Point systems in crypto have seen a rise in popularity in past months, with major protocols like Eigenlayer and Wormhole incentivizing initial engagement with point distributions to power users. These mechanisms have allowed many projects to bootstrap community engagement and compensate early adopters on their own terms. On the traditional side, loyalty point programs like Starbucks Rewards pale in comparison to the incentives offered by crypto projects, which begs the question: why have crypto point systems become so contested while traditional programs are integral parts of households across the world?

The allure of traditional consumer loyalty programs, from the likes of Starbucks and Domino's Pizza, lie in their proven track record of fostering customer loyalty and driving engagement. The Domino’s Rewards program, for example, has become a cornerstone of consumer retention for over 10% of households in the US. Programs like these offer a simple yet compelling value proposition: buy more, get rewarded more.

Starbucks rewards members earn stars with each purchase which can be redeemed for free items; encouraging repeat visits, providing valuable data on buying habits, and allowing for targeted marketing and a personalized customer experience. Similarly, Domino's offers straightforward reward redemption. The ease of earning points towards free pizza, coupled with the program's simplicity, makes it a powerful tool in maintaining a loyal customer base.

The success of these programs lies in their ability to offer tangible rewards for customer behavior that already exists. In other words, their main goal isn’t to encourage new customers to join, but to build lifetime customer value. With network effects, customer acquisition also comes into play. Most importantly, the accrued value to customers isn't theoretical - it's directly tied to consumption. Creating a direct link between buying behavior and benefits. These elements combine to form a customer retention framework that many crypto-based systems could learn from.

On the web3 side, the concept of rewards and points takes on a new layer with the introduction of onchain and offchain points and tokens. Though these digital assets carry the potential to change how we think about incentivizing consumer behavior, recent implementations have raised concerns about the technical details and economic models surrounding these point programs. The costs associated with maintaining decentralization and the pitfalls of poorly structured incentives could derail consumer trust and ecosystem stability.

While tokens allow for greater interoperability, they often face challenges stemming from regulatory concerns, market volatility, and less direct control by the protocol. Unlike tokens, recent point system implementations are not designed as currencies but as indicators of participation within a specific ecosystem. They are often non-transferable, emphasizing their role in fostering community engagement over financial speculation. Protocol points are typically earned by contributing to a network's security via staking, usage, or participating in governance decisions. This system aims to align individual actions with the broader goals of the platform, creating a symbiotic relationship between users and the protocol. Still, hyper-financialization has led to the growth of point farming. When points become viewed as assets to be farmed and traded, their intended purpose is distorted.

The risks associated with focusing on the financialization of points are non-trivial. Platforms like Pendle allow users to leverage points, introducing complexity and potential instability. The acceptance of centralized, offchain control of points is another conflicting layer. Similar to the legacy reward systems mentioned, crypto points are typically stored in an offchain database completely controlled by the protocol. Simply put, they don’t take advantage of the benefits of decentralization. Though onchain point solutions have begun to pop up like Stack’s L3 solution on Base, they face similar challenges and aren’t widely adopted.

Continuing with this line of thinking, the often obscure promise of future liquidity events can solely drive speculation; creating markets driven by profit rather than utility. Tying back to web2, this would be like if Domino’s either gave you a lifetime supply of pizza or nothing at all for some arbitrary number of purchases.

When token generation events are mishandled, the repercussions are far reaching. A platform may suffer from liquidity withdrawal and token devaluation, undermining user trust and long-term viability. Just recently, the highly anticipated FriendTech airdrop lost 42% of its value overnight as those misaligned with the long term goals of the platform dumped their tokens on the open market. Prior to the token launch, FriendTech points were being traded on Whales Market at $4 and above before dropping to $1 after the release. This volatility isn’t inherently unique to point systems, we’ve seen it in crypto daily, but it’s still something to note.

The importance of designing point systems that prioritize ecosystem growth ensures that rewards translate into lasting engagement for all participants. This demands a nuanced approach. First, incentives must be structured to promote behaviors that sustain the network over time. Warpcast exemplifies this by rewarding users in ways that encourage long-term contribution. Warps, on Warpcast, are used to elevate the user experience on Warpcast - instead of outside the ecosystem. Second, the integration of a customer flywheel is critical. This model creates a virtuous cycle where rewards not only recognize but also amplify positive user actions. Third, setting reward thresholds is an art. They must be attainable to motivate users while still calibrated to maintain the system's balance. Even the largest of protocols, such as Tensor, have fallen short at this. Only to capitulate to community outcry after the fact. Finally, rewards must spark meaningful engagement. Crypto needs incentive mechanisms that bring genuine participation.

All that to say, point systems in crypto still need to lean further into elements native to crypto. With the right mechanisms, non-transferable points and points featuring governance rights show promise. Non-transferable points tethered to individual users curb speculative frenzies by focusing on personal achievement and loyalty; reflecting one's contributions rather than one's capacity to trade. Meanwhile, points that entail governance rights enable users to steer ecosystems, ensuring that those invested in the platform's success have a hand in growth. This shift from passive accumulation to active coordination could redefine the value of loyalty programs. Regardless of the incentive models used, crypto native projects looking to incorporate points should treat them as a mechanism to encourage genuine product usage, not invent short-lived utility.