Written by: a16z
Compiled by: Block unicorn
We recently organized a brand new, comprehensive classification system of 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, typically 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. What they have in common is 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 tickets and upgrades; digital coins allow you to buy and sell items in video games.
Although businesses have been using such assets for decades, almost all past cases existed in centralized databases, which limited 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 answer the most frequently asked 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 within their related application ecosystem—their supply and demand are flexibly managed to maintain price stability. You can initially view them as currency in the digital economy.
So, where does the term “arcade token” come from? Whether or not you have been to an arcade, 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 participate in the economic system of the arcade.
The metaphor of the arcade clearly explains how these tokens operate: arcade tokens have a relatively stable value within their own economic system—whether within a single service or across multiple services. The relative stability of the value of arcade tokens distinguishes them from other types of tokens, such as those whose value comes 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 funny, arcade tokens are a powerful programmable economic primitive—they are the key to unlocking new realms of cryptocurrency design space.
What is not an arcade token?
To reiterate, the most fundamental difference between arcade tokens and other types of tokens is that arcade tokens are not intended for investment or speculation. Unlike the way people typically seek to obtain investment returns by purchasing network tokens or securities tokens, arcade tokens are used for consumption.
People sometimes refer to arcade tokens as “utility tokens” because they are designed to provide practical functions. We avoid using this label because it implies that other types of tokens lack utility, which is not the case. (For more information, please refer to our article on “Token Definitions.”) Other names for arcade tokens include “points” (although in everyday language, this usually means that the 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 describe below, the price of purchasing arcade tokens may fluctuate slightly over time. However, arcade tokens are typically supplied in unlimited quantities 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 within the jurisdiction of U.S. securities law.
This does not mean that the value of arcade tokens will never change - as we will elaborate on below, the purchase price of arcade tokens may experience slight fluctuations over time. However, arcade tokens are generally supplied in unlimited quantities at the current price, and they do not offer, promise, or imply any financial returns. This means they are generally not suitable as investment products and are therefore typically not subject to U.S. securities laws.
What is the use of arcade tokens? Why should developers consider using them?
Arcade tokens enable developers to mint and distribute value within 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.
This principle is very simple and aligns well with the example of an arcade: if you run an arcade, you would definitely want to control the supply of tokens to ensure that the issuance matches customer demand. For instance, if the number of customers doubles one day, issuing about twice as many tokens might be more helpful, so that all customers can play the games they want (of course, provided there are no capacity limits). Since enough tokens can be issued, why would you want to turn customers away?
You may also need to adjust prices: if you make significant improvements to the arcade itself—such as doubling the number of games, introducing more advanced and fully featured machines, or offering more generous prizes—you may increase the price of each token. In short, you need to flexibly control your economic system in order to better balance supply and demand (in addition, it can also showcase the value of your arcade to customers).
In addition to optimizing daily operations, this economic control also helps establish long-term connections with the most loyal customers. For example, you can distribute reward tokens to the most active players. More importantly, when people have some tokens left in their pockets at the end of the day, it encourages them to visit your arcade again since these tokens can be used there.
More formally, the arcade token supports:
Dynamic Pricing and Promotions: Arcade token issuers can adjust token prices, modify purchase prices denominated in tokens, or both. This enables them to offer discount promotions 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 enhancing 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 at the time of redemption, track liabilities on-chain, and implement currency policies similar to central banks - while keeping supply and pricing within predictable ranges.
How do arcade tokens 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 grant holders the right to access or use specific applications or services; crucially, their market value is designed to be programmatically constrained. This does not mean that arcade tokens must be pegged to fiat currency prices like stablecoins; it simply means that issuers can use certain mechanisms to set price floors and, typically more importantly, price ceilings.
Arcade tokens are usually freely purchased at a predetermined price. Think of the token vending machines in the arcade on the boardwalk: 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 limit. Therefore, arcade tokens do not have investment value: they are meant for consumption, not for speculation.
The value of a token can be assessed based on its redeemable value through any “consumption mechanism” (i.e., the mechanism through which the token exits circulation). In arcade games, the “consumption mechanism” refers to the game's “coin slot”—which means you can only play by inserting coins. If playing a game requires one token, then its value should be 25 cents. Alternatively, the arcade can also set a buyback price slightly below the initial price of the token; this way, the issuer can guarantee that these tokens worth 25 cents will always be bought back at a price of 20 cents each. This establishes a price floor, and the token price should not fall below this floor.
Consider the impact of these parameters on the market: if you know you can buy the same token from a tap (or vending machine) at a quarter of the price 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 is just not cost-effective.) Someone moving to another city might stand at the arcade entrance trying to sell his remaining 25-cent tokens for 22 cents each, but no one would pay more than 25 cents to take them. Therefore, while some may choose to sell their arcade tokens at a discount (for example, if they are completely leaving this ecosystem), the price of the tokens should remain relatively stable at any given point in time.
All these non-speculative factors make arcade tokens particularly suitable as the foundation of a controlled market economy. It is important to note that this does not depend on whether the usage scope of arcade tokens is narrow (limited to a single application or service) or broader - it is simply a result of the “tap/exchange” design of arcade tokens. (Continuing with the arcade example: even if the local grocery store owner is an arcade game enthusiast and chooses to accept local arcade game tokens instead of cash payment, if you can buy tokens for 25 cents just by walking into the arcade, then there is no reason to pay more than 25 cents for each token.)
Why not accept stablecoins directly as a payment method?
Arcade tokens conceptually overlap with stablecoins—both are designed to facilitate economic transactions while maintaining relatively stable values. However, arcade tokens provide greater flexibility for developers. Issuers can print arcade tokens on demand (although they still need to track the “shadow” value of these tokens on their balance sheet—i.e., the value of arcade tokens when redeemed). Issuers can then use these tokens to provide funding and subsidies to users, developers, and other network participants. Moreover, these tokens encourage participants to remain within a specific economic system rather than using funds elsewhere. (There’s a reason airlines issue “miles” instead of directly providing cash rebates to frequent flyers; 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 each partner's reach without the need for external funding.
Importantly, arcade tokens also allow issuers to finely control the flow of value within the economic system:
Restrictions on transferability (e.g., limited to within-app or between whitelisted addresses),
Set depreciation or expiry dates (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 as speculative assets, and they can be encoded through on-chain programming methods. In short: arcade tokens can help initiate growth, encourage user participation, and manage the operation of the internal economy, while granting its maintainers a certain degree of control.
The Power of Interoperability
As we have described, arcade tokens issued on public blockchains are similar to loyalty points or airline miles—but they have one key difference: they are on-chain, which means they can be open, interoperable, and composable.
Unlike traditional loyalty systems that confine value within a closed ecosystem, blockchain-based arcade tokens can be shared, accepted, and exchanged among multiple participants without permission—potentially even being used among competitors. Portability is a significant advantage: in this model, users can transfer their loyalty to different services, and status can also be easily transferred (for example, unlike today's cumbersome “tier matching” processes with airlines). This portability encourages market participants to compete on the quality of products and services, rather than merely 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' Star Rewards or McDonald's membership rewards programs. 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 of these operations can be completed without direct interaction between restaurants. Just as a single restaurant's reward program can enhance customer loyalty, the $FLY can simultaneously enhance loyalty across 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 neighborhood coffee shop and Starbucks can both benefit from accepting the same token. Although it may seem at first that neither coffee shop would want this to happen, the 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, allowing customers to gain discounts that enhance the value for both when visiting either. 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 offers can enhance customer loyalty to the coffee chain network and encourage customers to allocate a larger portion of their budget to coffee.
This kind of cooperative competition can bring more total surplus to the network, which can be distributed according to the sales proportion of each supplier. In other words, instead of fighting over a share of the cake, it's better to enlarge the cake.
Design trade-offs (and opportunities)
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 with its own native token typically does not require arcade tokens to operate normally.
But for many projects—especially those with a consumption-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 volume.
Usability: Intuitive and stable value, helping users understand their consumption situation.
Clarity in accounting: The cost on the balance sheet is the opportunity cost they can be exchanged for - no more, no less.
Control: Issuers can manage them in a manner similar to a central bank.
We also see that arcade tokens are gradually becoming a complement or precursor to network tokens. Blackbird's $FLY token allows users to redeem it at any participating restaurant, and this redemption process is managed by a specially constructed blockchain layer that is driven 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 process of decentralizing the operating protocol. In these cases, arcade tokens can serve as an entry point, catalyzing early demand and helping the network gain initial user growth, after which the network will shift to a more decentralized system in the long term.
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 gain 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 recognize people using Quarters solely for participation in games, rather than for speculation or investment.
Despite this positive precedent, the non-objection letter from Quarters and the regulatory mechanisms in many states still have flaws. For example, they are skeptical about interoperability, viewing it as a vulnerability rather than a feature. Their reasoning stems from a mistaken belief that once interoperability exists, assets become easier to trade, thus possessing the characteristics of financial instruments. This perspective overlooks a fact: trading demand still depends on whether the asset has speculative upside potential—as we explained earlier, arcade tokens typically 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 choice.
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 linked to usage allow issuers to programmatically curb speculative activity. Consumers can also benefit from interoperability, as it enhances user experience, fosters competition, and creates broader network effects—ultimately driving 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 crypto networks. Just as stablecoins have opened up new business models and network tokens have enabled decentralized value sharing and governance, arcade tokens can also significantly drive the development of the digital economy.
As regulatory policies become clearer, we expect more developers and users to recognize the advantages of arcade tokens, as more projects (including those that are not natively cryptocurrency projects) explore their uses.
