Even with their sophisticated tools, marketers can’t be sure what they do is actually driving the behaviors they want.
And it’s made much worse by bot fraud and click farms. Bot networks can now be rented by the hundreds of thousands, and they have become quite sophisticated at mimicking humans. The Association of National Advertisers (ANA) reports in their Bot Baseline Report that the economic losses due to bot fraud were estimated at $6.5 billion globally in 2017.122 Throw in pixel stuffing, cookie stuffing, ad stacking, search ad fraud, ad injections, and domain spoofing (to name just a few tactics), and it’s easy to imagine how ad fraud overall will have reached $19 billion in 2018, according to Juniper Research.123
Loyalty Programs Are Broken
Loyalty programs have been historically been an attractive tool for influencing consumer behavior. In various forms, they have been used by marketers for over 100 years. But it was the debut of airline frequent flyer points nearly 40 years ago that sparked a cultural obsession. This early success spawned loyalty programs across industries as diverse as retail, entertainment, grocery, and hospitality. US consumers hold 3.8 billion memberships in customer loyalty programs,124 and the average US household participates in 29 different programs.125 That gives consumers a complex and often fragmented labyrinth of points systems, currencies, redemption rules, and exchange programs to navigate.
Loyalty programs are increasingly falling short of businesses’ expectations. A McKinsey study found that 58% of loyalty program members don’t cash in their points, claim their vouchers, or otherwise follow through on the offers they’ve signed up for.126 And those that don’t redeem are more than twice as likely to defect.127 These programs have proven poor at driving consideration, targeting instead a much smaller (although high-value) segment of customers. And returns have been diminishing. Airlines in particular have been cutting back on their programs because they are becoming too expensive—exacerbated by accounting requirements that mean unused miles weigh down balance sheets.
Businesses are clearly struggling to continually be seen, heard, and understood by consumers and influencers. Where do they turn?
What Blockchains Make Possible
Powerful Incentives at Scale
Blockchains can enable a powerful new incentive model that can be used to craft near-perfect alignment between action and reward: tokens. There is much uncertainty today about how tokens will be regulated or even taxed, but there are many leaders in the space working to make them available as a strategic tool—and with good reason. Should tokens become mainstream, they could potentially be more effective at shaping behavior and driving action at scale than anything we’ve ever seen before.
The first blockchain, the bitcoin blockchain, created a secure, decentralized digital currency that, with a clever twist of incentive design, plays a key role in securing the blockchain and making it resistant to attack. Now, we have many blockchains, and many tokens. And these tokens can work to do much more—they can be adapted to incent any behavior.
Elad Verbin, the Lead Scientist at Berlin Innovation Ventures, explains, “Incentive design is one of the killer features of blockchains. Blockchain systems are uniquely able to implement fine-grained incentives tied to complex business logic. They also have the potential to be highly scalable, so they can support giving out incentives in tiny increments (e.g., micropayments), as well as enormous incentives given all at once.”128 Prominent blockchain innovator Trent McConaghy describes it like this: “The blockchain community understands that blockchains can help align incentives among a tribe of token holders. Each token holder has skin in the game. By rewarding them with tokens, you can get people to do stuff. Blockchains are incentive machines.”129
Hit Me Again, Please: What the Heck Are Tokens?
In broad strokes, tokens are a privately issued asset that can hold the same characteristics that all money does: they are fungible, divisible, portable, and durable, and are in limited supply. They exist only in digital form or code, and are secured using cryptography.
Tokens are typically created and distributed through a token sale (which is also used for fundraising) or giveaways (often with the intent of building a community). Often, foundations govern these tokens, with open source rules that anyone can see. To sustain value (beyond speculation), these foundations will need to attract an ecosystem of buyers and sellers that find value in transacting with the token. These are essentially self-sustaining mini-economies, called token economies. Today, the “value” of tokens is driven largely by speculative investors, and it will be a difficult transition to move from this “speculative value” to value derived from true utility—there is much debate in the community as to what path this transition will take.
Thousands of tokens have been created so far. While technically tokens could be created by a knowledgeable developer in less than an hour, creating a token that will have sustainable long-term value is very difficult, and it is very likely that the vast majority of these tokens will fail (simply visit deadcoins.com, a site that tracks the fallen, to get a feel for the scale of this challenge). However, those that are intelligently designed, well governed, and attract vibrant “token economies” could be contenders for long-term sustainability. These are the tokens that have the potential to become a compelling new tool for shaping behaviors and incenting engagement.
Your Token or Mine?
Theoretically, anyone can issue a token. However, it’s extremely challenging to issue a good token (as defined by long-term utility), and even more difficult to issue an unquestionably legal token in the face of the global regulatory uncertainty surrounding cryptoassets. Add in the complexity that long-term value depends on also building an economy around the token—an ecosystem of places a token can be used in exchange for goods and services—and you can see this is real work. But anyone could use a token that is already in the market and that has a “vetted” design (although few have truly been battle tested yet) and an active token economy. Or, they could use one of the growing number of token-as-a-service companies for a templatized path to a custom token. We have yet to see how consumers will react to the universe of tokens, and even with the market shakeout in the second half of 2018, it is quite possible the sheer number of options thrown their way as projects advance will feel overwhelming or confusing. Bottom line, there is a lot of growing up that needs to happen before we will have clarity on how to best use this new incentive tool. Even with this (large) uncertainty, it’s clear this is an important area to watch.
One token can be exchanged for another or into traditional currencies on exchanges that are built specifically for this purpose. Not all tokens are listed on exchanges, and the user experience of signing up and securely using them is intimidating for first-time users. However, there are many companies very interested in making this experience easier, and getting more and more people involved in using and investing in cryptoassets. We will most assuredly see rapid improvement in this experience.
While the universe of tokens is still young, the cryptocurrency market cap was over $200 billion for most of 2018. And as the space evolves, there will be increasing clarity as to which will be winners—essentially those that are successful at attracting consumers, businesses, and other members of the ecosystem to their “movement.”
Note that a discussion of tokens can quickly get complicated. There has been a great deal of excitement in the community about special categories of tokens with unique characteristics, like non-fungible tokens (NFTs) and security tokens, for example. For the purposes of this chapter, I am focusing only on one function of tokens: incenting consumer behavior at the application layer. If you are interested in learning more about the fascinating role of tokens in making blockchains work or how it is possible for a digital currency to even have any value at all, I have included resources on my website.
Tokens Build on a Foundation of Behavioral Psychology
Token economies have actually been around for a very long time. In fact, simulat
ed, nondigital “token economies” have been used by therapists as an effective mechanism for shaping behaviors since the 1960s.
In 1958, Dr. Nathan Azrin arrived at Anna State Mental Hospital in Illinois as the new director of treatment to find his new charges unwilling to dress or apply basic hygiene. With his colleague, Teodoro Ayllon, Azrin created the world’s first official token economy. It was a system in which patients bartered for tokens by modifying their behavior in incremental steps, and could later exchange the tokens for goods or privileges. Soon, the majority of the hospital’s population was dressing themselves, and some had even created a token-exchange store on the ward where token holders could trade their earnings for coveted items like lipstick.
Token economies have since become one of the most successful approaches in applied psychology and are used in education, couples therapy, military training, employee supervision, prisoner management, addiction treatment, athletic coaching, and parenting. According to the Encyclopedia of Mental Disorders, a token economy refers to a behavior modification system that utilizes some form of token to encourage the increase of desirable behavior, and the decrease of undesirable behavior.
Now, with the advent of cryptoassets, token economies will infiltrate our digital experiences to reach a scale never seen before. It is yet to be revealed what happens if this tool is easily accessible to any marketer. And despite broad use in their pre-crypto form, there has been very little research in the wild that would help us project how these systems will interact with our psychology when applied with this scale. Watch closely.
Fine-Tuned Calibration—and Impact
Tokens, when tied into a digital interface, can be very finely calibrated to incent behaviors that drive new levels of engagement and action. They have three key attributes that work in concert to deliver this new, powerful incentive model:
High reward relevance
Businesses have historically been limited in the kind of rewards they could offer consumers, with many resorting to loyalty point or service credits. As this space evolves, consumers will have the flexibility to use tokens they have earned to buy an increasingly broad range of goods and services. Tokens could potentially be portable between applications and even platforms. Consumers could even convert them to cash they can hold in their hands, if available in a growing number of exchanges focused on this purpose. This means they can tailor their reward to be more meaningful to them.
More precise targeting
Tokens are not only highly divisible, but also can be easily targeted to micro-behaviors. Rewards can be focused on driving small, discrete tasks, or even used to influence the shaping of broader behavior by continually rewarding very small actions. (First introduced by behavioral psychologist B.F. Skinner, shaping is the process of reinforcing successively closer and closer approximations to a desired, or targeted, behavior and can be a powerful method of influence. It is this concept that drove the initial idea for Dr. Azrin’s first token economy.) Over time, as practitioners learn more about how consumers interact with their application or platform to earn tokens, they will be able to incent “quality” micro-behaviors at higher and higher fidelity. As the practice evolves, it is likely we will see the earning of tokens pegged to actual impact as well—for example, the success an influencer has on getting his or her followers to take action.
Immediate gratification
A fundamental component of effectively influencing behavior is immediate reinforcement of actions with rewards. This instant feedback loop could be made easier with tokens (versus waiting for a transaction to clear or a monthly statement, as in the case of miles or points). The reward can be embedded directly in a digital interface so that users can see the results of their actions, as in a gamified system.
The Potency of Tokens + Gamification
In fact, the practice of using the triggers, stimuli, and approaches pioneered in games will be an important tactic for all businesses, regardless of industry, that want to influence behavior with tokens. Non-gaming industry professionals call this practice of using gaming fundamentals to drive engagement outside of an actual game gamification (a term that can make true gaming industry insiders cringe). Gamification is nothing new. It’s a well-worn and proven strategy in a broad range of industries. MySugr uses it to help manage diabetes, Duolingo uses it to teach language, and even Facebook deploys gamified campaigns to help brands engage consumers. All of these examples give us that familiar, lovely zing of dopamine (a hormone that makes us feel good) by rewarding us for specific actions. And they trigger serotonin (which can boost mood) when we think about past successes, such as looking at badges we’ve earned.
But game designers have long held a unique and extremely effective tool in their arsenal. It’s a mechanism that hasn’t been broadly accessible to industries like health care, education, and social media: virtual currency. Game designers have spent years working to shape consumer behavior with a rich range of in-game transactions—all fueled by virtual currency. They have learned how to drive engagement and revenue, no matter how good a player is or where they are in the game. They have even learned how to use virtual currency to help build communities. They have learned how to keep “in the game” and to drive habit. They have built best practices around what works and what doesn’t when it comes to creating new economies that motivate and reward users’ behaviors. Recently, social media players like Kik (instant messaging) and YouNow (livestream video chat) have experimented with in-app virtual currencies (and both have designed tokens).
When they hit the mainstream, tokens could be even more potent than an in-game virtual currency, and applicable to a much broader audience. In fact, the combination of tokens plus gaming fundamentals could give a range of businesses across industries the potential to tug more deeply at our psychology than ever before.
The combination of tokens plus gaming fundamentals could give a range of businesses across industries the potential to tug more deeply at our psychology than ever before.
In our modern, digitally driven world, we are an increasingly receptive audience. As Mary Meeker explains in her 2017 Internet Trend Report, millennials and Generation X have been gamified since birth. They’ve become wired to respond to the gaming mindset, such as the feedback loops and desire to progress to higher levels and achieve mastery. In Mary Meeker’s words, “Games are now foundational to digital success.”130
More Powerful, Aligned Communities
But the power amplifies by an order of magnitude when applied to an entire community. Blockchain entrepreneurs could use tokens as levers with which to influence a community’s direction of movement, and motivate community-level action. It is here that some of the most disruptive use cases are sure to originate. Tokens align the incentives of a user and a community, offering the possibility to reward actions that contribute to network value and community cohesion. Token holders also have “skin in the game”—the value of the token is driven by the size and engagement of its community and overall ecosystem. They have a vested interest in increasing token value, and supporting the participants in that token’s ecosystem.
Tokens can also be used to align the interests of a B2B ecosystem of businesses. They can be designed to drive productive contributions and positive behaviors even from a diverse range of businesses in a way that delivers value back to the ecosystem and all its members.
But blockchain-era communities will also have the power to exert great impact on the business itself. Because tokens are often designed to be portable, communities will have a new tool with which to wield their collective power. If a business is not serving a community, or violates the ethos or values of a community, that business could be abandoned en masse, along with all the economic weight that community represents. Companies that can find ways to align their business models to values and beliefs of a community’s will find themselves in a position to better tap its potential power.
Blurring the Lines between Business Owners and Participants
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On a token-driven platform (imagine a tokenized version of Amazon, Facebook, or Uber), the lines between participants can blur—all participants, whether buying or selling, consuming or contributing, would benefit from the increasing value of the network. This raises the possibility that token holders may act as promoters, working to refer and engage others, and growing the overall value of the network. Historically, businesses based on network effects struggle to get to the critical mass that makes a network truly valuable. Amazon, Facebook, and Uber derive much of their value from the size of their network. Tokens could, if the network is designed well, help propel a business past this classic dilemma; with everyone getting a share of the value created, all participants are motivated to make the network successful.
KJ Erickson, the cofounder and CEO of Public Market, a tokenized ecommerce protocol, believes that these centralized-network-effect businesses are primed for displacement. “As network-effect businesses grow, the value of participating and the cost of switching becomes higher, and so they naturally drive towards monopolies,” she explains. “All for-profit companies have a fiduciary duty to serve shareholders, and so they extract as much profit as possible through huge fees—understanding that even if network participants are frustrated, they have few alternatives. I argue that the network effects of tomorrow will often be built around decentralized, tokenized ecosystems with no distinction between network participants and network owners. They’ll capture the value of the network for participants without charging ‘rent,’ in the form of fees and data. It’s a better outcome for everyone—and if well designed, these decentralized networks could even supplant some of today’s most powerful companies.”131
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