LoyaltyX loves blockchain because it allows for the existence of a trustworthy cryptocurrency, which is a viable and exciting alternative to loyalty points. We believe it is the biggest development in loyalty since the invention of the frequent flyer program in the 1980’s. We’re even running a blockchain loyalty research project at University Of NSW called Unify Rewards (www.unifyrewards.com) to determine how members respond to earning cryptocurrency.
As we detailed in a recent article, major loyalty programs generally only allow points to be used within their eco-system, they set rules for them to expire, and they tend to devalue them over time to boot their profits. A free-floating cryptocurrency solves these problems for the member; cryptocurrencies can be spent directly or easily converted into local fiat currencies, cryptocurrencies never expire, and when the demand for a cryptocurrency rises then the value generally rises with it.
The implementation of a loyalty program using a major blockchain cryptocurrencies also brings with it some challenges. To illustrate, let’s say we wanted to run a loyalty program offering Bitcoin instead of loyalty points:
- Slow Processing Times: Generally a Bitcoin transaction takes up to 10 minutes, which is how often a block is created by miners. If the network is at full capacity, however, it can take much longer. Bitcoin’s protocol only supports an estimated 7 transactions per second, which means an order placed may not make it onto the next block, or even the one after that. This makes it impossible to deliver a real-time transaction experience to the member.
- High Fees: While paying a transaction fee for buying or selling BitCoin is optional, miners can choose which transactions to process and prioritise those that pay higher fees. For a loyalty program, this can add significant and unpredictable costs to the running of the program, something which may make it commercially unviable, particularly when major programs process millions of earn events each year.
- Forks: In the beginning there was BitCoin. Now there’s Bitcoin Core, Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited, Bitcoin Cash, Parity Bitcoin, BTC1, Bitcoin Gold, etc. One can assume the expansion of Bitcoin variations will continue as the decentralised ledger democratic process generates more and more forks, leading to who knows what. This continual fragmenting isn’t ideal for a loyalty program where members seek simplicity, trust and value. Without these elements, engagement with the program is likely to be undermined.
- Control: With mining rigs in China accounting for a scarily large percentage of all Bitcoin earners in the world today, is Bitcoin really controlled by no-one? If the Chinese government took over every mining rig on Chinese soil and put them to work always extending the shortest chains, then Bitcoin could be destroyed. While unlikely, the idea a loyalty currency may be under threat doesn’t lend itself well towards driving stronger loyalty program engagement.
Enter Hashgraph, a new distributed ledger technology which can process an enormous 300,000 transactions per second. Hashgraph stores and updates information with an algorithm which allows a distributed and decentralised community to reach consensus between members in a secure way with mathematically proven fairness in the absolute ordering of transactions. The technology avoids the need for massive energy consumption like the mining operations required for blockchain. Hashgraph’s inventor, Professor Leemon Baird claims it solves many of the shortcomings of Bitcoin and Ethereum.
Can Hashgraph solve the cryptocurrency loyalty program problems contained within blockchain? Let’s take a look:
- Slow Processing Times: Theoretically Hashgraph should support real-time cryptocurrency transactions due to its high processing speed. We say theoretically because a cryptocurrency is yet to be launched on Hashgraph, although it is in development.
- High Fees: Due to the high processing speed, the need for miners to charge higher fees for faster transaction processing is eliminated. The big unknown with Hashgraph is the commercial model; unlike most blockchain platforms which are open-source, Hashgraph is patented and privately-owned by a company called Swirlds Inc, meaning using it to run a loyalty program will likely incur licensing and/or transactions fees. It is too early to determine what cost this will add to the overall loyalty program operation.
- Forks: One of the main drivers of forks on the Bitcoin blockchain is a lack of consensus regarding software updates. If a large group of miners don’t want to progress with a certain upgrade, a fork is created, and often a new Bitcoin version is created also. With Hashgraph, this would appear to be less likely if the control of the software isn’t centralised (i.e. controlled by Swirlds). This is the most contentious part of Hashgraph; is it truly decentralised if it is owned by a single entity? This will continue to be a hotly-debated topic. Certainly from a loyalty perspective less forks mean less instability which will lead to better member trust and engagement.
- Control: In Hashgraph, it takes more than two-thirds of the entire population to agree on the order of transactions for the community to come to consensus, which makes it much more difficult to seize control than with Bitcoin, which requires 51% of a partition (not the entire population) to come to consensus. This should certainly reduce loyalty member anxiety about the stability of the cryptocurrency.
While it’s early days, Hashgraph appears to have potential to solve certain cryptocurrency loyalty program problems contained within blockchain when compared against Bitcoin.
It shouldn’t be forgotten however that the big advantage of Bitcoin is it’s a highly desirable currency, a major consideration for any loyalty program as detailed in a recent article. New cryptocurrencies running on Hashgraph will take time to develop this, if they ever achieve it at all.
LoyaltyX looks forward to the launch of a cryptocurrency on Hashgraph to better analyse and research the opportunities and challenges of this new technology.
Philip Shelper is Chief Design Officer & Co-Founder of LoyaltyX, an experimental loyalty agency and the program operator of Unify Rewards. He is also CEO & Founder of Loyalty & Reward Co, a leading loyalty management consulting agency.
Let’s connect! https://au.linkedin.com/in/philipshelper