In this article, we’re going to cover some quick questions about a curious property of loyalty points called breakage—points that are issued but never used. Breakage refers to the percentage of loyalty points issued to customers that are never redeemed. This typically happens when customers either forget to use their points, let them expire, or fail to accumulate enough points for redemption.
Breakage has allowed traditional loyalty programs to consistently create value for the business. It is one of the primary sources of profit for airline miles systems, which many of us are familiar with. Tracking this metric is important: if breakage is declining, it means fewer points are expiring unused. In other words, more people are cashing in their points. On the flip side, higher breakage implies an increase in the business’s revenue.
It's not that simple, though. An increase in breakage means that users aren’t redeeming their points for anything. This might also signal that the underlying utility of those points is weak, indicating a larger issue at play.
Technically, breakage measures the financial risk of unredeemed points. It's calculated by dividing the number of unspent points by the total number of points collected. Traditionally, a ratio above 30% indicates a loyalty program may be in trouble—meaning if over a third of the points are being redeemed, the points redemption model might need to be reworked.
For businesses, breakage represents a cost-saving advantage, as they don’t have to deliver the rewards or services associated with unredeemed points. However, managing breakage carefully is important, as high breakage rates can indicate disengagement, ultimately undermining the effectiveness of a loyalty program. Conversely, breakage helps balance program costs while ensuring customer satisfaction when redemption opportunities are strategically offered.
How does this phenomenon change in Web3? Traditionally, points have been used as a transient representation of future value and buy-in into the project releasing the points. They’ve conventionally accrued speculative value based on the project's eventual tokenization, while being fortuitously decoupled from market sell pressure. The "points = token" narrative has been quite prevalent in Web3.
However, we’re slowly seeing a change. Many projects with more fundamental user acquisition needs are realizing the value and effectiveness of building good loyalty programs using points systems that aren’t meant to attract speculative attention but instead retain quality users who find value in utilizing the product itself. These points programs might periodically convert to token incentives, but they begin developing inherent value—either through utility within the product or auxiliary benefits like merchandise, recognition, or sweepstakes. There’s also a third hidden use case: points entirely replacing tokens for a subset of Web3 applications that focus on building sustainable economies, which require significant oversight and complex logic to grow.
Broadly, we can categorize these points systems into:
Transient Points: Often an illiquid asset that captures speculation on the eventual token, decoupled from sell pressure.
Utility Points: Capture the value of the underlying service received upon redemption, with a premium for points-specific utilities like speculation or lotteries.
Points as Programmable Incentives: Capture the utility of the product they represent, effectively functioning like a token with guardrails, perennial in nature (with a possible token event that uses the points as a data source).
Breakage affects these types of points programs differently. While much can be said about the secondary effects of breakage on each category, today we’ll only be addressing the first: points as a transient representation of token speculation.
In this context, the function of redemption refers to the number of users that actually claim the airdrop and eventually either hold or sell the resultant token. Based on data from some of the biggest airdrops, like Arbitrum and Optimism, between 5% to nearly 20% of the airdrop can remain unclaimed. This is the first relevant metric of breakage. It means that of the expected bottom line the project anticipates, they can overshoot their points issuance by 20% with confidence, knowing they’ll still incur the same bottom line. However, this assumes a well-designed system of sources and sinks for the points, allowing for a fixed cost-per-point (CPP) model.
Some projects may choose to forgo a fixed CPP and instead opt for a diluting mechanism. Regardless of the outstanding points, they’ll eventually map to the same number of outstanding tokens. For these models, breakage becomes an interesting variable because it directly affects users.
Let’s say a project decided to create a rewards pool of 10,000 tokens, and during the points program, they distributed 1,000,000 points. At redemption, the user would get a CPC (cost per point) of 0.01 tokens per point. If there’s 20% breakage, 200,000 points remain unredeemed. This is unfortunate for the user because they should have benefited from a CPC of 0.0125, which is 25% more than what they ended up getting.
There’s a secondary effect contributing to the realized breakage of points: the percentage of users who sell their tokens soon after claiming them. This act of “cashing in” the tokens can be viewed as the ultimate redemption of the points they earned. The effect this breakage metric will have on the token price depends significantly on the available liquidity in the market and the fully diluted value (FDV) of the token. A low liquidity-to-FDV ratio results in tokens being sensitive to sell pressure. Market sentiment also influences the likelihood of users cashing in their airdrops upon receiving them. For example, nearly 41% of zkSync airdrop recipients sold their claimed rewards.
Overall, breakage has interesting implications in Web3 Points Programs that need to be parsed more thoroughly. There are robust analogs to Web2 loyalty programs which indicate higher breakage being generally worse for the project, but the flip side of nearly zero breakage is actually quite beneficial in terms of reducing sell pressure. Flavors of points that are not transient will have different reactions to breakage, that we’ll study in future articles!