Points are popular in Web3. Learn more about the advantages and challenges of points on the blockchain

The word that best sums up consumer technology in the 2010s is gamification. In retrospect, this seems par for the course given the state of the art at the time. We then entered the era of mobile Internet and social networking, and now everyone basically has a connected online gaming device in their pocket.

The early gamification trend ushered in a wave of companies trying to make games out of everyday activities and turn them into thriving businesses. They’ve turned area visits into games (Foursquare, 2009), traffic monitoring into games (Waze, 2008), language learning into games (Duolingo, 2011), and the list goes on. These companies realize that gamification is an effective strategy for promoting user marketing, engagement, and loyalty.

One of the common elements of gamification is a points system, which allows you to turn qualitative measures of progress into quantifiable metrics. Points systems essentially achieve two goals: a binary, clear outcome (numbers go up or down) and an easy channel to channel intrinsic motivation into extrinsic motivation (benefits, rewards).

Blockchains are a natural infrastructure for points systems because they are designed as universal ledgers with recorded entities to which value can be programmatically assigned based on certain actions.

Historically, this value has been distributed primarily through tokens on Ethereum, which are financial assets whose value changes in real time in the open market. Tokens are powerful tools for identifying, coordinating, and compensating users who contribute to the network, providing users with financial rewards and ownership shares.

Token incentives are critical to blockchain adoption. The promise of tokens as financial rewards offsets the high costs and risks of transacting on L1s like Ethereum. However, this can also create a vicious cycle. The high cost of on-chain transactions means that rewards tend to flow to those users who are willing to pay high fees (usually mercenary capital), and to the detriment of participants who are less willing to pay high fees or are risk-averse (usually new users) .

As blockchain transactions rapidly become cheaper (via L2 and L3), a wider range of on-chain non-financial activities become possible without the necessary financial rewards to compensate users. This new paradigm marks the emergence of new on-chain primitives such as proof, which are used to identify and coordinate users participating in complex decentralized networks.

On-chain proof is a method of identifying and classifying users, allowing users to self-certify their own attributes and prove the attributes of others. However, proof has its own limitations. Proofs are often qualitative, which makes them difficult to use in environments such as blockchains that lack contextual information. For example, it’s much easier to compare the number of kills a player has accomplished in the same game than it is to compare the color of the boss killed. This can be improved by adding contextual information, and further combined with developments in artificial intelligence and machine learning could also make such analysis easier. However, given these limitations, a more quantitative form of proof may be best suited to the current state of blockchain scalability.

We’ve already seen experiments with point systems in cryptocurrencies become popular, such as Blur points, which utilize forms such as “order points” and “loan points” to incentivize specific behaviors and distribute token rewards. Recently, Rainbow started issuing Rainbow Points to reward users for transactions in the Rainbow wallet. So far, most of these integration experiments have been conducted off-chain, which makes them very similar to Web32 integration.

In addition to traditional points systems, on-chain points offer an interesting opportunity to use points in a trustless manner in the blockchain to enable token redemption in ownership distribution, access gating that is resistant to Sybil attacks and improving market functions in DeFi.

The remainder of this article aims to illustrate the differences and trade-offs between tokens, off-chain points, and on-chain points, and explore the extent to which on-chain points can serve as a new primitive for builders and users, and with what advantages and challenges.

Why choose points

When it comes to tokens, there are many features that need to be carefully scrutinized before launch, and they can have a significant impact on the project’s appeal and the token’s price. Some of these factors include but are not limited to:

• Supply and Issuance: Will Tokens Be Inflationary or Deflationary?
• Purpose: Will the token be used for governance? If so, does holding a governance token represent a claim on any fees incurred by the project and control over allocations to the project treasury? Or will the native token be put to practical use? Will it be the unit of account for use of this project?
• Value accumulation: Is there a staking or locking mechanism? Does the token have a destruction mechanism?
• Distribution: Will the tokens be distributed via airdrop or emission? Will there be a redemption timetable?

In the case of points, they are typically non-financial, variable, and controlled by the issuer, meaning that the points system can be easily adjusted without immediately affecting any market dynamics. The supply of points can be unlimited, and the way points are used and redeemed can be modified. In addition, the tradability of points is also determined by the issuer, while tokens must be tradable.

Without fundamentally changing market dynamics, product mechanics, and user behavior, the project team is able to adjust the points system in real time and receive community feedback, giving it more time to understand and better retain users. In cases where points are used as token precursors, points help remove the urgency for projects to prematurely define a token model and allocate tokens.

It’s worth noting that since the points system is already heavily practiced in Web32, it’s also risk-free from a regulatory perspective.

Points are simpler to design and execute for builders, and simpler for users. Given the dynamic nature of token prices, users may find it difficult to know how to conceptualize a certain token: should I view it as an investment or a utility? For example, imagine an arcade game where you have to pay 0.25 tokens to play. If you knew that 0.25 token might be worth $10 tomorrow, you might be hesitant to put it into a machine.

Points can be regarded as “meta-currency”. Points can be converted into financial value and affect usage, but the relevance of this conversion can be designed according to the situation. In this mode, the redemption of points becomes more flexible.

In terms of point utility, points can be redeemed in a variety of options, including direct product benefits, project ownership, governance rights, or revenue. These are available for users to choose.

Why choose on-chain points?

The more flexible nature of points raises an obvious question: what is the difference between on-chain points and off-chain points. A key contradiction that arises when considering tokens vs. points is that ERC20 tokens maximize composability and minimize issuer flexibility, while off-chain points minimize composability and maximize issuer flexibility.

Implementing points on-chain rather than off-chain could sit somewhere in between, allowing flexibility while retaining the benefits of blockchain auditability and composability.

So, what does this mean in practice and why is it important?

Composability

In a way, we can think of on-chain points as quantitative proof that people can view and leverage on a global scale. Anyone can issue points to others on the chain, or build a points system based on third-party product usage or a local points system. On-chain points can add a new dimension to a user’s on-chain identity, similar to accumulating other on-chain credentials, and can be integrated into various modular protocols. With this framework, on-chain points can become a powerful tool used by projects and brands to identify power users across products, and even attract potential customers through discounts and airdrops.

Source

On-chain points also guarantee provenance and auditability, making the total distribution of points in the system as well as the history of the distribution method transparent. This transparency is critical to the community value brought by the points system and fairness in the distribution process.

For example, brands and agencies often work with influencers based on engagement metrics from platforms like YouTube, TikTok, Instagram, and more. However, these platforms configure and manipulate their algorithms for distribution in a black-box environment, making the logic behind the indicators difficult to discern.

Trust guarantee

Blockchain allows for clear guarantees on users’ current points allocation and redemption options. These guarantees enable points to be securely redeemed for other on-chain assets with minimal trust assumptions, giving on-chain points a potential value unprecedented in a Web32 points system. Without blockchain, point systems would suffer the same criticism in the crypto community as Web32 platforms: namely, that they fail to meet the level of trust commensurate with their value.

Resistant to Sybil attacks

The points system may also affect the “airdrop farming” activity of Web33 products. Bots can earn points just like tokens, but the points system can serve as a useful communication mechanism between the project team and early adopters by clearly indicating the type of reward that is not tied to the token, and be used to encourage certain contributions to the product or network . For example, providing liquidity to the protocol or stress testing certain features.

Community responsibility

Point distribution is also subject to community review before any redemption mechanism is clearly disclosed, reducing the risk of post-airdrop disputes. On-chain point distribution can even be audited through third-party timestamp verification.

Implement

As we mentioned before, points can be designed for various types of rewards, from discounts to product benefits, to ownership of projects, to governance rights, to direct revenue. Likewise, implementation points can vary greatly from project to project, ranging from some form of proof to modified ERC20 tokens to Soulbound tokens. While each method has its own advantages and trade-offs, we will cover a common process that may be possible: Redeeming ERC20 Tokens.

Although ERC20 tokens are the most versatile method for distributing rewards, they often minimize the issuer’s flexibility and maximize speculation. You can make modifications to make them non-transferable or have unlimited supply; however, you will still encounter the common confusion between tokens and currency forms.

There are also costs to consider when exchanging points for ERC20 tokens. The transaction costs of transferring ERC20 tokens on-chain every time a user joins and updates their credit balance can be prohibitively expensive for issuers. Alternatively, you can accumulate points in an off-chain database into a Merkle tree and periodically publish the Merkle root to the chain in a smart contract. When a user wants to claim tokens, they submit a transaction to the smart contract that contains a Merkle proof. The combination of the address used and the amount claimed can be verified against the published Merkle root (this is essentially how Merkle airdrops work). This is a common method of allocating tokens because it pushes transaction costs onto the end user rather than the project, thereby distributing the total cost (which can be millions of dollars) to all token holders.

Stack built a solution for trustlessly redeeming points into ERC20 tokens on any EVM chain, with distribution being cheaper than traditional Merkle airdrops.

While the exact specifications of a points or token system may vary on a case-by-case basis, we have provided a general description of off-chain points, on-chain points, and token characteristics below for guidance.

In addition to technical or cryptocurrency-specific implementation considerations, there are many other key design decisions in creating a points system. Some ideas are as follows:

The main goal of a project points system should be to encourage product usage, not to encourage point accumulation. Ensuring that the points program ultimately brings users back to your own product ecosystem is key to successfully launching the points-driven flywheel, rather than encouraging gratuitous behavior. This is particularly important for value sustainability. Any value lost in providing rewards must be compensated by value elsewhere, such as more users, higher value transactions, sales revenue, advertising, etc. Translating points directly into product benefits is especially helpful for maintaining a closed-loop feedback loop and testing the success of a specific feature or product. Farcaster Warps is one example, where points earned within the app can be used as gifts to other users or used to receive discounts on in-app purchases of NFTs. This clear use case for points in the product reduces the risk of speculation pouring in, simply as a basis for some future financial incentives.

An effective points system also requires an intuition about what will drive momentum for your users and your product. For example, if your users are relatively price-insensitive, discounts may not be as interesting; for products that benefit from strong network effects, other levers such as personalization or social access/rewards may be more attractive. If your product is driven by session time, it may be more productive to dole out smaller rewards often and consistently, and you may benefit from doling out higher value rewards less often than a product driven by volume.

The future of points

The story of gamification is not new, with many case studies showing that gamification can lead to positive user habits, motivate alignment, and increase loyalty between brand and user.

Going forward, decentralized, user-owned networks will define the new Internet. In an on-chain world, gamification points can serve as a unique way to recognize and reward users’ actions and contributions in a more powerful and comprehensive way than in Web2. It is therefore important to understand the goals and role of decentralization and ownership in your product and design your points system accordingly. While tokens are extremely powerful tools for coordinating and managing these networks, they have also proven to be more rigid than originally thought. On-chain points serve as a potential new primitive for teams to use with tokens to explore paths to better user identity, user ownership, and incentive alignment. However, points will only be beneficial in achieving these goals if they are carefully utilized with these goals in mind.

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