Web3 loyalty programs: What’s holding them back?

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The emergence of Web3 presented the opportunity to change the world of customer loyalty programs. The idea was that using blockchain technology, companies could offer tokenized rewards that give customers more control. Points no longer expire, no more being stuck in a single brand’s ecosystem; just pure freedom. At least that was the promise. Is it real? It’s much more complicated.

Visa, for example, is trying to bring this idea to life, launching its own web3 loyalty pilot program in early 2024. But despite all the excitement, the problems with web3 loyalty programs are pretty clear: they’re hard to use, they get shut down frequently, and they have a major liquidity problem. Tokenized rewards sound great in theory, but what’s the point if they have no real-world value or can’t be easily redeemed?

If Web3 loyalty programs are going to work, they will need to solve these fundamental problems. While a potential fix called “Universal Direct Debit” is on the horizon, we’re not there yet.

The promise of Web3 rewards

When Web3 loyalty programs first emerged, the vision was simple: Create a new kind of rewards system where customers actually own their rewards. Instead of points that expire or can only be used for certain things, tokenized rewards will be flexible and transferable. Customers can trade rewards, sell them or redeem them across multiple platforms. Sounds like a dream, right?

In theory, web3 rewards would allow customers to cash out their rewards whenever and however they want. Own your tokens, use them freely and avoid the restrictions of traditional loyalty programs. This should have been a win for both customers and businesses. Businesses will build deeper relationships with their customers, and customers will feel more engaged and in control.

But that’s not exactly what happens. Sure, tokenized rewards may seem to offer more flexibility, but in practice many of these programs are just as restrictive as their traditional counterparts. Many still trap users in closed ecosystems. And even when they do let you trade tokens, the process is so complicated that it’s more trouble than it’s worth.

The biggest problem with Web3 loyalty programs is that they are very difficult for most people to use. Let’s face it: Web3 technology is not user-friendly. If you’ve ever tried managing a web3 wallet, dealing with gas fees, or navigating a decentralized exchange, you know it’s not exactly a smooth process. These platforms require a lot of technical know-how that most customers do not have.

Even Web3 veterans find this process cumbersome at times. Setting up wallets, transferring tokens, managing private keys; There are too many things. So when you take a casual user who is used to traditional loyalty programs, asking them to switch to this more complex system is a big ask. And if something is too complex, people won’t use it.

The main purpose of Web3 fidelity was to offer greater flexibility and ease of use. But right now, redeeming tokenized rewards isn’t any easier than collecting airline miles or cashback points. It’s more complicated with more steps and more headaches. Web3 loyalty programs will have a hard time winning people over until they figure out how to streamline the user experience.

Liquidity in Web3 loyalty programs

Then there is the liquidity issue. In traditional loyalty programs, your points are valuable because you can exchange them for anything like a flight, a free meal, or a discount on your next purchase. In Web3 loyalty programs, tokens are expected to work the same way, but they do not always have the same type of value.

In this context, liquidity refers to how easily a token can be used for something useful. If you can’t spend your coins on things you want or need, they aren’t worth much. The problem with many tokenized rewards is that they lack this liquidity. Yes, you can theoretically trade or sell your tokens, but if there aren’t enough platforms or brands accepting those tokens, their value will drop significantly.

Take Visa’s 2024 web3 loyalty pilot program, for example. This is an exciting step forward, but even Visa, a huge player, faces the same liquidity problems. Tokens must have real value and utility, and this is only possible if there is sufficient demand for them.

Currently, many web3 loyalty programs do not have enough partners or platforms on which tokens can be spent. And even if they do, the process of exchanging or retrieving those tokens is often so complicated that most customers don’t care.

Some programs have attempted to create liquidity by listing tokens on decentralized exchanges or establishing liquidity pools. However, these methods often create short-term liquidity that diminishes over time, especially if the token has no ongoing utility. This is a big challenge for brands trying to make tokenized rewards work in the long term.

One possible solution to the liquidity problem is universal direct redemption. The idea here is quite simple: instead of dealing with trading or transferring tokens, users will be able to redeem them directly for the products they want; There will be no need to swap.

For example, if you’re hungry for pizza, instead of trying to exchange your game rewards for a few pizza tokens and then taking the pizza tokens to a pizzeria, you can go to the pizzeria and redeem your game rewards directly for a slice. pizza. No complicated exchanges, just direct payment.

Universal direct deposit, which allows users to bypass the exchange process, could make tokenized rewards much more practical. This can help keep the value of these tokens high because users will be able to spend them on things they want without actually going through hoops. This is a way to reduce friction and improve the overall usability of web3 loyalty programs.

Additionally, by providing real and convenient repayment options, universal direct repayment can help create more sustainable liquidity. Rather than relying on artificial demand such as listing tokens on an exchange, brands will provide ongoing value to their customers by providing them with practical ways to redeem their rewards.

Despite the current hurdles, web3 loyalty programs are full of potential, and with big names like Visa trialling blockchain to enable these programs to work at scale, consumers could see real change sooner than we think.

Solutions like universal direct deposit can be a game changer by allowing customers to redeem rewards directly and simply. Think of all those unused airline miles waiting to be released.

Robert Wesley

Robert Wesley is the founder and CEO of My AI, which recently won Tectris.VC’s web3 travel accelerator. Robert is a serial entrepreneur and has founded five organizations across sectors and continents. Robert’s diversity of entrepreneurial experiences range from graphical computing to artificial intelligence to finding terrorists.