Welcome to the Block & Mortar newsletter! Every week, I bring you the top stories and my analysis on where business meets web3: blockchain, cryptocurrencies, NFTs, and metaverse. Brought to you by Q McCallum.

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#23 - The other side of web3 loyalty programs, and making web3 disappear

Last week’s issue covered Starbucks and Chipotle launching web3-based loyalty programs.  After we released that, we mused that those industry heavyweights had opened the floodgates. Now Build-A-Bear has unveiled a toy covered in crystals (backed, of course, by a digital twin NFT). And Wal-Mart has opened its store inside the Roblox metaverse.  Sheer coincidence they did this in the lead-up to the holiday toy season…

All of that leads us to our first segment:

Whose status is it, anyway?

Customer loyalty programs are nothing new, but web3 does lend itself well to the idea.  As we noted last week:

Blockchains are ultimately tamper-resistant systems for logging events [such as] “customer A completed action B at time C,”  which is why companies are increasingly exploring blockchain technology for their loyalty programs.  It feels natural to model customers as wallets, loyalty points as fungible tokens, and special participation as NFTs.

From the company side, it’s nice to let blockchain technology handle the heavy lifting and accounting logic.  For consumers, the big selling point of cryptocurrency tokens and NFTs is ownership of digital assets.  

Game developers saw this NFT use case early on: You’ve spent months playing our RPG, powering up that sword/helmet/whatever.  Shouldn’t you truly “own” it, and be able to sell it to someone when you’re done?  That topped-out item looks like a sword or hammer, but it’s really an expression of your time and effort.  Someone who doesn’t want to grind through the leveling-up process will happily trade their money for your item.  

(Underground markets for in-game items have existed for ages.  Putting this on-chain is a chance for game publishers to formalize the secondary market and capture some of that revenue.)

Replace “playing a video game” with “frequenting a coffee shop” or “air travel” and this idea still works. The perks that come with that level of loyalty status constitute an asset, one that a customer developed through continuous interactions with your business.  If this status is represented by an NFT in their crypto wallet, it’s entirely possible they’ll want to express their ownership of that asset by … y’know … selling it.

Maybe they need some quick cash.  Maybe they’re shifting away from a high-travel role, and someone moving into such a role would like all the perks of Super Mega Platinum status.  The former road warrior gets to sell their asset; the new one eases their travel burden, and the airline collects some cash from the transaction. Win-win-win.

But will the businesses see it that way?  Unlikely.

The idea of customers selling loyalty status is an uncomfortable question for many companies, because they are accustomed to holding all of the proverbial cards.  It will be tempting to simply declare status as non-transferable.  But that runs contrary to the idea of digital ownership that is core to web3.  

At best, these companies will encounter a lot of friction by forbidding customers from expressing that ownership.  At worst, they’ll play a game of whack-a-mole against multiple underground markets.  

Blockchain technology allows marketplaces to spring up anywhere, and for anything.  If an item is on-chain it’s best to assume that people will want to trade it. The best companies will account for this when designing their web3-based loyalty programs, and they’ll develop rules that allow for transfer of status while keeping things fair for everyone involved.  They’ll also develop loyalty perks that people will be less eager to sell.  In other words, these companies skip over the Napster moment of suing fans, and go straight to the iTunes era of providing an official framework for what customers want.

We only talk about DAOs when there’s trouble

The different pieces of web3 are settling into their roles:

  • metaverse properties are gathering spots – digital amusement parks, even – sponsored by corporations

  • cryptocurrency tokens and DeFi are for speculation

  • NFTs are for art collectors, event ticketing, and loyalty programs

  • Decentralized autonomous organizations (DAOs) are … nobody’s really sure?

On the one hand, DAOs are an interesting way for groups to pool funds and make decisions.  On the other hand, every time we hear about them, it’s because of legal matters.  

Case in point: DeFi platform Ooki DAO has had a run-in with the CFTC:

A recent enforcement action by the Commodity Futures Trading Commission signals that the community-run projects popular in crypto known as decentralized autonomous organizations, or DAOs, are within the purview of the agency’s oversight – as are the millions of people who hold DAO governance tokens that are used to make decisions.

This has, understandably, raised questions around what this could mean for the wider DAO space.  It’s entirely possible that this case is specific to something Ooki DAO has done.  This could also become the CFTC’s first foothold in claiming jurisdiction over all DAOs, which has a very “Excalibur” feel to deciding who regulates what.

The CFTC is certainly getting creative in how it plans to serve notice to Ooki DAO’s members:

🚨Blockchain Regulation Update: Yesterday, the CFTC filed a declaration informing the court that it seeks to perfect service of process of a lawsuit on every voting member of Ooki DAO via its chat bot and forum posts. 🧵


3/ This is a stunning new development for the space because, if approved by the court, it will create legal precedent allowing regulators to claim proof of service of a legal action against every member of decentralized entity via notice to its website.

(Is this better or worse than serving notice by airdrop?  You be the judge. We’re not sure.)

We empathize with lawmakers to an extent. Technology moves so quickly that they can’t help but to get involved after the horse is already out of the barn.  That said, showing up out of the blue to claim jurisdiction over a portion of web3 leaves everyone confused.  People who are unsure of the boundaries are less likely to test novel use cases, which ultimately slows adoption.

web3’s disappearing act

Do you remember the early days of machine learning and artificial intelligence (ML/AI)? Everyone was quick to brag about how much they were throwing this new technology into their products.  

These days you still see plenty of “AI-powered!” claims in investor pitch decks, but companies have learned to dial back on that message in public.  Terms like “artificial intelligence” and “neural networks” conjure thoughts of semi-autonomous black boxes.  And that raises legitimate concerns about computers making decisions with insufficient compassion or human oversight.  

The corporate web3 world is learning fast from its older, emerging-tech sibling.  Universal Studios handles crypto wallet mechanics behind the scenes for its theme park visitors. Starbucks calls its loyalty program’s NFTs “journey stamps.” Apple’s Tim Cook prefers to talk AR and VR instead of saying “metaverse,” while Disney CEO Bob Chapek uses a homegrown term:

“We call it next-gen storytelling,” Chapek told Deadline backstage at the expo in Anaheim on Sept. 10. “We tend not to use the M word too often, because it has a lot of hair on it."

We expect more companies to lead this double life, describing the tech in detail to colleagues and investors while not daring to utter its name in public.  (Borrowing a hard-learned lesson from AI-driven insurer Lemonade, you have to be very careful about keeping those worlds separate.  But that’s another story.)

Sure, these companies are trying to distance themselves from the seedier side of web3 that makes so many headlines.  They’re also making the smart move of talking to customers about what matters to them.  If you have a fancy new loyalty program, website, or whatever, your customers are most interested in how that will make their lives better.  What’s under the hood is, at best, a secondary concern.

Marketers who understand the web3 spirit

We recently noted that companies – especially their marketing teams – should be mindful of bringing web2 habits into the web3 space:  

The intrusive web2 marketing practices that rely on building lists, identifying specific individuals, and pestering targeting directly contacting them flies in the face of web3’s ethos of pseudonymity. In web3, fans let you know that they’re interested. Not the other way around.

One could argue that this active, customer-driven idea of web3 brand affinity fandom is stronger than its passive, one-sided web2 cousin. To get there, marketers will have to embrace this world in which they derive greater benefit but have less control. And they may have some trouble letting go.

It was refreshing, then, to catch this session from the BW Marketing Whitebook Summit 2022.  The five panelists – all marketing executives – explored use cases for corporate training, in-store demos, and job interviews, as well as blending real-world and metaverse experiences.  The conversation steered clear of the web2 marketing trope of using technology to simply harvest personal data. 

What really caught us was a comment from Siddhartha Butali, Chief Marketing Officer at Airasia India.  He noted that, in web3, people need to regain control over their personal data and:

"[…] trade it only if they want to, with brands that they trust. And that is going to reduce the number of brands that consumers will engage with, to only those with whom you want to share a relationship of trust. And that will get accentuated even more with the anonymity that the metaverse will offer and the kind of data streams that we’ll be creating in that universe."

(You can watch his full statement at the video’s 20:50 mark.)

We’re still not sure how data privacy laws will take shape, but we have a hunch that there will be a stronger push to first-party data.  Making the most of the information that people have chosen to give directly to you – as opposed to the lists you’ve acquired from your “trusted partners” –  would therefore become a business survival skill.  Hopefully other marketers make note of Butali’s lead and start planning for that world now.

The wrap-up

This was an issue of Block & Mortar.

Who’s behind Block & Mortar? I'm Q McCallum. I've spent the past two decades in the emerging-tech space. And I'm very interested in web3 use cases.

Credit where it's due. Big thanks to Shane Glynn for reviewing early drafts. Any mistakes that remain are mine.

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