Tokenization and Interoperable Loyalty: Unlocking Brand Growth

Tokenization opens a world of opportunities for brands – one of which is interoperable loyalty. Here's what you need to know and how this might play out.

Nov 08, 2023

Dear Readers,

Last week we delved into Web3 loyalty. This week we’re taking a closer look at tokenization, interoperable loyalty and the opportunities for brands.

⏱️ Reading time: 5 min

Web3’s standout feature? Interoperable loyalty.

Web3’s open, shared data layer enables permissionless co-branded loyalty ecosystems. This means that brands can accept loyalty reward status and points from other brands through token-gating, lowering the costs of building loyalty ecosystems significantly and increasing network value. Download Magic’s interoperable loyalty deep dive for free.

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We’ve learned that Web3 loyalty is driven by two paradigm shifts, enabled by blockchain:

Digital ownership, scarcity, and transferability of assets: Consumers can control and transact digital assets without the need to trust a third party platform. This also enables genuine digital scarcity.
Wallet centric interaction model: In Web3, the wallet becomes the user's main point of interaction.

We also looked at four standout loyalty applications of Web3 tech:

Interoperability at scale, enabled by the open, transparent nature of Web3.
Personalization & “Loyalty Discrimination”, enabled by on-chain data.
Transferability, liquidity & fraud prevention for digital loyalty assets.
Building community & consumer collectives.

Let’s focus on interoperable loyalty for now.

The Bigger Picture: Tokenization

Interoperable loyalty requires loyalty assets to live on-chain. The process of bringing an asset on-chain, whether digital or physical, is called “tokenization”.

Recently, Roland Berger forecasted tokenized assets could reach $11 trillion by 2023.

In their report, they discuss how tokenization promises to “redefine asset ownership” and how we might be “on the cusp of a major breakthrough in its global adoption”.

They also mentioned how tokenization could “overhaul traditional frameworks ownership, lowering transaction costs, bringing transparency and greater liquidity”.

What does this mean for brands?

Products, whether virtual or physical with digital counterparts – so-called "phygitals" or "digital twins" – would exist on-chain.

In a world where most products would live on-chain, new opportunities arise:

Genuine limited editions: Digital twins can transparently limit collections on-chain, removing the need to rely on the brand's word.
Counterfeits & resales: Luxury brands such as Hublot, Bulgari, Dior, LVMH or Prada are working with the Aura Blockchain Consortium to bring digital twins of their products on-chain to ensure product traceability and authenticity. Additionally, upcoming EU regulation mandate a Digital Product Passport (DPP) for product traceability and life cycle information. Aura Blockchain Consortium is an example of how blockchain can used to create digital twins or passports that contain the required data.1
More data: Physical products linked to NFTs via NFC chips from firms like IYK*, Endstate, and others, enable tracking of secondary sales and owner behaviors. This is possible thanks to start-ups like Addressable.io that link wallet data to personal information, such social media handles, or Web3Sense, specialized in analyzing NFT token holders.
Web3 commerce: With phygitals growing, trustless digital to physical redemptions (and vice versa) will be key. This means that owners of digital twins can claim their physical counterparts, without the need to trust brands or centralized marketplaces. Firms such as Boson Protocol2 or Solaire are building on that.

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Interoperable Loyalty 2.0

With the rise of phygitals and Web3 commerce, not only loyalty or membership tokens, but also tokenized, owned products could be used as a loyalty assets.

This would introduce a new dimension to interoperable loyalty.

Last week, we examined an example in which users holding a membership token from one brand (IWC Diamond Hands Club token holders) could receive a discount from a sunglasses brand through a token-enabled Shopify store, without needing to coordinate with the Swiss watch manufacturer.

Here's how tokenized products might function as loyalty assets:

Example: New York Jets fans purchase their tickets as NFTs and store them in their wallets. McDonald's could launch a citywide campaign in New York, offering every Jets ticket holder a 20% discount for the entire evening of a game. This increases the ticket's value, benefiting both the New York Jets and their fans. Additionally, it enables McDonald's to attract new customers based on the products they possess, bypassing the need for a joint loyalty program with the Jets.3
Why unique to Web3: Web3's cryptographic security makes unique digital counterparts possible on-chain, allowing brands to utilize the open data for token-gating.
Web2 limitations: Brand collaborations and asset verifications would be manual, cumbersome, and not scalable.

This example applies to numerous other situations where complementary products could increase value for both consumers and brands.

Tiffany & Co., for example, launched a custom jewellery programme just for CryptoPunk NFT owners. To get a pendant, CryptoPunk holders had to first purchase an NFTiff, which will cost them 30 ETH, or about $50,000.

Caveats

Here’s critical feedback I received on last week’s deep dive:

“Your brand piggybacks on other brands' loyalty" is exactly the problem. Why would a brand dilute their brand value like that?”

Certainly, that's a valid concern. What would happen, for instance, if Adidas began offering promotions to Nike owners, or if a sex toy brand targeted Nike owners?

Would this not harm brand equity? Indeed, it would.

Therefore, when contemplating interoperable loyalty, consider the following:

It works best for complementary brands and products.
It benefits smaller brands the most, as they can leverage the added value of an open loyalty network to expand their brand presence.
Currently, there are no effective mechanisms to prevent the targeting of certain NFT owners by competitors or entities that could dilute the brand. This can be an issue for brand safety.

The tokenization of physical assets offers several exciting opportunities for brands, including interoperable loyalty. This thesis is evolving, and I am sure that we will see some exciting innovations in the near future.

Talk soon,

– Marc