a16z: Arcade Token The most underrated type of Token

Authors: a16z, Scott Duke Kominers, Eddy Lazzarin, Miles Jennings, Tim Roughgarden

Preface

We have recently organized a brand new, comprehensive classification system for token types, which includes network tokens, collectible tokens, and meme coins. Among the seven types we identified, arcade tokens are the least known and most undervalued: a type of token that has relatively stable value within a specific software or product ecosystem, usually managed by the issuer (such as a company).

Essentially, arcade tokens are a form of blockchain-based assets, similar to certain assets that people are already familiar with: such as airline miles, credit card points, and in-game digital coins, etc. Their commonality lies in the fact that they are currencies that circulate within the market economy and support its operation: for example, frequent flyer miles and reward points can enhance brand loyalty and can be used to purchase airline tickets and upgrades; digital coins can allow you to buy and sell items in video games.

Although companies have been using such assets for decades, almost all past cases have existed in centralized databases, which limits ownership, transferability, and user choice. In contrast, arcade tokens based on public blockchains are different; they possess openness, interoperability, and composability, which endow them with a range of new market design advantages.

This article aims to address the most common questions we receive about arcade tokens: what they are, what their purpose is, why they have value, how developers use them, the design trade-offs involved, and the opportunities they present.

What is Arcade Token?

From a technical perspective, arcade tokens are essentially digital currencies used in their related application ecosystem—its supply and demand are flexibly managed to maintain price stability. You can initially think of them as currency in the digital economy.

So, where does the term “arcade token” come from? Whether you've been to an arcade or not, you might be familiar with the concept: you walk in, exchange cash for tokens (usually physical tokens), and then use those tokens to play a few rounds of Galaga, Gator Panic, or other games you enjoy. These tokens allow you to engage in the economic system of the arcade.

The metaphor of an arcade clearly explains how these tokens operate: arcade tokens have a relatively stable value within the economic system they belong to—whether within a single service or across multiple services. The relative stability of arcade token value distinguishes them from other types of tokens, such as those whose value derives from underlying assets (like asset-backed tokens or collectible tokens), decentralized network market operations (like network tokens), or speculative investments in specific entities (like company-backed tokens or security tokens).

Although the name sounds silly, arcade tokens are a powerful programmable economic primitive—they are key to unlocking new realms of cryptocurrency design space.

What is not an arcade token?

To reiterate, the most substantial difference between arcade tokens and other types of tokens is that arcade tokens are not intended for investment or speculation. Unlike what people typically expect when purchasing network tokens or security tokens to gain investment returns, arcade tokens are meant for consumption.

People sometimes refer to arcade tokens as “utility tokens” because they are intended to provide practical functions. We avoid using this label as it implies that other types of tokens lack utility, which is not the case. Other names for arcade tokens include “points” (although in common usage, this usually means that relevant records are kept on a private ledger rather than a public blockchain) and “loyalty tokens” (which refers only to a specific application).

This does not mean that the value of arcade tokens will never change— as we will explain below, the price of purchasing arcade tokens may fluctuate slightly over time. However, arcade tokens are typically issued in unlimited supply at the current price, and they do not provide, promise, or imply financial returns. This means they are generally not suitable as investment products and are therefore usually not subject to U.S. securities laws.

This does not mean that the value of arcade tokens will never change— as we will detail below, the purchase price of arcade tokens may experience slight fluctuations over time. However, arcade tokens are typically supplied in unlimited quantities at the current price, and they do not provide, promise, or imply any financial returns. This means they are generally not suitable as investment products and are therefore usually not subject to U.S. securities laws.

What are the uses of arcade tokens? Why should developers consider using them?

Arcade tokens enable developers to mint and distribute value in the digital economy. Crucially, this ability to create and distribute value can incentivize user behavior, drive early growth, and generate network effects—without relying on external capital or speculative demand.

The principle is very simple and aligns well with the example of an arcade: if you run an arcade, you definitely want to control the supply of tokens to match the demand from customers. For example, if the number of customers doubles one day, it might be more helpful to issue about twice as many tokens so that all customers can play the games they want (of course, assuming there are no capacity limits). Since it's possible to issue enough tokens, why would you turn customers away?

You may also need to be able to adjust prices: if you make significant improvements to the arcade itself—such as doubling the number of games, introducing more advanced and feature-rich machines, or offering more generous prizes—you may be able to raise the price of each token. In short, you need to flexibly control your economic system to better balance supply and demand (additionally, this can showcase the value of your arcade to customers).

In addition to optimizing daily operations, this economic control also helps establish long-lasting connections with the most loyal customers. For example, you can issue reward tokens to the most active players. More importantly, when people end their day with some tokens left in their pockets, it incentivizes them to return to your arcade, as these tokens can be used there.

More formally, the arcade token supports:

• Dynamic Pricing and Promotions: Arcade token issuers can adjust token prices, modify the purchase price denominated in tokens, or both. This allows them to offer discounts on goods or services during periods of low demand or reward consumption during peak times.
• Network Effects: Similar to airline miles and credit card reward points, users who acquire or hold tokens are more likely to remain loyal to the brand. The value of this established user base encourages merchants, developers, and other service providers to engage more in collaboration, thereby increasing user value – this is a typical platform network effect.
• Incentives and Loyalty Rewards: Arcade token issuers can provide rewards and other benefits to customers who complete specified actions. They can also leverage issuance rights to offer rewards when network participants accept or redeem tokens. All of this reinforces the network effects described earlier.
• Economic Control: Arcade token issuers can destroy tokens upon redemption, track liabilities on-chain, and implement monetary policies similar to central banks—while keeping supply and pricing within a predictable range.

How Does Arcade Token Work?

Economic Dynamics Analysis

The economic dynamics of arcade tokens distinguish them from other types of tokens. Arcade tokens do not grant holders ownership of the underlying ecosystem, but rather confer the right to access or use specific applications or services; crucially, their market value is designed to be programmatically restricted. This does not mean that arcade tokens must be pegged to the price of fiat currency like stablecoins; it merely means that issuers can employ certain mechanisms to set a price floor, and typically more importantly, a price ceiling.

Arcade tokens are typically purchased freely at a predetermined price. Think of the token vending machines in a seaside arcade: you walk up, insert a dollar, and the machine gives you four tokens, each priced at 25 cents. These token vending machines, often referred to as “taps” or “valves,” effectively set a price ceiling, and the market value should never exceed this ceiling. Therefore, arcade tokens do not have investment value: they are meant for consumption, not speculation.

The value of a token can be assessed based on its redeemable value through any “consumption mechanism” (i.e., the mechanism by which tokens exit circulation). In arcade games, the “consumption mechanism” refers to the game's “coin slot” — that is, the place where you must insert coins to play. If playing a game requires one token, then its value should be 25 cents. Alternatively, the arcade could also set a buyback price slightly lower than the initial price of the token; this way, the issuer can guarantee to buy back these tokens worth 25 cents at a price of 20 cents each. This establishes a price floor, below which the token price should not fall.

Consider the impact of these parameters on the market: If you know you can buy the same token for a quarter of the price from a faucet (or a vending machine) at any time, would you spend a dollar to buy a token worth 25 cents from a speculator? Absolutely not—this is simply unreasonable! (Or rather, it's just not cost-effective.) Someone moving to another city might stand outside an arcade trying to sell his remaining 25-cent tokens for 22 cents each, but no one would pay more than 25 cents for them. Therefore, while some people might choose to sell their arcade tokens at a discount (for example, if they are leaving this ecosystem altogether), the price of the token should remain relatively stable at any given point in time.

All these non-speculative factors make arcade tokens particularly suitable as a foundation for a controlled market economy. It is important to note that this does not depend on whether the use of arcade tokens is narrow (limited to a single application or service) or broader—they are simply the result of the “tap/exchange” design inherent to arcade tokens. (Continuing with the arcade example: even if the local grocery store owner is a video game enthusiast and chooses to accept tokens from local arcade games instead of cash payments, there would be no reason to pay more than 25 cents for each token if you can simply walk into the arcade and buy tokens for 25 cents.)

Why not directly accept stablecoins as a payment method?

Arcade tokens conceptually overlap with stablecoins—both aim to facilitate economic transactions while maintaining relatively stable values. However, arcade tokens offer developers greater flexibility. Issuers can print arcade tokens on demand (although they still need to track the “shadow” value of these tokens on their balance sheets—that is, the value of arcade tokens at the time of redemption). Issuers can then use these tokens to provide funding and subsidies to users, developers, and other network participants. Additionally, these tokens encourage participants to stay within a specific economic system rather than using funds elsewhere. (There’s a reason airlines issue “miles” instead of direct cash rebates to frequent travelers; these miles must be used to purchase future flights.)

Arcade tokens can also provide developers with more profit options. Issuers can sell tokens directly to users (at a fixed or dynamic price), package them into subscription plans, or distribute them through promotional activities. When partner networks agree to accept a certain arcade token, they can establish cross-promotion and affiliate marketing models—these strategies can expand the reach of each partner without external funding.

Crucially, arcade tokens also allow issuers to finely control the flow of value within the economic system:

• Transferability restrictions (e.g., limited to within the application or between whitelisted addresses),
• Set depreciation or expiration date (encourage timely use and reduce hoarding), and
• Link the exchange to specific goods or services (aligning practicality with economic intent).

These features help to enhance the value of tokens as a medium of exchange rather than a speculative asset, and can be encoded through on-chain programming. In short: Arcade tokens can help initiate growth, encourage user participation, and manage the internal economy's operation, while granting its maintainers a certain level of control.

The Power of Interoperability

As we have described, arcade tokens issued on a public blockchain are similar to loyalty points or airline miles—but they have one main difference: they are on-chain, which means they can be open, interoperable, and composable.

Unlike traditional loyalty systems that confine value within closed ecosystems, blockchain-based arcade tokens can be shared, accepted, and redeemed among multiple participants without permission – theoretically even being used between competitors. Portability is a significant advantage: in this model, users can transfer loyalty to different services, and status can also be transferred easily (for instance, unlike the cumbersome “status matching” processes of airlines today). This portability encourages market participants to compete on the quality of products and services rather than simply pursuing user lock-in, and can transform fragmented loyalty programs into public goods.

So far, the $FLY token issued by Blackbird, founded by the creators of Resy and Eater, is considered one of the best on-chain arcade token cases. This token creates a loyalty program for restaurants similar to Starbucks' Stars program or McDonald's rewards program. It may sound somewhat familiar, but it is unique: the same token can be used at multiple different restaurants. Customers earn tokens after spending at restaurants within the Blackbird network, which can then be redeemed for discounts and other benefits at any participating restaurant. Since the underlying protocol is based on blockchain, all these operations can be completed without direct interaction between restaurants. Just as a single restaurant's rewards program can enhance customer loyalty, the $FLY can simultaneously boost the loyalty of the entire restaurant network.

Consumers benefit from broader utility; businesses benefit from shared network effects.

The result is cooperative competition (rather than traditional competition): for example, your local coffee shop and Starbucks can both benefit from accepting the same token. Although it may seem that neither coffee shop would want this situation at first, a shared membership program enabled by arcade tokens can actually benefit both parties. Arcade tokens can complement the experiences of Starbucks and the local coffee shop, so that visiting either one provides discounts that enhance the value for both. For instance, if one of them offers a free mocha coffee in exchange for arcade tokens, then the value gained from purchasing coffee at both shops will increase. Such discounts can strengthen customer loyalty to the coffee chain network and encourage customers to allocate a larger portion of their budget to coffee.

This cooperative competition can bring more total surplus to the network, which can be distributed according to each supplier's sales volume. In other words, instead of competing for a share of the cake, it is better to make the cake bigger.

Trade-offs (and Opportunities) in Design

Arcade tokens are not suitable for all projects. In cases where speculative assets are needed, arcade tokens are inappropriate. For example, a layer-1 blockchain network that has its own native tokens usually does not require arcade tokens to function properly.

However, for many projects—especially those with a consumer-centric economic model or those that integrate with the physical world—arcade tokens may be a highly attractive option. They have the following advantages:

• Price Stability: Achieved through a mechanism of price ceilings and floors as well as controlling the issuance.
• Usability: Intuitive and stable value that helps users understand their spending situation.
• Clarity in Accounting: The cost on the balance sheet is the opportunity cost of what they can be redeemed for - no more, no less.
• Control: Issuers can manage them in a manner similar to central banks.

We also see that arcade tokens are gradually becoming a complement or precursor to network tokens. The Blackbird $FLY token allows users to redeem at any participating restaurant, and this redemption process is managed by a specially built blockchain layer that is powered by network tokens. For example, a decentralized computing network can use network tokens to ensure security and incentives among computing providers, while using arcade tokens to establish network effects among users. Alternatively, a marketplace platform can use arcade tokens to guide user participation and then gradually introduce network tokens during the decentralization of its operational protocol. In these cases, arcade tokens can serve as a gateway, catalyzing early demand and helping the network gain initial user growth before the network transitions to a more decentralized system in the long run.

Regulatory Outlook

An example of an early arcade token is Quarters, which comes from the blockchain-based gaming platform Pocketful of Quarters. Players can use Quarters tokens to obtain features and rewards in participating games. Regarding the view that arcade tokens are not investment assets, Pocketful of Quarters received a no-action letter from the U.S. Securities and Exchange Commission (SEC) in July 2019. The SEC stated in the letter that they acknowledge that people use Quarters solely for participating in games, rather than for speculation or investment.

Despite this positive precedent, the no-objection letters from Quarters and the regulatory mechanisms in many states still have flaws. For instance, they are skeptical of interoperability, viewing it as a vulnerability rather than a feature. Their reasoning stems from a misconception that once interoperability exists, assets become easier to trade, thereby exhibiting characteristics of financial instruments. This perspective overlooks the fact that trading demand still depends on whether the asset has speculative upside potential — as we explained earlier, arcade tokens usually do not have such potential. Meanwhile, interoperability is one of the most exciting advantages of on-chain arcade tokens, bringing numerous benefits to consumers, including reduced trading friction and increased choices.

Clever design can alleviate regulatory concerns. Arcade tokens need not be confined to closed networks. Mechanisms such as price caps, faucet-sink models, and redemption mechanisms tied to usage allow issuers to programmatically curb speculative activities. Consumers can also benefit from interoperability, as it enhances user experience, fosters competition, and creates broader network effects—ultimately promoting innovation and delivering greater value to users without relying on financial speculation.

Although arcade tokens are not suitable for all scenarios, they are a crucial component in the evolution of the crypto network. Just as stablecoins have opened up new business models and network tokens have achieved decentralized value sharing and governance, arcade tokens can also significantly promote the development of the digital economy.

With the increasingly clear regulatory policies, we expect more developers and users to recognize the advantages of arcade tokens, as more projects (including those that are not native cryptocurrency projects) explore their uses.