a16z: Arcade Tokens, the Most Undervalued Token Type
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a16z: Arcade Tokens, the Most Undervalued Token Type
A token that maintains relatively stable value within a specific software or product ecosystem, typically managed by the issuer (such as a company).
Navigating Web3 tides with focused insightsAuthor: a16z
Translation: Block unicorn
We recently developed a new, comprehensive taxonomy of token types, including network tokens, collectible tokens, and meme coins. Among the seven types we identified, arcade tokens are the least known and most underappreciated: tokens with relatively stable value within a specific software or product ecosystem, typically managed by an issuer (such as a company).
At their core, arcade tokens are blockchain-based assets analogous to familiar ones: airline miles, credit card points, in-game digital coins, and so on. What they share is that they function as currencies circulating within and supporting the operation of an economic system: for example, frequent flyer miles and rewards points enhance brand loyalty and can be used to purchase flights or upgrades; digital coins allow you to buy and sell items in video games.
While companies have used such assets for decades, nearly all prior cases existed within centralized databases, limiting ownership, transferability, and user choice. Arcade tokens built on public blockchains differ—they offer openness, interoperability, and composability, giving them a new set of market design advantages.
This article aims to answer the most common questions we receive about arcade tokens: what they are, what they do, why they're valuable, how developers can use them, the design trade-offs involved, and the opportunities they present.
What Are Arcade Tokens?
Technically speaking, arcade tokens are simply digital currencies for their associated application ecosystems—whose supply and demand are flexibly managed to maintain price stability. You can think of them first and foremost as money in a digital economy.
Where does the term "arcade token" come from? Whether or not you’ve been to an arcade, you’re likely familiar with the concept: you walk in, exchange cash for tokens (usually physical), then use those tokens to play a few rounds of Galaga, Gator Panic, or your favorite game. These tokens let you participate in the arcade’s economy.
The arcade analogy clearly illustrates how these tokens work: arcade tokens maintain relatively stable value within their respective economic systems—whether within a single service or across multiple services. This relative price stability distinguishes arcade tokens from other token types whose value derives from underlying assets (like asset-backed or collectible tokens), decentralized network operations (like network tokens), or speculative investment in a particular entity (like company-backed or security tokens).
Despite the playful name, arcade tokens are powerful programmable economic primitives—and keys to unlocking new frontiers in crypto design space.
What Arcade Tokens Are Not
To reiterate, the most fundamental distinction between arcade tokens and other token types is that arcade tokens are not meant for investment or speculation. Unlike network tokens or security tokens, which people often buy hoping for investment returns, arcade tokens are meant for consumption.
Sometimes arcade tokens are called "utility tokens" because they are designed to provide functional utility. We avoid this label because it implies other token types lack utility, which isn’t true. (See our “Token Definitions” article for more.) Other names for arcade tokens include “points” (though colloquially this usually implies records kept on private ledgers rather than public blockchains) and “loyalty tokens” (which refers only to one specific use case).
This doesn’t mean the value of arcade tokens never changes—as discussed below, the purchase price of arcade tokens may modestly fluctuate over time. But arcade tokens are typically supplied infinitely at the current price, and they do not offer, promise, or imply financial returns. This means they are generally unsuitable as investment products and thus typically fall outside the scope of U.S. securities laws.
This doesn't mean arcade token values never change—indeed, as we’ll detail below, the purchase price of arcade tokens may modestly fluctuate over time. But arcade tokens are typically supplied infinitely at the current price, and they do not offer, promise, or imply any financial return. This means they are generally unsuitable as investment products and thus typically not subject to U.S. securities regulations.
What Are Arcade Tokens For? Why Should Developers Consider Using Them?
Arcade tokens enable developers to mint and distribute value within digital economies. 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 logic is simple and aligns well with the arcade example: if you run an arcade, you’d want control over token supply to match issuance with customer demand. For instance, if customer volume doubles on a given day, issuing roughly twice as many tokens would help ensure all customers can play the games they want (assuming no capacity constraints). If you can issue enough tokens, why turn customers away?
You might also need to adjust pricing: if you significantly improve the arcade itself—say, doubling the number of games, introducing more advanced machines, or offering better prizes—you might raise the price per token. In short, you need flexibility to manage your economy to better balance supply and demand (and signal the enhanced value of your arcade).
Beyond optimizing daily operations, this economic control helps build lasting relationships with your most loyal customers. For example, you could reward active players with bonus tokens. More importantly, when people leave the day with leftover tokens in their pockets, it incentivizes them to return, knowing those tokens can be used at your arcade.
More formally, arcade tokens support:
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Dynamic pricing and promotions: Arcade token issuers can adjust token prices, adjust prices of goods/services denominated in tokens, or both. This allows discounting during low-demand periods or rewarding spending during peak times.
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Network effects: Similar to airline miles and credit card points, users who earn or hold tokens are more likely to remain loyal. The established user base's value encourages merchants, developers, and other service providers to participate, enhancing user value—classic platform network effects.
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Incentives and loyalty rewards: Arcade token issuers can reward customers for completing specific actions. They can also use issuance rights to reward participants when tokens are accepted or redeemed, reinforcing the network effects described above.
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Economic control: Arcade token issuers can burn tokens upon redemption, track liabilities on-chain, and implement central bank-like monetary policies—while keeping supply and pricing predictable.
How Do Arcade Tokens Work?
Understanding Economic Dynamics
The economic dynamics of arcade tokens distinguish them from other token types. Rather than granting ownership in the underlying ecosystem, arcade tokens grant access to or use of specific applications or services; crucially, their market value is programmatically constrained. This doesn’t mean arcade tokens must be pegged to fiat like stablecoins—it simply means issuers can use mechanisms to set price floors and, more importantly, price ceilings.
Arcade tokens are typically freely purchased at a predetermined price. Think of a token vending machine at a boardwalk arcade: you insert a dollar, and it gives you four tokens at 25 cents each. This vending machine—often called a “faucet” or “valve”—effectively sets a price ceiling that market value should never exceed. Thus, arcade tokens lack investment value: they are meant for consumption, not speculation.
A token’s value can be assessed based on its redeemable value through any “sink mechanism” (a mechanism by which tokens exit circulation). In arcades, the sink is the game’s coin slot—the point where you insert a token to play. If a game costs one token, its value should be 25 cents. Alternatively, the arcade could set a buyback price slightly below the initial token price; for instance, guaranteeing to repurchase 25-cent tokens at 20 cents each. This establishes a price floor that the token value shouldn’t fall below.
Consider how these parameters affect the market: if you know you can always buy the same token from the faucet (or vending machine) for 25 cents, would you pay a dollar to a speculator for a 25-cent token? Absolutely not—it wouldn’t make sense! (Or, put another way, it wouldn’t be rational.) Someone moving to another city might stand outside the arcade trying to sell their 25-cent tokens for 22 cents, but no one will pay more than 25 cents. While some may choose to discount their arcade tokens (e.g., leaving the ecosystem entirely), the token price should remain relatively stable at any given time.
All these non-speculative factors make arcade tokens particularly suitable as foundations for controlled market economies. Note that this doesn’t depend on whether arcade tokens are used narrowly (within a single app or service) or more broadly—it’s simply a result of the arcade token’s “faucet/sink” design. (Continuing the arcade analogy: even if the local grocer loves video games and chooses to accept arcade tokens instead of cash, there’s still no reason to pay more than 25 cents per token if you can just walk into the arcade and buy them for 25 cents.)
Why Not Just Accept Stablecoins?
Arcade tokens conceptually overlap with stablecoins—both aim to facilitate economic transactions while maintaining relatively stable value. But arcade tokens offer developers greater flexibility. Issuers can mint arcade tokens on demand (though they must still track the “shadow” value of these tokens on their balance sheet—their redemption value). Issuers can then use these tokens to fund and subsidize users, developers, and other network participants. Additionally, these tokens encourage participants to stay within a specific economic system rather than spend funds elsewhere. (There’s a reason airlines give out “miles” instead of cash back to frequent flyers—miles must be spent on future flights.)
Arcade tokens also offer developers more monetization options. Issuers can sell tokens directly to users (at fixed or dynamic prices), bundle them into subscription packages, or distribute them via promotions. When partner networks agree to accept a given arcade token, they can establish co-marketing and affiliate models—strategies that expand reach without external funding.
Crucially, arcade tokens also allow issuers fine-grained control over value flows within the economy:
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Limit transferability (e.g., only within the app or among whitelisted addresses),
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Set depreciation or expiration dates (encouraging timely use and reducing hoarding), and
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Link redemption to specific goods or services (aligning utility with economic intent).
These features help reinforce the token’s role as a medium of exchange rather than a speculative asset, and can be encoded via on-chain programming. In short: arcade tokens can help bootstrap growth, encourage user engagement, and manage internal economic operations, while giving maintainers a degree of control.
The Power of Interoperability
As described, arcade tokens issued on public blockchains resemble loyalty points or airline miles—but with one key difference: they are on-chain, meaning they can be open, interoperable, and composable.
Unlike traditional loyalty systems that lock value within closed ecosystems, blockchain-based arcade tokens can be shared, accepted, and redeemed across multiple participants without permission—even theoretically among competitors. Portability is a major advantage: in this model, users can transfer loyalty across services, and status transfers easily (unlike today’s cumbersome airline “status match” processes). This portability encourages competition on product and service quality rather than pure user lock-in, and can transform fragmented loyalty programs into public goods.
To date, $FLY tokens issued by Blackbird—a company founded by the creators of Resy and Eater—are among the best examples of on-chain arcade tokens. The token creates a loyalty program for restaurants akin to Starbucks Rewards or McDonald’s membership perks. It may sound familiar, but it’s distinct: the same token can be used across multiple different restaurants. Customers earn tokens when dining at participating Blackbird network restaurants and can redeem discounts and other benefits at any participating location. Because the underlying protocol is blockchain-based, all this happens without direct interaction between restaurants. Just as individual restaurant rewards boost customer loyalty, $FLY enhances loyalty across the entire restaurant network.
Consumers benefit from broader utility; businesses benefit from shared network effects.
The result is coopetition (rather than pure competition): for example, your local coffee shop and Starbucks could both benefit from accepting the same token. While it may initially seem neither wants this, a shared arcade token-based rewards program can actually benefit both. Arcade tokens allow Starbucks and local cafes to complement each other—visiting either enhances value at both. For instance, redeeming a free mocha via arcade tokens at one boosts the perceived value of coffee purchases at both. Such offers strengthen loyalty to the coffee network and increase coffee spending as a share of budgets.
This coopetition generates more total surplus for the network, which can be distributed proportionally to each vendor’s sales. In other words, instead of fighting over slices of the pie, they grow the pie.
Design Trade-offs (and Opportunities)
Arcade tokens aren’t suitable for every project. In cases requiring speculative assets, arcade tokens are inappropriate. For example, a Layer 1 blockchain with its own network token typically doesn’t need an arcade token to function.
But for many projects—especially those centered on consumption-based economics or real-world integration—arcade tokens can be highly attractive. They offer several advantages:
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Price stability: Achieved through price caps and floors and controlled issuance.
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Usability: Intuitive, stable value helps users understand their spending.
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Accounting clarity: Their cost on the balance sheet is their opportunity cost upon redemption—no more, no less.
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Control: Issuers can manage them similarly to central banks.
We’re also seeing arcade tokens increasingly serve as complements or precursors to network tokens. Blackbird’s $FLY token allows redemption at any partner restaurant, with redemptions managed by a dedicated blockchain layer powered by a network token. For example, a decentralized computing network might use network tokens to secure and incentivize compute providers, while using arcade tokens to build network effects among users. Or a marketplace platform might use arcade tokens to bootstrap user engagement, gradually introducing network tokens as the protocol decentralizes. In such cases, arcade tokens act as on-ramps, catalyzing early demand and helping networks achieve initial user growth before transitioning long-term to more decentralized systems.
Regulatory Outlook
An early example of an arcade token is Quarters from Pocketful of Quarters, a blockchain-based gaming platform. Players use Quarters tokens to unlock features and rewards in participating games. On 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 it agreed Quarters were used solely for game participation, not speculation or investment.
Despite this positive precedent, the Quarters no-action letter and many state-level regulatory frameworks remain flawed. For example, they view interoperability skeptically, treating it as a loophole rather than a feature. Their reasoning stems from the mistaken belief that interoperability makes assets easier to trade, thus making them more like financial instruments. This overlooks the fact that trading demand depends on whether the asset has speculative upside—which, as previously explained, arcade tokens typically lack. Meanwhile, interoperability is one of the most exciting advantages of on-chain arcade tokens, offering consumers benefits like reduced friction and increased choice.
Clever design can alleviate regulatory concerns. Arcade tokens don’t need to be confined to closed networks. Mechanisms like price caps, faucet-sink models, and usage-linked redemption allow issuers to programmatically discourage speculation. Consumers benefit from interoperability too, as it improves user experience, fosters competition, and creates broader network effects—ultimately driving innovation and delivering greater user value without reliance on financial speculation.
While arcade tokens aren’t right for every use case, they are a crucial component in the evolution of crypto networks. Just as stablecoins unlocked new business models and network tokens enabled decentralized value sharing and governance, arcade tokens can scale digital economies.
As regulatory clarity improves, we expect more developers and users to recognize the advantages of arcade tokens, with more projects—including non-crypto-native ones—exploring their potential.
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