints 10 loyalty tokens to a customer's wallet for every $1 spent.

Points are awarded for non-transactional actions to drive platform interaction and community growth. This turns engagement into a quantifiable, rewardable asset.

• Actions include: Completing a user profile, referring friends, writing reviews, or participating in governance votes.
• Programmability: Smart contracts can enforce complex rules, like bonus points for streak-based logins.
• Utility: Builds user habit and data while distributing rewards transparently.

Loyalty points can be staked or locked to generate additional rewards, creating a flywheel effect for user retention. This transforms static points into productive capital.

• Staking Rewards: Users lock points in a smart contract to earn more points or a secondary reward token.
• Enhanced Benefits: Staking often grants access to exclusive tiers, products, or governance rights.
• Capital Efficiency: Allows the loyalty program's treasury to utilize locked capital for other protocol activities.

The core utility: points are burned or transferred to redeem real-world value. On-chain redemption enables precise inventory and reward pool management.

• Direct Burn: User sends points to a burn address to unlock a discount code or NFT voucher.
• Marketplace Integration: Points can be spent in a dedicated Web3 marketplace for digital/physical goods.
• Transparent Supply: Businesses can track redemption rates in real-time to manage liability and demand.

Because points exist as standard tokens (often ERC-20), they can be traded on decentralized exchanges (DEXs) or NFT marketplaces. This creates liquidity and a market-driven valuation.

• Peer-to-Peer Trading: Users can sell unused points to others who value them more.
• Price Discovery: Market trading establishes a clear monetary value for the loyalty currency.
• Consideration: Businesses must design around regulatory implications (e.g., securities laws) when points are freely tradable.

Loyalty points built on open standards can be used across multiple partnered brands and applications, breaking down traditional walled gardens.

• Composable Rewards: Points earned from one brand's DApp could be used to pay for services in another's.
• Infrastructure: Enabled by shared blockchain networks and cross-chain messaging protocols.
• Example: Airline points used to book a hotel via a separate, integrated travel protocol.

Loyalty points are non-transferable, non-tradable tokens issued by a protocol to track and reward specific user actions. Unlike fungible tokens, they are typically soulbound to a wallet and represent a claim on future value, such as airdrops, governance power, or exclusive access. Their primary function is to align user incentives with protocol growth without immediate monetary speculation.

Protocols deploy points programs to quantify contributions. Common actions that earn points include:

• Providing liquidity to pools
• Trading on a decentralized exchange
• Borrowing or lending assets
• Referring new users
• Completing on-chain quests or tutorials Points are accrued in a backend database or via a non-transferable ERC-20/ERC-1155 token, creating a transparent ledger of user engagement.

Points serve multiple strategic purposes for a protocol:

• Airdrop Proxy: A common precursor to a token distribution, where points often determine allocation size.
• Engagement Funnel: Drives specific, growth-oriented user behavior (e.g., volume, liquidity depth).
• Loyalty Lock-in: Creates switching costs by building user-specific equity within the ecosystem.
• Data Source: Provides a clear metric for analyzing the most valuable user cohorts.

Points are implemented either off-chain in a centralized database (cheaper, flexible) or on-chain via smart contracts (transparent, verifiable). On-chain models often use:

• Non-transferable ERC-20 tokens with mint/burn functions restricted to the protocol.
• Soulbound Tokens (SBTs) or ERC-1155 for non-fungible reputation.
• Merkle trees for efficient proof-of-points during airdrop claims, where the root is stored on-chain.

Blur used a points system to reward NFT marketplace bidding and listing, which directly correlated with its BLUR token airdrop. EigenLayer awarded EigenPoints to restakers, influencing future airdrop allocations. friend.tech issued points based on key purchases and trading volume. These systems demonstrate how points act as a veiled incentive mechanism before a token launch.

Points farming is the user strategy of optimizing behavior purely to accumulate loyalty points, often in anticipation of a future airdrop. This can lead to:

• Sybil attacks: Users creating multiple wallets to farm points.
• Wash trading: Artificial volume to inflate point accrual.
• Mercury liquidity: Capital that quickly enters and exits a protocol post-reward. Protocols combat this with anti-Sybil measures and time-based vesting for rewards.

Points are issued as standard fungible tokens (e.g., ERC-20) on a public blockchain. This model provides full transparency and programmability but requires users to manage gas fees for transactions.

• Examples: Starbucks Odyssey's Siren Collection (Polygon), Air France-KLM's Flying Blue NFTs.
• Pros: Fully composable, can be traded on DEXs, and integrated into DeFi protocols.
• Cons: User onboarding friction due to wallets and gas fees; points are publicly visible.

Points are tracked in a traditional database, but key actions (issuance, redemption, transfers) are cryptographically proven and settled on-chain. This hybrid model balances scalability with verifiable integrity.

• Mechanism: A Merkle Tree root of user balances is periodically committed to a blockchain (e.g., via a smart contract). Users can submit Merkle proofs to claim or redeem points without constant on-chain transactions.
• Pros: Low transaction costs, familiar user experience, with cryptographic auditability.
• Cons: Less real-time transparency than fully on-chain models.

Programs are built on high-throughput, low-cost networks like Polygon, Arbitrum, or Base to mitigate the gas fee and scalability limitations of Ethereum Mainnet.

• Purpose: Enables micro-transactions and complex gamification logic that would be prohibitively expensive on Layer 1.
• Example: Starbucks Odyssey is built on Polygon, allowing minting and trading of collectibles with minimal fees.
• Trade-off: Introduces dependency on the security and decentralization of the chosen Layer 2 or sidechain.

Points or achievements are issued as non-transferable tokens bound to a user's identity (e.g., an Ethereum Address). This prevents point farming and secondary market speculation, preserving program integrity.

• Concept: Popularized by Vitalik Buterin, SBTs represent credentials, memberships, or reputational points.
• Use Case: Ideal for tiered status levels (e.g., Gold, Platinum) or proof of participation in brand events.
• Implementation: Can be built using standards like ERC-721 or ERC-1155 with transfer-locking logic.

A specialized smart contract architecture that separates the issuance logic, balance ledger, and redemption rules into distinct, upgradeable modules. This provides maximum flexibility for program managers.

• Components:
  • Rule Engine: Defines how points are earned (e.g., for purchases, social actions).
  • Ledger Module: Tracks balances (on-chain or off-chain).
  • Redemption Module: Manages burning points for rewards.
• Advantage: Business logic can be updated without migrating user balances, enabling rapid iteration.

Users interact with the loyalty smart contract without paying gas fees directly. A relayer (often the program sponsor) submits and pays for transactions on behalf of users via meta-transactions or account abstraction.

• Mechanism: Users sign messages approving actions (e.g., 'claim 100 points'), which are bundled and submitted by the relayer.
• Standards: ERC-2771 for meta-transactions and ERC-4337 for Smart Contract Wallets enable this.
• Benefit: Drastically reduces user friction, crucial for mainstream adoption, while maintaining on-chain finality.

A core security decision is whether points are self-custodied in user wallets or custodied by the issuer. Self-custody empowers users but introduces risks of permanent loss from lost private keys. Issuer custody centralizes control and simplifies recovery but reintroduces counterparty risk. Hybrid models using account abstraction or social recovery wallets can offer a middle ground.

Poorly designed issuance can devalue points. Key design parameters include:

• Emission Schedule: Fixed supply vs. continuous inflation.
• Redemption Sinks: Mechanisms to burn points upon redemption to control circulating supply.
• Value Peg: Whether points have a fixed fiat value, float based on demand, or are purely abstract.
• Expiry Policies: Implementing expiry (e.g., via time-locked contracts) to prevent liability buildup and encourage engagement.

The regulatory classification of points is critical. Jurisdictions may treat them as:

• Prepaid Access / Stored Value: Subject to money transmission laws.
• Securities: If they are marketed as an investment with profit expectation.
• Unregulated Rewards: The ideal, but requires careful structuring to avoid creating a secondary market or speculative instrument. Legal opinions are essential before launch.

On-chain programs are vulnerable to automated exploitation. Defenses include:

• Proof-of-Personhood: Integrating attestations (e.g., World ID) to limit one account per human.
• Transaction Graph Analysis: Monitoring for bot-like patterns in point accrual.
• Rate Limiting & Caps: Implementing daily earning limits or caps per action.
• Challenge Periods: Delaying point finalization to allow for fraud detection and reversal.

Designing for cross-chain or cross-ecosystem use introduces complexity. Considerations:

• Bridging Security: Using secure cross-chain messaging protocols (e.g., CCIP, LayerZero) to transfer point balances, accepting the trust assumptions of the bridge.
• Standardization: Adopting token standards (e.g., ERC-20, ERC-1155) for maximum wallet/dapp compatibility, even if points are non-transferable.
• State Reconciliation: Ensuring consistent point totals across multiple chains or layer-2s without double-spending.

Program rules may need to evolve. Security models for upgrades include:

• Transparent Proxy Patterns: Using UUPS or Transparent Proxies to allow logic upgrades while preserving user point balances in a separate storage contract.
• Multi-signature Governance: Requiring multiple trusted signers to approve rule changes.
• Timelocks: Implementing a delay between upgrade proposal and execution, allowing users to exit if they disagree with changes.
• Immutable Contracts: The most secure but least flexible option, locking rules forever.

The process of converting a traditional loyalty point into a digital asset (token) on a blockchain. This enables points to be programmable, tradable, and interoperable across different platforms. Key aspects include:

• Standardization: Using token standards like ERC-20 for fungible points.
• Transparency: All transactions and total supply are recorded on-chain.
• Ownership: Users hold their tokenized points in their own wallets.

A mechanism where users lock their loyalty tokens in a smart contract to earn additional rewards or unlock premium benefits. This creates programmable engagement and can be used for:

• Yield Generation: Earning more tokens as an incentive for holding.
• Governance: Gaining voting rights on program changes.
• Tiered Access: Unlocking higher membership levels based on stake size.

The permanent removal of loyalty tokens from circulation, often triggered when a user redeems them for a reward. This is a critical deflationary economic control that:

• Manages Supply: Prevents inflation of the point system.
• Creates Scarcity: Increases the perceived value of remaining points.
• Settles Obligations: Finalizes the exchange of points for goods/services, recorded immutably on-chain.

A type of non-transferable token that represents credentials, affiliations, or achievements. In loyalty programs, SBTs can function as non-tradable membership badges or proof of loyalty history. They enable:

• Sybil Resistance: Preventing users from buying reputation.
• Persistent Identity: Creating a portable, verifiable record of engagement.
• Unique Rewards: Granting benefits that are tied to a specific user's journey.

The backend logic and smart contract system that governs the issuance, distribution, redemption, and lifecycle of loyalty points. A robust engine handles:

• Earning Rules: Programmable logic for how points are awarded.
• Balance Management: Tracking user holdings and transaction history.
• Redemption Logic: Automating the exchange of points for rewards via smart contracts.

The ability for loyalty points or tokens to be recognized, used, or exchanged across different platforms, brands, or blockchains. This is a core promise of tokenization and is achieved through:

• Cross-Chain Bridges: Moving points between different blockchain networks.
• Shared Standards: Adopting common technical specifications.
• Loyalty Marketplaces: Platforms where points from various programs can be traded or pooled.