Since 2009, the crypto ecosystem has evolved from primarily focused on speculative trading to encompassing a wide range of utility and community-based projects. Within this evolving landscape, Crypto Points has emerged as a significant tool for fostering user loyalty, incentivizing active engagement, and gauging potential airdrops.

Crypto Points effectively align the interests of projects and users, thereby driving adoption and facilitating increased community participation. This blog post provides an in-depth exploration of Crypto Points, including their underlying mechanisms, benefits, strategic applications, and associated challenges. It is tailored to provide valuable insights for crypto users, project founders, and developers.

The Concept of Crypto Points

Crypto points are digital assets or tokens distributed by cryptocurrency projects to incentivize and reward user participation and engagement within their ecosystem.

Crypto Points can be likened to traditional loyalty points used by airlines and credit card companies, where customers are rewarded for their patronage with points that can be redeemed for various perks.

In Web3, these points can be earned through contributing to project development, participating in community events, or fulfilling specific tasks. Crypto points often hold utility within the project's ecosystem, such as being used for voting, accessing exclusive features, or redeeming rewards. They foster loyalty, enhance community involvement, and drive the adoption of cryptocurrency initiatives.

The History of Crypto Points in Web3

While the concept of crypto points is relatively new in the broader timeline of cryptocurrencies, it is deeply embedded in the gamification strategies utilized by Web3 projects to enhance user engagement and loyalty.

The early adoption of crypto points can be traced back to community-driven projects that sought to reward participants for their contributions without diluting their primary tokens. Platforms like Steemit and Reddit experimented with blockchain-based reward systems, distributing points for content creation and community engagement. These points could later be converted into tokens or used within the platform for various benefits.

Also, the NFT marketplace Blur introduced a points program in 2022 to reward early adopters and track engagement. This move set a precedent as pioneers for other projects to follow.

Earning Blur Points for Waitlist. Source: Blur Mirror

Differences Between Crypto Points and Cryptocurrencies

While both Crypto Points and cryptocurrencies exist on the blockchain, their purposes diverge significantly. Cryptocurrencies like Bitcoin or Ethereum have direct monetary value and can be traded on the open market.

In contrast, Crypto Points typically hold non-monetary value and are designed for use within specific ecosystems. They serve as a measure of participation and engagement rather than a medium of exchange.

Types of Crypto Points

Crypto points have become an integral part of the crypto ecosystem, vital to user engagement, loyalty, and governance. This blog post explores various types of crypto points, their functionalities, and their impact on the crypto community.

Reward Points

Reward points are issued to users for performing specific actions such as trading, staking, or participating in governance. These points are often redeemable for various benefits within the platform.

Examples:

• Binance: Binance's "Word of the Day" promotion allowed users to earn points by participating in an educational word-guessing game. These points can be redeemed for rewards in the Rewards Hub.

• Blur: Blur, an NFT marketplace, used reward points to incentivize users to list and bid on items and lend their assets. The points influence users' rewards, such as 'Care Packages' containing valuable items.

• Manta Network: Manta Network issues reward points to users participating in its decentralized privacy-preserving platform, contributing to various activities like staking and liquidity provision.

Manta Network Airdrop Criteria. Source: Manta Medium

Loyalty Points

Loyalty points are designed to encourage engagement by rewarding users for their continuous involvement in a platform. These points can accumulate over time and might be converted into native tokens or used to unlock premium features.

Examples:

• Rainbow Wallet: Rainbow Wallet rewards users with loyalty points for various activities, including interacting with Ethereum, swapping assets, and referring friends.

• ENS (Ethereum Name Service): ENS distributed loyalty points to users who held and used .eth domain names early, which were converted to huge airdrops, contributing to the decentralized web infrastructure.

Engagement Points

Engagement points reward users for interacting with and contributing to the platform's ecosystem, such as commenting, voting, sharing content, or participating in events. These points often enhance a user's reputation within the community and can be exchanged for governance rights or special privileges.

Examples:

• Friend.Tech: Friend.Tech uses engagement points to reward users for interactions on their web3 social networking app. Check out our previous Guide for more details on the tokenomics of Friend.Tech’s points.

• Lens Protocol: Lens Protocol incentivizes user engagement by awarding points for creating and sharing content on its decentralized social network.

Airdrop Points

Users accumulate airdrop points based on their activity and engagement with a platform, which can later be converted into tokens during an airdrop event. This type of point system is commonly used to attract early adopters and create hype around new projects.

Examples:

• Jupiter: Jupiter utilized points systems to boost transaction volumes and total value locked (TVL) before central airdrops.

• Arbitrum: Arbitrum issued governance points through its ARB token airdrop, empowering users to participate in the network's decision-making process.

• Optimism Airdrop #2: This airdrop rewards users for their positive-sum participation in Optimism governance and encourages active engagement with the OP Mainnet.

Gaming Points

Gaming points are specific to blockchain-based games and reward players for their in-game achievements, event participation, or contributions to the game's ecosystem. These points can often be traded or used to purchase in-game assets.

Examples:

• Axie Infinity: Axie Infinity rewards players for in-game achievements, event participation, or contributions to the game's ecosystem with SLP (Smooth Love Potion) tokens.

• Crypto Unicorns: Crypto Unicorns rewards players with XAI tokens for various activities within the game. Players can earn these tokens by completing quests, farming on their lands, breeding and evolving unicorns, participating in community events, and securing a place on the leaderboard.

• Pirate Nation: Pirate Nation, a pirate strategy adventure game, rewards players with PIRATE tokens through BOOTY points for completing quests and participating in events.

Referral Points

Referral points reward users for bringing new participants to the platform. This type of system incentivizes users to promote the platform and grow its user base.

Examples:

• Binance: Binance had a referral program where users earned points for bringing new participants to the platform, which can be used for fee discounts and other rewards.

• Arkham: Arkham had a referral-based points scoring system. The more referrals users made, the more points they earned, which could later be converted into rewards.

An example of an Invite Dashboard on Arkham. Source Arkham Twitter

How Crypto Points Work

Crypto points can be customized for various purposes, such as promoting community growth, enhancing user retention, etc. To understand the mechanics of crypto points, we must dive into their issuance, earning mechanisms, storage, utilization, and overall impact on the ecosystem.

Issuance and Distribution

The issuance and distribution of crypto points are governed by predefined rules encoded in smart contracts or managed by centralized systems. The key aspects include:

• Initial Supply: Projects determine an initial supply of crypto points, which can be fixed or variable. This supply can be allocated for different purposes, such as community rewards, developer incentives, or ecosystem development.

• Distribution Mechanisms: Points can be distributed through various methods, including airdrops (free distribution to users), rewards for specific actions (e.g., completing tasks, attending events), periodic distributions (e.g., staking rewards), and so on.

For example, CoinList uses a points system called Karma to reward users who add value to protocols through activities such as staking, trading, validating, and providing liquidity. Users with sufficient Karma points gain access to the Token Sales Priority Queue, significantly increasing their chances of securing a spot in token sales.

Earning Mechanisms

Users can earn crypto points through various activities that benefit the project's ecosystem. Common earning mechanisms include:

• Participation in Governance: Voting on proposals, contributing to discussions, and engaging in decision-making processes.

• Community Engagement: Creating content, commenting, sharing posts, and participating in forums.

• Task Completion: Completing specific tasks or quests the project sets, ranging from technical contributions to marketing efforts.

• Staking and Providing Liquidity: Locking up the project’s tokens in a staking contract or providing liquidity in decentralized finance (DeFi) pools. EtherFi, a restaking platform, rewards participants with points for staking their tokens, fostering a more stable and secure ecosystem.

Storage and Management

Once issued, crypto points are stored in digital wallets that support the respective blockchain protocol. These wallets provide users with tools to manage, track, and utilize their points. The points can be:

Cryptocurrency points can be transferable or non-transferable depending on the project's design. Points can be transferred between users or remain locked to the user’s account. In some cases, points may be Interoperable and thus usable across different platforms or applications within the same ecosystem, enhancing their utility and value.

Crypto points offer various utilities within a project’s ecosystem. Users can redeem points for rewards, participate in governance, and enhance their social status within the community.

Benefits of Crypto Points

Crypto Points offer a range of benefits for users, projects, and the broader crypto ecosystem. Users and project founders can leverage Crypto Points to enhance engagement, governance, and monetization by understanding these benefits.

Benefits to the Projects

Implementing crypto points can offer several advantages for projects in the cryptocurrency ecosystem. Firstly, they can serve as a powerful tool for community building. Projects can foster a more active and engaged community by rewarding users with crypto points for participating in various activities. This increased engagement can lead to greater visibility, user retention, and project growth.

Crypto points can also incentivize participation in project-related activities. For example, projects can offer crypto points as rewards for completing tasks like beta testing, providing feedback, or contributing to open-source codebases. This gamification approach can encourage users to participate more actively, leading to a more vibrant and collaborative ecosystem.

Finally, crypto points can be valuable for measuring potential airdrops or token distributions. By tracking user engagement and contributions through crypto point accumulation, projects can better assess the size and dedication of their community. This data can inform decisions regarding token allocations, ensuring a fair and transparent distribution process.

Benefits to the User

For users, crypto points provide tangible and intangible rewards for their engagement and contributions. These points can be redeemed for various benefits and rewards, such as airdrops or token distributions, discounts, exclusive access or perks, or other valuable rewards.

For instance, the blockchain-based game Splinterlands uses a reward point system to incentivize players, allowing them to earn cards, packs, and other in-game assets that enhance their gaming experience and have real-world value.

Furthermore, earning and holding crypto points can elevate a user's status within the community, granting them recognition and influence. This gamification aspect makes participation more enjoyable and creates a competitive environment that motivates ongoing engagement.

Similarly, Crypto points often grant users early access to new features, products, or services before they become available to the general public. This exclusivity can be highly appealing, as it allows early adopters to experience the latest offerings and provide valuable feedback to the project team.

Splinterlands Dashboard showing Staked SPS and BAsed Glint. Source: Splinterlands Docs

The Role of Crypto Points in Airdrops

Airdrops have become a prominent strategy in the cryptocurrency space, used by projects to distribute tokens, reward early adopters, and foster community growth. Integrating crypto points into airdrop strategies can enhance these campaigns by providing users more targeted, engaging, and rewarding experiences. This section delves into how airdrop strategies can leverage crypto points to maximize their effectiveness and impact.

Crypto points can enhance airdrop strategies by providing a framework for more sophisticated and engaging distribution methods. Here’s how:

Rewarding Specific Behaviors

Projects reward users with crypto points for specific actions (e.g., community participation, task completion, liquidity provision). These points can be converted into tokens during airdrops, ensuring active community engagement and a vibrant ecosystem.

Creating Tiered Airdrops

Crypto points allow for the creation of tiered airdrop structures, where users receive rewards based on their level of engagement or contribution. Higher point holders might receive a larger share of the airdrop, incentivizing users to accumulate more points through active participation.

Enhancing Gamification

Projects can integrate gamification elements into airdrop strategies using Crypto Points. Users can earn airdrop tokens using crypto points by creating challenges, leaderboards, and quests. This fun approach drives engagement and community building.

Ensuring Fair Distribution

Crypto points can help ensure a fair and transparent distribution of airdrop tokens. Projects use predefined criteria and recorded point balances to allocate rewards fairly to deserving participants which helps avoid biases.

Example: Gitcoin uses a point system through its product, “Gitcoin Passport,” to reward contributors based on their impact. During airdrop campaigns, tokens are distributed proportionally to contributors based on their earned points, ensuring a fair and merit-based reward system.

Gitcon Passport Points. Source: Gitcoin

Building Long-term Engagement

Airdrops that integrate crypto points can foster long-term engagement by providing ongoing incentives for users to remain active within the ecosystem. Instead of one-off distributions, projects can use points to reward continuous participation and contributions, ensuring sustained user involvement.

Example: Blast, a layer 2 scaling roll-up solution, introduced a points program during its testing phase. Users bridged ETH to the layer 2 network to earn yields and accumulate points, fostering community engagement. Blast rewarded point holders with its BLAST token via an airdrop campaign.

Designing an Effective Crypto Points System

Creating an effective crypto points system requires careful planning and alignment with the project's goals. Project founders should consider the following key factors:

1. Align with Project Goals: The points system should be designed to incentivize behaviors directly contributing to the project's success. The points should reward actions that drive the project forward, encouraging community engagement, liquidity provision, or governance participation.

2. Gamification and Engagement: Incorporating gamification elements can make the points system more engaging and enjoyable for users. Leaderboards, achievement levels, and rewards for reaching milestones can foster a sense of competition and motivation among community members.

3. Balanced Rewards Structure: The rewards associated with points should be carefully calibrated to incentivize desired behaviors without being too generous or scarce. Overcompensating can lead to inflation and devaluation, while insufficient rewards may fail to motivate participation.

4. Transparency and Fairness: Clear and transparent rules for earning and redeeming points are crucial for building trust within the community. Project founders should ensure the system is fair and accessible to all participants without favoring any particular group or individual.

5. Adaptability and Scalability: As the project evolves, the points system should be flexible enough to adapt to changing needs and priorities. Founders should consider scalability factors, such as the potential influx of new users and the impact on the point's economy.

Cons, Challenges, And Pitfalls of Crypto Points

While crypto points offer numerous benefits, they have cons, challenges, and pitfalls. Understanding these issues is crucial for designing effective and sustainable reward systems. Here’s a deep dive into some of the challenges associated with crypto points, including instances where their use failed or was unsuccessful.

1. Centralization and Trust Issues: Many crypto point systems are centralized, meaning the project team controls point issuance, distribution, and management. This centralization can lead to trust issues, as users may be concerned about the reward system's fairness and transparency.

2. Inflation and Devaluation: Crypto points can suffer from inflation if the project issues fewer points without a corresponding increase in utility or demand. This inflation can lead to devaluation, reducing the incentive for users to earn and hold points.

3. Lack of Liquidity and Utility: For crypto points to be valuable, they need to be helpful within the project's ecosystem and, ideally, liquid. If users cannot easily spend or convert their points, their perceived value diminishes, reducing engagement and participation.

4. Complexity and User Experience: The design and implementation of crypto points systems can be complex, leading to a steep learning curve for users. If the system is too complicated, users may be deterred from participating, negating the intended benefits.

5. Regulatory and Compliance Risks: Crypto points systems must navigate a complex regulatory landscape. Depending on their design and implementation, they may be subject to securities laws, anti-money laundering (AML) regulations, and other compliance requirements. Failure to comply can lead to legal challenges and penalties. An example of this is Block.one’s EOS Airdrop. Block.one faced a $24 million fine from the SEC for conducting an unregistered securities sale during its EOS airdrop campaign. This incident highlights the regulatory risks of crypto point and token distributions, even for well-funded and widely used projects.

6. Vulnerability to Exploits and Abuse: Crypto point systems are vulnerable to exploits and abuse, like Sybil attacks. In these attacks, malicious actors create multiple accounts to earn points illegitimately, undermining the reward system's fairness and effectiveness. Strengthening the security systems of platforms issuing Crypto Points is crucial to prevent abuse.

7. Management and Distribution Issues: Effective management and fair distribution of crypto points are critical for maintaining community trust. Missteps in these areas can lead to significant challenges. Projects must ensure transparent and fair point allocation, avoiding favoritism or disproportionately rewarding certain user groups. An example here is EigenLayer, where the EigenLayer airdrop faced criticism over token distribution fairness. Many tokens were reserved for the team and investors, leaving fewer for the community and raising concerns over the project's commitment to equitable distribution.

8. Inflated Expectations and Speculation: Crypto points can sometimes lead to inflated expectations and speculative behavior, where users accumulate points in anticipation of future value or rewards. This speculative mindset can be detrimental if the project fails to deliver on its promises or if the utility of the points fails to meet user expectations.

Conclusion

Crypto points represent a dynamic and innovative way to engage users, reward participation, and build vibrant communities within the crypto ecosystem. From their origins in early blockchain projects to their sophisticated implementations in DeFi, NFTs, and gaming platforms, crypto points have evolved into a versatile tool for user incentivization.

Despite challenges such as centralization, regulatory hurdles, and speculative behavior, the benefits for projects, users, and the broader ecosystem are substantial. By addressing these challenges transparently and thoughtfully, projects can harness the full potential of crypto points to foster loyalty, drive engagement, and create sustainable growth in the ever-evolving digital landscape.