Loyalty Points (On-Chain)

Airlines and hotel chains issue points as non-transferable tokens (SBTs) on a blockchain. This enables:

• Provable ownership and history of customer status (e.g., Gold, Platinum).
• Automated reward distribution for stays or flights via smart contracts.
• Composable benefits, allowing points to be used as collateral for upgrades or combined with NFT-based lounge access passes.
• Transparent expiration policies and real-time point balances visible to the user.

Brands create interoperable loyalty programs where points act as utility tokens within a broader commerce network.

• Cross-brand redemption: Points earned at a coffee shop can be spent at a partner clothing retailer.
• Dynamic rewards: Smart contracts can trigger bonus points for specific purchase behaviors or social sharing.
• Customer-owned data: Users control their purchase history, which can be selectively shared to unlock personalized offers without compromising privacy.

Points are used as a staking mechanism or governance proxy within decentralized finance protocols.

• Liquidity mining incentives: Users earn points for providing liquidity, which may later be convertible to tokens or confer voting power.
• Credit scoring: Consistent point accumulation can contribute to an on-chain reputation system for undercollateralized lending.
• Yield-bearing points: Points themselves can accrue value by being staked within the protocol's treasury, blending loyalty with DeFi yield.

In-game achievements and community contributions are tokenized as on-chain points.

• Player reputation systems: Points represent skill level or contributions, usable across different games in a studio's ecosystem.
• Creator fan clubs: Fans earn points for engagement (e.g., streaming, content creation), redeemable for exclusive NFTs or access.
• Interoperable assets: Points earned in one game could be used to mint a cosmetic item in another, facilitated by a shared layer-2 blockchain.

Companies issue points on a private or permissioned blockchain for internal reward programs.

• Transparent reward distribution: All employees can verify the fairness of bonus or recognition programs via the public ledger.
• Automated vesting: Points can be programmed with cliff periods and linear vesting schedules.
• Redemption flexibility: Employees can redeem points for various options (gift cards, crypto, donations) through integrated oracle price feeds.

On-chain loyalty points are typically implemented as Non-Transferable Tokens (NFTs) or Soulbound Tokens (SBTs), which are minted to a user's wallet address and cannot be sold or traded. This ensures rewards are tied to individual user identity and activity, preventing market manipulation and sybil attacks. The points are often represented as an ERC-1155 semi-fungible token or a custom ERC-20 with transfer restrictions, where the balance reflects the user's cumulative points.

Because points exist on-chain, their issuance and utility can be governed by smart contracts. This enables:

• Automated distribution based on predefined on-chain actions (e.g., providing liquidity, completing quests).
• Time-based vesting or decay schedules.
• Composability with DeFi: Points can be used as collateral in lending protocols or to unlock premium features in other dApps, creating a cross-protocol loyalty layer.
• Transparent audit trails for all point transactions.

Protocols use on-chain points to bootstrap and retain users without immediate token dilution. Examples include:

• Blast and EigenLayer: Awarding points for locking ETH or LSTs to gauge user commitment before a token airdrop.
• Decentralized Exchanges (DEXs): Granting points for providing liquidity or trading volume.
• NFT Marketplaces: Rewarding users for listing, bidding, or purchasing assets. This creates a merit-based system where future token distributions are weighted by proven, on-chain contribution.

On-chain points rely on verifiable on-chain data for distribution, making the system transparent and auditable. However, they require robust sybil resistance mechanisms to prevent users from farming points with multiple wallets. Common techniques include:

• Proof-of-Personhood integrations.
• Staking requirements (e.g., locking a minimum value of assets).
• Behavioral analysis of wallet transaction graphs to cluster related addresses.
• Time-locked commitments that make farming economically inefficient.

On-chain points often function as a prologue to a token airdrop. This creates a multi-stage user acquisition funnel:

1. Points Accumulation: Users engage with the protocol to earn points, which serve as a claim on a future, undefined reward.
2. Retention & Data Gathering: The protocol observes user behavior over time to design a fair token distribution model.
3. Token Distribution (Airdrop): Points are redeemed or used to calculate allocations in the protocol's native token, rewarding early, loyal users. This defers regulatory questions around securities while building a community.

The core logic and value of on-chain points are governed by smart contracts. Vulnerabilities here can lead to catastrophic loss, including:

• Reentrancy attacks draining point balances.
• Access control flaws allowing unauthorized minting.
• Upgradeability risks if using proxy patterns. Mitigation requires rigorous audits, formal verification, and secure development practices like using established standards (e.g., ERC-20, ERC-1155).

Users directly control their points via private keys, shifting custody risk from the issuer to the user. This introduces challenges:

• Loss is permanent: Lost keys mean irrevocable loss of points.
• Phishing & social engineering: Users are primary targets.
• Gas fees & complexity: Requiring users to pay for transactions can be a major UX barrier. Solutions include account abstraction (ERC-4337) for sponsored transactions and MPC wallets for improved user experience.

Preventing users from creating multiple accounts (Sybil attacks) to farm points is a fundamental design challenge. On-chain solutions include:

• Proof-of-Personhood attestations (e.g., World ID).
• Staking requirements or bonding curves for program entry.
• On-chain activity graphs to detect bot-like behavior.
• Time-locked claims or progressive rewards to disincentivize rapid, automated farming.

On-chain points may attract regulatory scrutiny depending on their design and utility. Key considerations:

• Security vs. utility token classification: If points are tradeable and have speculative value, they may be deemed securities in some jurisdictions.
• AML/KYC requirements: For points convertible to high-value assets or cash.
• Tax implications: Clear records of point issuance and transfers create an immutable audit trail for tax authorities. Legal counsel is essential during design.

A core promise of on-chain points is their ability to move across applications, but this requires careful design:

• Standard interfaces (e.g., ERC-20) enable wallets and DEXs to recognize points.
• Bridge risk: Moving points across chains introduces trust in bridge security.
• Sovereignty trade-off: Fully portable points reduce issuer control over redemption and program economics. Design must balance openness with business logic enforcement.

The tokenomics of the points system must be sustainable and attack-resistant. This involves:

• Inflation control: Preventing devaluation through unlimited or poorly calibrated issuance.
• Collusion resistance: Designing rewards to discourage user cartels from gaming the system.
• Clear redemption mechanics: Defining the claim or burn process for converting points to rewards, ensuring the backing treasury or logic is solvent and secure.