Smart Contracts, Composable NFTs, and the future of brand loyalty programs
Newsletter #10
Hello again. It’s been a few weeks, but thanks for joining me at Becoming Metaversal. In each issue, I aim to update you about what’s been happening in the world Web3. My ambition is to help people learn, grow, and build in the space. To achieve this, I have organized the content into four sections:
News and what’s been making headlines
Recent thinking, and longer format inspiration piece
Noteworthy tools, podcasts, and articles from leaders in the space
Events that I am looking forward to
And lastly, before getting into the content, if you are reading this and haven’t subscribed yet, you can join the growing group of people by subscribing here. 🚀
Smart Contracts, Composable NFTs, and the future of brand loyalty programs
I should start by saying that I don’t believe the whole world is going to start collecting JPEGS, or that art and music NFTs become suitable as brand loyalty rewards in and of themselves. Not at all. But the smart contracts contained with NFTs offer a better way to govern and implement loyalty programs.
In this way, NFTs will serve as behavioral indicators and signals of personal preferences that are composable in nature, meaning that as they are grouped together they will not only paint a more complete and accurate picture of an individual but can also adapt in their function to reflect the needs and desires demonstrated by this more complete picture. Most importantly, NFTs will allow for the full potential of personalized loyalty to be delivered without requiring brands to collect a huge volume of first-party (PII) data or to intrude on a person’s privacy.
These functions will in turn allow brands to finally get rid of the overly simplistic Gold, Silver, and Bronze member tier systems that are endemic to loyalty programs today, and instead deliver truly individualized loyalty programs that reflect the behaviors and preferences of every member at a one-to-one level.
The next thing I will say is that the technology to deliver on this vision/ambition is not there yet, but over the course of this article, I will attempt to highlight how it could work and spotlight a few brands that are working on building out the infrastructure and the use cases to make it happen.
Terminology and concepts that I refer to
Before getting into the subject, I have tried to explain a few of the concepts and terms that I will be using in plain English and with a minimum of technical jargon.
Smart Contracts - Think about them as tech-powered self-executing contracts that action contract terms when a set of pre-defined criteria occur.
Composability - This is a reference to the fact that Smart contracts and the NFTs that contain them can be programmed to interact with each other. In other words, they can behave like lego blocks. Or maybe the better reference would be to say that composability can do for business what open-source did for software development.
Cross-Chain Interoperability (CCIP) - A term relating to blockchains becoming “compatible” with each other. While that description is overly simplified it will suffice for the purposes of this article. For detail, please read about LayerZero Labs, and read about Chainlink’s efforts toward CCIP.
POAP (Proof of Attendance Protocol) - POAPs are digital mementos. They are tokens (like NFTs) minted in celebration of a moment or an event. A typical use might be to issue POAPs for people as a designation of membership to a club, or as a memento from a concert or sporting event.
Now let’s get on with it.
The problem with loyalty programs today
Loyalty Programs - you know, the airline mileage program you belong to but never quite have enough miles to earn anything of real value. Or the hotel program where you are always a few stays away from earning a free night. Yes, those are the programs I want to talk about today.
These programs have some problems in the eyes of consumers with many people being cynical of their real value due to Points Fatigue, Elusive Tier Status, and an overall, distrust of the mechanics. That said, these programs are hugely important for brands - after all, 84% of people will choose a brand that has a loyalty program when making a purchase decision. But the challenges mentioned above result in only 37% saying that the points and tier are an effective tactic to retain their loyalty.
So if the programs are important, but the way they work isn’t doing the job, then we should find a better way. After all, loyalty matters. It can reduce the cost of sales and drive profitability. It builds active consumer advocacy. It makes forward-looking sales forecasts easier to create and more accurate.
So how do we get people excited about loyalty programs? How do we make sure the rewards are really relevant to each individual member? How do we make people feel valued as individuals and not just as numbers within the program?
NFTs and smart contract composability offer a better loyalty solution
To add a bit of context and to make the article sound a bit less theoretical, I’m going to discuss Web3’s potential impact on loyalty through the lens of an imaginary airline called Premium Airlines. Their loyalty program is in need of a refresh, and one key objective is to develop a rewards model that is personalized to the individual behaviors and preferences of each and every member/traveler.
First things first: no more Bronze, Silver, and Gold status tiers.
Instead, every Loyalty Member gets a Membership Token (NFT) that changes and evolves over time. The evolution is a reaction to a combination of both off-chain data (e.g. location data), and the other NFTs that accumulate in the loyalty members’ wallets over time and through their engagements with both Premium Airlines, and other brands, and their everyday activities.
So every flight or brand engagement for which an NFT is delivered results in visual changes to the Membership Token as it changes to reflect the member’s personal status at an individual level - with no two people’s actions being the same, no two people’s tokens would look the same.
But the changes aren’t just visual. As the NFT evolves through usage, so do the rewards and benefits that it unlocks for the member. In this way, low activity members who previously felt that moving up a status tier was always out of reach now see the impact of their activity right away (even if that impact is small), while high-value customers are still rewarded with a Membership Token and that reflects and unlocks the rewards associate with exclusivity and privilege.
To govern this effectively, the Membership Tokens at the heart of the platform are created as “soul-bound NFTs”. This means that they can’t be sold or traded, but are instead bound to the individual. That said, Premium Airlines knows that sometimes people want to sell miles (or the tokenized equivalent) and so they make that possible by rewarding engagement with $Miles coin and with Activity Tokens. Earned through engagement, these reflect past travel, personal preferences, and behaviors that are unique to each member.
So in short, the loyalty program isn’t built on a single NFT, but rather a collection of composable NFTs (and the smart contracts contained within them) that connect like Lego Bricks, with each brick representing a different trait. Assembled together, the brick reacts to those around them in order to unlock a truly unique and personalized set of benefits through a structure that is governed and self-administers by the master Smart Contract contained within the primary Membership Token. In this way, members acquire $Miles coins and Activity Tokens over time, and these combine to signal and govern the types of rewards and benefits each individual member is entitled to.
One big challenge for Premium Airlines is that most of its members still don’t have a Crypto Wallet today, and many still feel they are too complicated and risky to use. To solve this, the airline integrates a Crypto Wallet directly into the membership mobile app without calling it a Crypto Wallet. Instead, they use language members are familiar with such as My Account, My Activity, My Rewards. And because all of their loyalty members have access to the app, Premium Airlines is able to airdrop NFTs to any one of their loyalty members easily without anyone needing to worry about a 64-character hex string address or to memorize a 12/24 word private key.
All that said, others might not want to use a wallet from the airline, so they allow “power users” to set their own address, use their own wallet, and manage their own private instead of having one assigned to them from the airline should they choose to do so.
With this foundation in place, Premium Airlines moves to activate the loyalty program, and they start with the most obvious use case:
Make the airline ticket an NFT
Sounds simple, but in truth, people change their flight times a lot, they cancel flights, and they upgrade their seats. All kinds of things can change between the initial booking and the moment of travel, so having flight tickets immutably recorded in an NFT could result in significant waste. Their solution is “lazy minting” pre-flight, and actual NFT minting upon landing. This means that pre-flight, the ticket data is set up and ready for mint, but is not actually minted to the blockchain - so changes are still possible, but then after the flight, the NFT in the member’s wallet reflects the travel actually taken.
As an added benefit, minting after the flight allows Premium Airlines to include metadata that goes beyond just the basic flight and seat numbers. For example, it could also include the aircraft registration details, exact departure, and arrival times, even the actual flight path would be recorded into the NFT. This metadata easter egg would give the flight geeks out there a new source of data to collect. It’s not information that everyone cares about, but for that select audience, it’s a real win.
Sustainability is another potential problem associated with minting airline tickets as NFTs. Airlines are responsible for roughly 2.1% of all global carbon emissions (based on 2019 data), and with over 4 billion flight bookings per year, tickets as NFTs could become another major carbon contributor if the right technology is not selected. On this basis, they select a low emissions blockchain.
There are a number of chains developing in this space, and even existing chains like Ethereum are working to minimise their energy consumption my moving to Proof of Stake. One such example of a low energy consumption blockchain is FLOW which based on 2021 data uses just 0.18 GWh annually, or in simpler terms, “minting an NFT on FLOW takes less energy than a Google search or Instagram post.”
Personalize rewards with Composable NFTs
While highly desirable by consumers, individually personalized reward programs are both difficult to manage and cost-prohibitive. Composable smart contracts help Premium Airlines to solve both of these challenges.
To illustrate how the program will work, I am going to tell a customer story about John Doe, a new member of the Loyalty program. John lives in London and travels regularly to New York for work. Further to that, he takes a few other work trips and a couple of holiday trips each year.
When John Doe signs up for the Premium Airline loyalty program, he receives his Membership Token (Soulbound NFT) in his wallet
After his first flight to New York:
An Activity Token (Flight Ticket NFT) is included in the “Flight History” section of his wallet.
He receives the relevant number of $Miles Coin in his wallet and can see what their exact value is on crypto exchanges.
His Membership Token is visually updated to reflect both the city he has traveled to (New York) and the total distance he has flown to date.
Following his return flight, John receives a second Activity Token, representing the return leg of his trip. Further updates are also made to his Membership Token.
No rewards are available to John Doe as he has not yet demonstrated any loyalty to Premium Airlines. He has only taken one round-trip flight after all.
The above gives a functional indication of how the program works. That said, it still sounds fairly similar overall to the way loyalty programs work today. It is through further interactions with the program, when a greater number of composable NFTs start to build a clear portrait of the member, that the Smart Contracts deliver real and individualized value for both the member and the loyalty program.
What follows are the principles and objectives that Premium Airlines considered in developing their program, how they are made possible through tokenization, and how they manifest to deliver individual value for our member John Doe.
Principles and objectives for the Loyalty Program
Principle 1. Eliminate cynicism by giving members Reward Tokens early in the relationship
Cynicism about loyalty programs can develop quickly with people can see the value exchange as being very one-sided. As such Premium Airlines wants to demonstrate its loyalty to its members early.
For John, this happens on his second trip to New York, when upon arrival in the city, he not only receives an Activity Token and some $Miles coins, but also gets a notification that he’s eligible to mint a Rewards Token to unlock new services.
Objective 2. Let members mint the rewards they actually want as NFTs
John knows he hasn’t flown enough to get a free flight, so he’s curious what the Rewards Token being offered to him could be. A few examples of the rewards might include:
Free unlimited wifi on future flights
Dining discounts at partner restaurant in NYC
Guest memberships at a gym
As well as a few other benefits that aren’t too expensive for the airline to offer
By offering John his choice of rewards, he feels really happy, and the airline is able to save money versus the current program in which they give members a list of benefits, most of which go unused by people but which cost them money. Equally, his choices are indicative of personal preferences and behaviors and can therefore influence the future rewards offered to him.
Objective 3. Leverage NFT traits to evoke status, exclusivity, and unlock unique rewards
One of the aspects of PFPs (NFT profile pictures) that resulted in their exploding in popularity is the range of different traits that the images can have, and the rarity associated with them. Rare traits within an NFT collection have become highly desirable and can dramatically influence the price of an NFT.
In getting rid of the Gold, Silver, and Bronze membership levels, Premium Airlines moved to a Segment of 1 model. But people who travel a lot, still want their status recognized and so their Membership Tokens are constantly evolving based on their activity with the airline and its partners.
Imagine a digital membership card where the background image becomes more urban if you only travel to cities, or where palm trees appear for people who take regular beach holidays. For John, since he travels regularly to New York, the Statue of Liberty appears in the background of his membership NFT, and if he travels a lot more, the statue of liberty changes to denote a greater level of status.
The point is that there doesn’t need to be a single marker of status - there would be no Gold or Diamond card, but rather each person’s status would be reflected through a unique combination of traits. So even if two people both fly a million miles, they might have totally different elements to represent their status. The thing that would bind them would be the rarity levels associated with the traits they have.
But what’s important isn’t just the look and feel but the utility associated with the traits. Premium Airlines knows that not everyone values the same rewards, and with that in mind they developed a variety of partnerships, each of which is accessed and unlocked through the traits evolutions associated with the Membership Token.
Dining rewards from restaurant chains, and/or fine dining establishments are unlocked when your Membership Token starts to present “food traits”. A velvet rope appearing in the Membership Token unlocks limited access to member’s clubs. 3D glasses allow members to connect their wallets and stream premium content for free.
Objective 4. Enable cross-wallet and cross-chain inter-operability for improved contextual relevance in the offers
Let me unpick that title a bit. What this means is that John’s Membership Token isn’t only aware of the tokens within his Premium Airlines wallet but within all of the other brand wallets that have cross-wallet bridging enabled (and where John has expressly given permission for sharing).
Yes I know this sounds like a significant security risk, but note that even when this bridge is enabled, no data is shared with anyone or any brand. Everything remains securely in the possession of its owner. It is only that his Membership Token would have awareness of the tokens he has from other brands. This will be a challenge security-wise, when we think about developing the types of user experiences that will be required to drive mainstream adoption of Web3, these are the types of useful services that will be needed. Lots of work to do here before this is real, secure, and scalable, but this is just a vision piece so give me a little more leeway and stick with me.
What all this means is that, if John books an event, goes to a conference, joins a gym, or anything else where the provider gives him their own tokens, then despite Premium Airlines not being aware of the action John has taken, the next time they drop a new Reward Token to John, the Smart Contract inside the Membership Token would recognize the 3rd party tokens, and if they are relevant to what the airline can offer this would enable the further personalization of the reward to reflect these preferences.
Principle 5. Use NFT Composability to layer rewards so they grow progressively with engagement
As John continues to fly back and forth to New York, he continues to receive Reward Token offers, and being a foodie, he continues to select the dining discount.
As the token stack, so do the benefits:
1 token = 5% off at some restaurants
2 tokens = 10% off at those same restaurants
3 tokens = 10% off at a wider range of restaurants
And 4 tokens start to unlock even greater value rewards like the ability to book dinner at some exclusive and token gated restaurants - such as Flyfish club.
Obviously, the value structure could be anything, but hopefully, this gives you an idea of how composability could work in its most simple form.
Principle 6. Use Smart Contract that trigger reward offers to allow for reduced reliance on high media spend sales communications
Recognizing John as a frequent business traveler, Premium Airlines seeks to win his leisure travel as well. To do this the airline offers short-haul rewards to destination cities that he has never visited with them.
No need to wait for a sale to occur to promote the new destinations, after accumulating three long-haul activity tokens in a row within 6 months, the smart contract in the Membership Token knows to automatically offer short-haul rewards flight as a mintable bonus.
But the offer isn’t just triggered by the Membership Token, it is also defined by the full composition of the Activity Tokens in his wallet. In John’s case, all his past flights have been booked as solo flights, and all to New York. As such, they offer him the ability to mint a discount token if he books a getaway with a partner or family. In this way, if John elects to mint the reward, the airline will have positioned a high-value marker within his wallet.
Principle 7. Reward high-value actions with NFT airdrops
Premium Airlines believes in the power of advocates but knows that people can also be a bit cynical about influencers. As such, they launched a program for Loyalty Members to encourage advocacy and the sharing of content. The way it works is simple: share a picture or a comment, and if they meet both the brands’ visual criteria and a predefined level of reach/positive sentiment, then the member gets a reward.
This is all governed automatically through APIs to identify the content, and brand-trained Vision AI and NLP systems for content verification.
Meeting these standards results in the members’ ability to mint a new reward, or potentially just receive a bonus allocation of $Miles Coin.
Principle 8. Surprise & delight members with rewards based on 3rd party tokens
One thing Premium Airlines would have no way of knowing about John is that he is a runner. In fact, last month John ran a marathon and got a POAP for participating. The presence of this Marathon POAP is a signal of a preference for fitness and so the next time a reward NFT is offered/minted it would be a fitness or health-based reward.
This could also work with partners that the airline builds around their brand values. For example, let’s say that Premium Airlines is focused on sustainability and want to encourage more sustainable behaviors. They might in that instance partner with a specific charity, community, or even with another brand like The Solar Roof Company.
Let’s use The Solar Roof Company as an example and say that John bought a roof for his house from them. With his purchase, John receives a warranty in the form of an NFT. When Premium Airlines sees The Solar Roof Company NFT in John’s wallet it results in the airline automatically buying him carbon offsets for every flight he books. In this way, they help to reinforce his values in a manner that is relevant to their own.
This is an example of a benefit that is based on a members real-world actions and values outside of their direct interactions with the brand.
The crazy thing is, the POAP from the marathon and the NFT from the Solar Roof Company wouldn’t even have to be on the same blockchain as the one used by Premium Airlines. Through omni-chain interoperability protocols, and bridges the Membership Token will be able to recognize NFTs from other blockchains in his wallet.
Principle 9. Use token gating to let members influence CSR policies through a DAO like structure
Now that we know John is focused on Sustainability, Premium Airlines wants to engage him in that area. To do so, they AirDrop him a new Sustainability token.
It’s not a reward, he gets no discounts for having it, but instead, it grants him access to Premium Airlines Community Powered CSR DAO. It’s a community that has direct influence over the way the company deploys its CSR budget. There are a few different sections with the DAO, but having the Sustainability Token, he is only able to create and vote on proposals relating to that subject.
The airline isn’t perfect (airlines do still burn a lot of fossil fuels after all), but having a voice and being part of the community that influences how they behave and get better on these issues does a lot to make John not just a loyalty member, but an advocate.
Principle 10. Use sponsorships to grant access to token gated Metaverse events for all Loyalty Members
Metaverse concerts can draw a huge crowd. Metaverse sporting events will soon be doing the same. Accessing these events via the Metaverse will become increasingly common, but will likely soon be gated with people needing to pay for access.
Premium Airlines sponsors sports teams, musicians, and even local market concert halls and in all cases, their loyal members can access the Metaverse Events using their Membership Token by connecting their wallets. Some members with exclusivity traits are even granted special access to AMA’s with the teams after the matches.
Principle 11. Make it easy for people to use or sell their $Miles Coin
We’ve talked a lot about NFTs, tokens, and lifestyle-type rewards up until now. But that doesn’t mean there isn’t still a simple mechanic to earn a free flight - and that is $Miles Coin. Miles coin works in exactly the same way as frequent flyer miles do today in that you earn 1 for every mile you travel with the airline, and they are redeemable for free flights, upgrades, or products within the Premium Airlines consumer product store. But here’s how it’s different and better.
While you earn the same way and spend the same way, if you are a low miles traveler and you are probably never going to earn enough of them to get a free flight, you can easily sell your $Miles coin. To do so, all you have to do is transfer them out of your wallet and onto any major crypto exchange where the coin is actively traded.
It is worth noting that this liquid market for $Miles Coins does present a major financial challenge for the airline. Today, they count on a certain number of miles expiring worthless and making them easy to sell means that they will almost inevitably all be used. This is potentially a huge cost to the airline, but its one that they manage to offset through a transfer fee.
So if someone decides to transfer their miles out of the wallet and onto a Crypto Exchange, the transfer has a 10 or 20% burn fee attached to it. So it’s not free to transfer your miles off-platform, but for people who would typically just see their miles expire, it’s still a better solution.
Another interesting thing that happens when $Miles Coin is listed on the exchange is that the price of a mile starts to fluctuate. Overall it tracks the price of jet fuel which is a primary price driver of airline tickets, but every year the price of $Miles Coin also explodes around Christmas and major holidays. At these moments in time, Premium Airlines is actually able to sell additional miles on the exchanges as a profit-driving revenue stream.
One last note on this subject: the tokens are given to people from the airline, and selling them represents a capital gain which in some countries is a tax event. It’s not a huge issue, but when it comes to gifting people things they can sell, it is something to keep in mind.
Principle 12. Use “Nesting” and “Staking” to reward long-term loyalty with added value or multipliers on $Miles Coin earnings, and enable community interests
Premium Airlines wants to reward loyalty, and what is a better testament to loyalty than consistent use over time. As such they want to reward their longest-standing members (who remain consistently active) with greater rewards.
They do this in two ways:
They put a multiplier on members $Miles Coin earnings in relation to how long they have had their Membership Token, and with what frequency they fly. So as the members lifetime value to the airline grows, so do the rewards they receive. Yes, this rewards the heavy fliers more, but it does reward infrequent but long-term members as well, so everyone can win over time.
They give members a single seat on the board, with the voice of that seat being governed by the overall member community. Participation in the community requires members to stake their $Miles Coin. I know this last one might sound implausible, but in a world of Web3 where tokenization aligns the interests of founders, investors, and customers through shared ownership, a board seat is one way that legacy brands will look to align interests.
Summary and what this means for every loyalty program
If you’ve made it this far, I’ll summarize by saying that my purpose in writing this article wasn’t to pretend that NFTs can solve the challenges that plague loyalty programs through scarcity or collectability. Instead, they will do it through connectivity, deterministic precision, and usefulness to the members of the program. Key to their success are the following points:
Data is owned by the member - Personal and behavioral data is owned and governed by the member with no PII data being stored by the brand.
Complete understanding of the member - Cross-Wallet and Cross-Chain interoperability allow brands to react to the information they could not know based purely on the direct interactions they have with the member.
True one-to-one personalization - Status tiers can be eliminated, and benefits and rewards can instead be delivered based on the NFTs a person holds in their wallet, and their reflection of the members’ true behaviors and preferences at an individual level
Gives purpose and power to the Community - While not everyone will want to engage in a brand loyalty community, DAO structures for CSR, and $Miles Coin staking give members a more active interest and sense of shared ownership.
Easier and cheaper to administer - The reduction in data requirements on the brand side will result in a massive decrease in costs. Not to mention the savings that will be made possible through total benefit optimization (meaning you can give people less because you will actually be giving them the things they value and nothing more).
The technologies to do everything I described aren’t yet mature. But here are a few interesting companies that are building the functionality to fuel the Use Cases described above
Cub3 - They are developing a tokenized loyalty platform for brands to reward people based on what they have dubbed: Proof-of-Behaviour
Arianee - Have a white-label web-based wallet solution that can be used to support brands in tokenizing and distributing assets more easily
Burrata - Are developing an NFT solution for identity that leverages soulbound NFTs
Disco.xyz - Developing the foundations for decentralized identity
Lens Protocol from Aave - building a composable and decentralized social graph that brands and people can build on and scale
Chainlink and LayerZero - Developing approaches to engage cross-chain / omnichain inter-operability protocols
The Association NFT from the NBA - These are dynamic NFTs that evolve based on player stats on a game-to-game basis.
Other articles, podcasts and resources that have me thinking in interesting ways
Li Jin and her fund Variant are very worth following both to track investment, and to get access to their research. This piece on The Ownership Economy is particularly interesting and filled with great and useful data.
Punk6529, who is without a doubt one of the most prescient voices in the NFT community caught my a few times recently. First with an amazing interview that he did with Raoul Pal on the Real Vision Podcast. There is a Pay Wall, but here is the link all the same, and here is a link to the first 15 minutes which is free on YouTube and which I highly recommend as a sample.
Secondly, Punk6529 launched OM - A decentralized community-governed metaverse incubated by 6529.
Image taking within OM by Punk 6529 Nonfungible.com just put out a free, but really great report on the state of the NFT market in Q1 this year.
Gh0stly Gh0sts dropped as the first Omni-Chain layer zero NFT. The NFTs were free to mint on all Layer Zero compatible blockchains including Ethereum, Binance, Avalanche, Polygon, Arbitrum, Fantom, and Optimism. You can read more about Omni-Chain and Layer Zero in this article if you want.
A16z has written a great article about Composability. I highly recommend it.
Here is another great article, this one is about the Mental Models of Web3:
What I am excited about that’s happening soon:
Crypto Packaged Goods is extending beyond their Genesis Token and launching POP and I’ve got serious FOMO. The drop is going to use a raffle and an allow list for people, so I’ve got a chance. :-)
I am super excited by the community they have built, but I have no opinion on values, so make no mistake. This is not financial advice, and nothing else in this newsletter is financial advice. You should always do your own research.
MET AMS, the first big Metaverse conference in Amsterdam is coming up in June. I am still not sure if I will be there or not, but I am hoping and making plans.
The Cannes Lions International Festival of Creativity is taking place the week after MET AMS, and I will be there judging work in the Creative Business Transformation category. Is it too soon to see great Web3 use cases? I will find out soon.
One last thing before you go.
And if you know anyone else who you believe would be interested, please share the newsletter with them. Thanks and have a great week.
This is the most complete and tangible write down I've read when it comes to the opportunity of tokenising brand loyalty programs. There's a few very compelling concepts here, both on break down between reward coins and activity tokens, as well as the composability of the embedded smart contracts. Especially love the idea on not requiring wallet access and hiding some of the BC complexity for loyalty program members.
Hat off for this impressive article Justin, I'm pretty baffled by the depth of this article. I would say in terms of technology take a look to Sayl (saylcloud.com), they're well on its way to do what you describe.