Welcome to another edition of the DeFi Frontier, a weekly newsletter about DeFi innovation for the real world! The buzz around real-world assets (RWA) in DeFi is growing day by day. Stay tuned as we track the break-neck pace of this new era of crypto innovation.

News Wire

Drama and intrigue

• April 6 - U.S. Treasury Department warns of money-laundering risks associated with DeFi. In a risk assessment, the U.S. Treasury Department indicated that the absence of AML/KYC compliance creates the potential for abuse by illicit actors. (link)  

• April 5 - Maple Finance pool manager M11 Credit resumes lending. M11 Credit’s previous pool suffered a $36mn default last year from Orthogonal Trading. (link)

• April 4 - P2P BTC exchange Paxful suspends operations. Paxful CEO Ray Youseff cited a dispute with the company’s cofounder Artur Schaback as well as regulatory concerns as the reasons behind the surprise shutdown. (link)

Innovation

• April 7 - German government proposes pro-blockchain legislation. Germany’s “Future Finance Act” would support the issuance of electronic securities on a blockchain as well as increased portability of crypto assets. (link)

• April 5 - Brazilian investment bank BTG Pactual issues USD-backed stablecoin. BTG Pactual launched the BTG Dol stablecoin on Polygon, making the stablecoin available through the bank’s Mynt crypto application. (link)

Real-world assets

• April 7 - BSC-based Venus Protocol considers real-world asset exposure. The DAO for Venus, BSC’s largest lending protocol by TVL ($1.3bn), is considering proposals from Credix Finance and Steakhouse Financial to collateralize its VAI stablecoin with real-world assets. (link)

• April 5 - Citi forecasts $4 trillion in asset tokenization by 2023. A recent Citi GPS report predicted that “tokenization of financial and real-world assets could be the killer use case driving blockchain breakthrough.” (link)

Bonus item (just for fun!)

• April 5 - Apple OS contains the Bitcoin white paper. The most recent versions of MacOS reportedly contain the Bitcoin whitepaper hidden within a secret drive, which can be accessed by entering the following command into the terminal app: open/System/Library/Image\Capture/Devices/VirtualScanner.app/Contents/Resources/simpledoc.pdf (link)

Analysis

Nubank, the Brazilian fintech giant, recently announced the expansion of its Polygon-based Nucoin rewards token for all Brazilian customers. Why is Nubank powering its rewards with blockchain? And how can Nucoin and other rewards tokens benefit non-crypto-native customers?

Today, we’ll discuss how blockchain technology is changing the rewards game, helping businesses to administer smoother, more delightful rewards experiences. In short, the future of rewards is tokenized.

The Landscape (and Limitations) of Loyalty Rewards

Though the technology underlying Nucoin - blockchain - is new to many consumers, the goals of the Nucoin rewards program are nothing new. Done right, rewards can inspire customer loyalty and incentivize the use of a company’s products. According to Deloitte's Center for Financial Services, 80% of consumers say they prefer banks that offer rewards, and another 66% of consumers say they modify their spending to maximize rewards, as the Bond Loyalty Report shows.

‍But for customers, rewards aren’t always rewarding

Done wrong, however, rewards programs can frustrate customers, rather than delight them. Persistent pain points for customers include:

• Confusing rewards structures: According to a NextAdvisor study, some 54% of Americans find frequent flyer programs confusing, and 45% said they were confused about their credit card rewards.

• Limited utility: Many rewards programs fail to clearly communicate the benefits and opportunities that their points unlock, leaving customers confused - not excited - about what to do with their rewards earnings.

• Arbitrary rule changes: Rewards programs often overpromise and then retroactively devalue their rewards to remain solvent. During the COVID-19 pandemic, for example, many airline reward programs significantly devalued their points, leading to customer frustration.

For companies, rewards management is a pain.

Rewards programs can also be a headache for the businesses that manage them, with notable challenges including:

• Fraud management: Preventing fraudulent rewards issuance is a key concern for any rewards program manager. According to Structured Finance Magazine, up to 70% of loyalty programs have been affected by fraud.

• Partner integrations: Many loyalty programs partner with other merchants to allow customers to earn and redeem rewards at more locations. However, reconciling rewards points across multiple ecosystem partners can be a logistical nightmare. In airline loyalty programs, for example, miles earned from alliance partners can take up to 30 days to credit to customer accounts

Tokenized rewards can smoothen over many of these points of friction, creating more value for customers and businesses alike.

The Future of Rewards is Tokenized

In a monetary system, blockchain technology enables “programmable money,” with the issuance and tracking of currency units facilitated by smart contracts. In customer rewards, blockchain can enable “programmable rewards,” yielding efficiency benefits for businesses and leading to a smoother customer experience.

Traditional rewards make use of a single, private ledger managed by the issuing organization. These ledgers often require manual reconciliation and upkeep, especially when a rewards program includes external partners.

In contrast, tokenized rewards are issued on a blockchain, with issuance and reconciliation proceeding according to the blockchain’s rules and smart contracts.

Tokenized rewards unlock a richer customer experience

For customers, tokenization unlocks a best-in-class rewards experience, enabling the following benefits:

• Near-instant rewards crediting: Always-on smart contracts can securely automate rewards issuance upon the completion of predetermined requirements (e.g., customer expenditures).

• Security and transparency: In traditional rewards programs, customers can see their points devalued (or even removed) via arbitrary program decisions. Tokenized rewards, in contrast, are governed by transparent smart contracts and owned by customer wallets.

• Rewards portability: Tokenized rewards can be made highly flexible, tradable, and spendable wherever customers prefer. Customers can redeem their earned rewards within the rewards ecosystem, but can also withdraw them to external wallets.

Blockchain enables technical rewards management advantages

From a management standpoint, tokenized rewards create numerous operational efficiencies:

• Automatic, near-real-time reconciliation: Blockchain-based transactions provide for an always up-to-date record of balances without the need for a centralized clearinghouse.

• Fraud-resistant: Unlike traditional rewards points, each token is issued on the blockchain and therefore easily verifiable. Blockchains are also highly tamper resistant, providing an authoritative record of rewards.

• Unique and trackable: Also unlike traditional rewards points, tokens are trackable from the moment of issuance to the moment of redemption, providing a new, rich dataset for rewards program managers.

Conclusion

The blockchain revolution is only beginning, with lots of use cases still to be explored. Customer rewards are a key frontier for blockchain innovation, as many millions of consumers earn tokenized rewards in the coming months.