a16z: Why is Arcade Token considered the most undervalued type of token?

Authors: Scott Duke Kominers, a16z Research Partner; Eddy Lazzarin, a16z Chief Technology Officer; Miles Jennings, a16z General Counsel; Tim Roughgarden, a16z Head of Research; Translated by: @Golden Finance xz

We have recently built a brand new classification system for token types, covering network tokens, collectible tokens, and meme coins, among others. Among the seven categories of tokens we have defined, the least explored and most undervalued is the Arcade token: a token whose value is relatively stable within a specific software or product ecosystem, usually managed by the issuer (such as a company).

Essentially, arcade tokens are a form of asset based on blockchain, equivalent to types that people are already familiar with: airline miles, credit card points, virtual coins in games, etc. The commonality of these assets is that they are all internal currencies that are endogenous to the market economic system and support its operation. For example, frequent flyer miles and reward points can cultivate brand loyalty and be used to purchase flight tickets or upgrade cabins; virtual coins in games can be used to buy or sell in-game items.

Although companies have been using such assets for decades, past instances have almost all been built on centralized databases, limiting ownership, transferability, and user choice. The difference with arcade tokens based on public blockchains is that they feature openness, interoperability, and composability, resulting in a range of new market design advantages.

This article aims to answer the questions we are most often asked: What is the Arcade token? What are its functions and values? How can builders leverage them? What are the design trade-offs? What opportunities do they bring? …

1. What is the Arcade Token?

From a technical perspective, the Arcade token (Arcade Token) is essentially a digital currency that circulates exclusively within its associated application ecosystem—maintaining price stability through flexible supply and demand adjustments. Please first understand it as the currency within a digital economy.

So, where does the term “arcade token” come from? Whether or not you've been to an arcade, you might understand its core logic: upon entering the arcade, you exchange cash for game tokens (usually physical coins), and then use these tokens to play the games you are interested in. Game tokens allow you to participate in the economic cycle of the arcade.

The metaphor of the arcade clearly reveals the operating principle of this type of token: arcade tokens have a relatively stable value within their own economic system (whether it is a single service or a multi-service ecosystem). This relative stability distinguishes them from other types of tokens: for example, tokens whose value comes from underlying assets (such as asset-backed or collectible tokens), tokens that rely on decentralized network market operations (such as network tokens), or tokens based on speculative investments in specific entities (such as company-backed or security tokens).

Despite its casual name, the arcade token is actually a powerful programmable economic primitive—it's the key to unlocking new realms of crypto design space.

So, what is not the Arcade token?

To emphasize again, the essential difference between Arcade tokens and other types of tokens is that Arcade tokens are not meant for investment or speculation. Unlike network tokens or security tokens that people often hold for investment returns, the core function of Arcade tokens is consumption.

Some people refer to arcade tokens as “utility tokens” because their original design intention is to provide a utility function. However, we avoid this label because it implies that other types of tokens lack practicality, which is clearly not the case. Alternative names for arcade tokens could include “points” (although in common usage, this often refers to records associated with a private ledger rather than a public chain) and “loyalty tokens” (which only describes one specific application scenario).

This does not mean that the value of arcade tokens never changes— as described below, their purchase price may fluctuate slightly over time. However, arcade tokens are typically supplied in unlimited quantities at the current price and do not provide, promise, or imply any financial returns. This means they are generally not suitable as investment products and are therefore not typically regulated by U.S. securities laws.

2. What are the uses of Arcade tokens? Why should builders consider using Arcade tokens?

Arcade tokens empower builders to create and distribute value within the digital economy. The key is that this ability to create and distribute value can incentivize user behavior, guide early growth, and generate network effects—without relying on external capital or speculative demand.

Its logic is intuitive and closely follows the metaphor of an arcade: if you run an arcade, you must control the supply of game tokens to match customer demand. For example, when the number of customers doubles, the circulating amount of tokens must also roughly double to allow all visitors to enjoy themselves (unless there are capacity constraints). Since it is possible to issue more tokens to meet demand, why refuse customers at the door?

You may also need to adjust pricing: if you make significant upgrades to the arcade (such as doubling the number of game machines, introducing more sophisticated all-in-one devices, or offering more exquisite prizes), you can increase the price per token. In short, you need flexible economic control to optimize the supply-demand balance (and thereby convey the value of the arcade to customers).

In addition to smoothing daily operations, such economic controls also help establish long-term relationships with the most loyal customers. For example, rewards game coins could be given to core players. Importantly, when people leave, the game coins they have left in their pockets will become an incentive for them to return to the gaming hall—because only then do the game tokens have any utility.

Let me formally elaborate that the arcade token supports the following functions:

Dynamic Pricing and Promotions: The issuer of arcade tokens can adjust the token price, the price of goods/services priced in tokens, or both simultaneously. This allows them to offer discounts during periods of low demand or to reward consumer behavior during peak times.

Network Effects: Just like airline miles and credit card points, users who hold tokens are more likely to maintain brand loyalty. The value of this stable user base will attract merchants, developers, and other service providers to increase their participation and collaboration, thereby enhancing user value—creating a classic platform network effect.

Incentives and Loyalty Rewards: Issuers can reward and grant privileges to users who complete specific actions, and can also use their issuance rights to provide returns to network participants when tokens are accepted or redeemed. This move can strengthen the aforementioned network effects.

Economic Control: The issuer can destroy tokens upon redemption, track liabilities on-chain, and implement central bank-like monetary policy—while maintaining the supply and price within a controllable range.

3. How do arcade tokens work?

(1) Economic Dynamics Analysis

The economic dynamics of arcade tokens differentiate them from other types of tokens. They do not grant holders ownership of the underlying ecosystem, but rather the ability to access or use specific applications/services; the key point is that their market value is designed to be confined programmatically. This does not require arcade tokens to peg to fiat currency prices like stablecoins, but rather means that the issuer can implement specific mechanisms to establish a price floor (and usually more importantly, a price ceiling).

Arcade tokens are usually freely obtainable at a preset price. Imagine a token vending machine at a seaside arcade: you insert 1 dollar, and the machine dispenses 4 tokens (25 cents each). These types of distributors, known as “faucets,” essentially set a price ceiling that the market value should never surpass. Therefore, arcade tokens do not have investment properties: they are used for consumption, not speculation.

The value of a token can be assessed through the redemption capability of the “recovery pool” (i.e., the mechanism that removes tokens from circulation). Taking an arcade as an example, the recovery pool is the coin slot of the game—insert a coin to play. If playing a game requires 1 game coin, then its value must equal 25 cents. Additionally, the issuer can set a buyback price slightly lower than the faucet price (for example, buying back a 25-cent token for 20 cents), thereby establishing a lower limit that the price should not fall below.

Consider the impact of these parameters on the market: When you know you can buy the same game currency from the “faucet” (or vending machine) at a quarter of the speculator's price at any time, would you still spend $1 to buy game currency worth 25 cents from the speculator? Absolutely not – that is simply unreasonable! (It doesn't even make sense.) Someone looking to move away from town might sell the remaining 25-cent game currency for 22 cents each at the entrance of the arcade, but no one would buy at a price higher than 25 cents. Therefore, although some may choose to sell arcade tokens at a discount (for example, to permanently exit the ecosystem), the token price should remain relatively stable at any given point in time.

All these non-speculative attributes make arcade tokens particularly suitable as the foundation of a controlled market economy. It is important to note that this is unrelated to whether arcade tokens are used for a single application scenario or a broader field—they are merely the inevitable result of the “faucet/redemption” design mechanism. (Continuing with the arcade analogy: even if a local grocery store is a gaming enthusiast and accepts arcade tokens as a substitute for cash payment, if one can always walk to the arcade and purchase game tokens for 25 cents, then no one needs to pay a higher price.)

(2) Why not accept stablecoin payments directly?

Arcade tokens and stablecoins conceptually overlap to some extent—both aim to maintain relatively stable values to facilitate economic transactions. However, arcade tokens can offer builders greater flexibility. Issuers can mint arcade tokens as needed (still needing to track the “shadow value” of these tokens on their balance sheets—i.e., accounting treatment when tokens are redeemed), which can then be distributed as incentives to users, developers, and other network participants. Additionally, tokens can encourage participants to remain within a specific economy, preventing capital outflow. (The logic is the same as airlines issuing “miles” that must be used to purchase their flights instead of direct cash back.)

Arcade tokens also provide builders with more profit avenues: issuers can sell tokens directly to users at a fixed or dynamic price, bundle them into subscription packages, or distribute them through promotional activities. When the partner network agrees to accept specific arcade tokens, cross-promotion and alliance models can be established—these strategies can expand the influence of all parties without the need for external funding.

The key lies in the fact that arcade tokens also grant the issuer fine control over the flow of value within its economy, which is specifically achieved through the following methods:

Limit transferability (e.g., restricted to in-app transfers or whitelisted addresses);

Set a depreciation period or validity period (encourage timely use and reduce hoarding);

Bind the redemption rights to specific goods or services (aligning utility with economic intent);

These features help to strengthen the value of tokens as a medium of exchange (rather than as speculative assets) and can be realized through on-chain programming. In short, arcade tokens can facilitate ecosystem startup growth, promote user engagement, and manage internal economic operations, while providing maintainers with controllable operational space.

(3) The Power of Interoperability

As mentioned earlier, arcade tokens issued on a public chain are similar to loyalty points or airline miles, but there are key differences: they operate on-chain, which means they possess openness, interoperability, and composability.

Unlike traditional loyalty systems that confine value within closed ecosystems, blockchain-based arcade tokens can be shared, accepted, and redeemed by multiple parties without permission—even among competitors (theoretically). Portability is a significant advantage: in this model, users can carry their loyalty across services, and their identity status can be easily transferred (for example, escaping the complex “membership matching” processes of airlines today). This portability encourages market participants to compete based on product and service quality (rather than solely relying on user lock-in) and turns fragmented loyalty programs into public goods.

The most typical on-chain arcade token case currently is the Blackbird project token FLY, launched by the founders of Resy and Eater. This token creates a loyalty system for the restaurant industry, similar to Starbucks stars or McDonald's rewards program, but with a groundbreaking innovation: the same token can be used across multiple restaurants. Customers earn tokens by spending at merchants within the Blackbird network and can redeem discounts and privileges at any partner restaurant. Since the underlying protocol is based on blockchain, all processes do not require direct interaction between restaurants. Just as a single restaurant's rewards program enhances customer stickiness, FLY can simultaneously strengthen the loyalty system of the entire restaurant network.

Consumers gain broader usability, while businesses share network effects.

The result has given rise to cooperative competition (as opposed to traditional competition): for example, local coffee shops and Starbucks can achieve a win-win situation by accepting the same token. At first glance, it may seem that neither party is willing to do so, but the shared loyalty program enabled by arcade tokens is actually beneficial for both. This token can complement the experiences of Starbucks and local coffee shops, enhancing the value for both when consumers spend at either location. For instance, if one party offers a free mocha exchange token, it increases customers' sense of acquisition when buying coffee at both places. Such cooperation can strengthen customer loyalty to the network and encourage them to allocate more of their budget to coffee consumption.

This cooperative competition creates more total surplus for the network, and each provider can share the revenue proportionally based on sales. In other words, rather than competing for a limited share, it is better to grow the whole pie together.

(4) Design Trade-offs (and Opportunities)

Arcade tokens are not suitable for all projects. They make no sense in scenarios that require speculative assets. For example, a layer-1 blockchain network that has its own native tokens typically does not need arcade tokens to operate.

However, for many projects — especially those that are consumer-centric or involve the integration of the physical world — arcade tokens may be a highly attractive option. They offer:

Price Stability: Achieved through upper and lower limit mechanisms and controlled issuance;

Usability: Intuitive and stable value helps users understand consumption content;

Accounting Clarity: The cost on its balance sheet strictly equals the opportunity cost of redeemable assets;

Control: The issuer may adopt a central bank-like management model;

We have also observed the emerging role of arcade tokens as a supplement or precursor to network tokens. Blackbird's FLY token allows users to redeem at any partner restaurant, a redemption process managed by a dedicated blockchain layer operating on network tokens. For example, a decentralized computing network may use network tokens to ensure security and incentives among computing providers, while leveraging arcade tokens to establish network effects within the customer base. Alternatively, markets may initially use arcade tokens to kickstart engagement, introducing network tokens only after the operational protocol has been decentralized. In such cases, arcade tokens can serve as an “entry channel,” catalyzing early demand and accumulating initial momentum before the network shifts to a more decentralized system in the long term.

4. Regulatory Outlook

An early example of arcade tokens is the Quarters token issued by the blockchain gaming platform Pocketful of Quarters. Players can use Quarters tokens to obtain features and rewards in cooperative games. Related to the concept of “arcade tokens as non-investment assets,” the company received a no-action letter from the U.S. Securities and Exchange Commission (SEC) in July 2019, in which the agency recognized that Quarters tokens are used solely for game participation and not for speculation or investment.

Despite this positive precedent, the Quarters non-disclosure agreement and many state-level regulatory systems still have flaws. Firstly, they are skeptical of interoperability, viewing it as a defect rather than a feature. This logic stems from the erroneous belief that as long as interoperability exists, assets may be easier to trade, thus exhibiting financial instrument properties. This perspective overlooks the fact that trading demand still depends on whether the asset has speculative space— and as mentioned earlier, arcade tokens typically do not possess this characteristic. Meanwhile, interoperability is precisely one of the most anticipated advantages of on-chain arcade tokens, as it can significantly reduce friction, increase choices, and bring tangible benefits to consumers.

Clever design can alleviate regulatory concerns. Arcade tokens need not be confined to closed networks. Through mechanisms such as price caps, the “faucet-recycling pool” model, and redemption rules linked to usage, issuers can programmatically suppress speculative activities. Interoperability also benefits consumers—enhancing usability, fostering competition, and creating broader network effects, ultimately driving innovation and creating greater value for users without relying on financial speculation.