Arcade tokens: The most underappreciated token type

We recently put together a new, comprehensive taxonomy of token types, including network tokens, collectible tokens, and memecoins. Of the seven types we identified, the least explored and most underappreciated is the arcade token: a token with a relatively stable value within a specific software or product ecosystem, often managed by an issuer (like a company).

Fundamentally, arcade tokens are the blockchain-based equivalent of a type of asset that people are already familiar with: airline miles, credit card points, in-game digital gold, and so on. What all these have in common is that they are currencies that are internal to, and support the functioning of, a marketplace economy: Frequent flyer miles and rewards points, for example, can encourage brand loyalty and be used to make flight and upgrade purchases; digital gold can let you buy or sell items in a video game. 

While companies have used assets like these for decades, almost all previous instances have existed on centralized databases, limiting ownership, transferability, and user choice. Arcade tokens on public blockchains differ in that they are open, interoperable, and composable, which gives them a range of new market design benefits.

This post aims to answer the most common questions we’ve received about arcade tokens: what they are, what they do, why they have value, how builders can use them, the design tradeoffs they entail, and the opportunities they present. 

What is an arcade token?

At a technical level, arcade tokens are just digital currencies intended for spending in their associated application ecosystems — with supply and demand managed flexibly to maintain price stability. Think of them foremost as currencies within a digital economy.

So, where does the term “arcade token” come from? Irrespective of whether you’ve visited an arcade, you’re probably familiar with the concept: You go inside; you trade cash for tokens, typically physical ones; then you use those tokens to play a few rounds of Galaga, Gator Panic, or whatever else you’re into. The tokens let you participate in the arcade’s economy. 

The metaphor of an arcade makes explicitly clear how these tokens work: Arcade tokens have a relatively stable value within the context of the economic system of which they are a part — whether that’s inside a single service, or across a variety of services. The relative stability of arcade tokens’ value sets them apart from other types of tokens, such as those whose value derives from underlying assets (as in asset-backed or collectible tokens); from the operation of decentralized network marketplaces (as in network tokens); or from speculative investments in a specific entity (as in company-backed or security tokens).

Despite the playful name, arcade tokens are a powerful, programmable economic primitive — and they are the key to unlocking a new area of the crypto design space. 

What isn’t an arcade token?

Again, the most substantive distinction between arcade tokens and other types of tokens is that arcade tokens aren’t for investment or speculation. Unlike network or security tokens, which people often acquire in hopes of generating investment returns, arcade tokens are for spending. 

People sometimes refer to arcade tokens as “utility tokens” because they’re designed to provide, well, utility. We avoid this label because it suggests that other token types lack utility, which is absolutely not the case. (See our “Defining tokens” article for more on this.) Alternative names for arcade tokens can include “points” (although in common parlance, this often implies that the associated records are kept on private ledgers rather than on public blockchains) and “loyalty tokens” (which describes just one specific application). 

This doesn’t mean the value of an arcade token can never change — as we describe below, it’s possible that the price of buying an arcade token could change by small amounts over time. But arcade tokens typically have unlimited supply at the prevailing price, and they do not offer, promise, or imply financial returns. This means they are generally unsuitable as investment products, and are thus typically outside the scope of U.S. securities laws.

What are arcade tokens good for? And why should builders consider using them?

Arcade tokens enable builders to print and provision value within a digital economy. Crucially, that ability both to create and allocate value can incentivize user behavior, bootstrap early growth, and generate network effects — without relying on external capital or speculative demand. 

The intuition is simple and again lines up with the arcade analogy: If you’re running an arcade, you will likely want to be able to control the supply of tokens to keep their issuance in line with customer demand. For example, on a day when twice as many customers show up, it may help to have roughly twice as many tokens in circulation, so all the visitors can play as many games as they want (barring any capacity constraints). Why turn people away when you can mint enough tokens to go around?

You’ll also probably want to be able to adjust prices: If you make big improvements to the arcade itself — such as doubling the number of games, bringing in more elaborate full-featured machines, or offering fancier prizes — you might bump up the price per token. In short, you want flexible control over your economy so that you can better manage the tradeoffs between supply and demand (and, furthermore, so that you can signal the value of your arcade to customers).

Beyond smoothing out day-to-day operations, this kind of economic control also helps build lasting relationships with your most loyal customers. You could hand out bonus tokens to your most committed players, for instance. Significantly, when people go home at the end of the day with a few leftover tokens in their pockets, they’re carrying an incentive for them to come back to your arcade, since that’s where the tokens can be used.

Stated more formally, arcade tokens support: 

• Dynamic pricing and promotion: Arcade tokens issuers can adjust token prices, adjust the token-denominated price of making purchases, or both. This allows them to discount goods or services during low-demand periods or reward spending sprees during peak moments.
• Network effects: As with frequent flyer miles and credit card points, users who receive or hold tokens are more likely to remain attached to the brand. And the value of this established user base drives increased participation and collaboration from merchants, developers, and other service providers, which in turn raises the value for users — a classic platform network effect.
• Incentives and loyalty rewards: Arcade token issuers can give bonuses and other perks to customers who perform desired actions. They can also use their issuance powers to reward network participants when they accept or redeem the token. All of this reinforces the network effects just described.
• Economic control: Arcade token issuers can burn tokens upon redemption, track liabilities onchain, and implement monetary policy akin to central banking — all while keeping supply and pricing within a predictable band.

How do arcade tokens work?

The economic dynamics, explained

The economic dynamics of arcade tokens differentiate them from other kinds of tokens. Instead of granting holders ownership rights in the underlying ecosystem, arcade tokens grant holders the ability to access or use certain applications or services; crucially, their market value is designed to be programmatically bounded. This doesn’t require that arcade tokens be pegged to the price of a fiat currency like a stablecoin; it just means that an issuer can use certain mechanisms to effect a price floor and (often more importantly) a price ceiling. 

Arcade tokens are typically freely available at a pre-specified price. Again, think of a token vending machine in an arcade at the boardwalk: You walk up and put in a dollar, and the machine gives you, say, four tokens at a price of 25 cents each. Such token dispensers, commonly referred to as “faucets” or “spigots,” in effect set a price ceiling that the market value should never exceed. Hence, arcade tokens are non-investible: They are for spending, not speculation. 

The value of the token can then be assessed based on what it is redeemable for via any “sinks,” or mechanisms for taking tokens out of circulation. In the case of an arcade, the sinks are games’ “slots” — as in, insert coin to play. If playing one game costs one token, then that means it has to be worth 25 cents. Alternatively, or in addition, the arcade could make the tokens redeemable at a buyback price that’s a bit lower than the faucet price; so an issuer can guarantee that it will always pay, say, 20 cents apiece to buy back those 25-cent tokens. This establishes a floor under which the price should not drop.

Consider the implications of these parameters for the market: Would you ever buy a 25-cent token from a speculator for a dollar when you know you can buy that same token from a faucet (or vending machine) at any time for a quarter of the speculator’s price? Not a chance — that wouldn’t make sense! (Or cents, for that matter.) A person who’s moving to a different town might stand in front of the arcade and try to sell their leftover 25-cent tokens for 22 cents apiece, but it wouldn’t make sense for someone to buy them for more than 25 cents. So while some people may choose to sell their arcade tokens for a discount (for example, if they’re leaving the ecosystem for good), the price should remain relatively stable at any given point in time.

All these non-speculative factors make arcade tokens especially well-suited as foundations for controlled marketplace economies. And note that this doesn’t depend on whether the arcade token is used narrowly, within a single application or service, or more broadly — they are simply consequences of the arcade token’s faucet/redemption design. (Continuing the arcade metaphor: even if the local grocer is a huge video game fan and thus opts to accept the local arcade’s tokens in lieu of cash for payments, there’s still no reason for anyone to pay more than 25 cents per token if you can always get them at that price just by walking over to the arcade.)

Why not just accept stablecoins as payments? 

Arcade tokens have some conceptual overlap with stablecoins — both are designed to facilitate economic transactions while holding a relatively stable value. But arcade tokens can provide much greater flexibility to builders. An issuer can print arcade tokens on-demand (although issuers must still remember to track these tokens’ “shadow” value — accounting for what happens when those arcade tokens are redeemed — on their balance sheets). Issuers can then use these tokens to provide grants and subsidies to users, developers, and other network participants. Moreover, the tokens encourage participants to remain within a given economy, rather than spending their funds elsewhere. (There’s a reason airlines give out “miles” that have to be used for buying future flights from them, rather than simply giving cash rebates to frequent flyers.)

Arcade tokens can also give builders more options for making money. Issuers can sell the tokens directly to users (at a fixed or dynamic price), bundle them into subscription packages, or distribute them through promotional campaigns. When a network of partners agrees to accept a certain arcade token, it enables them to set up cross-promotion and affiliate models — tactics that can broaden each partner’s reach without requiring external capital. 

Crucially, arcade tokens can also allow issuers to exercise fine-grained control over how value flows within their economy by

• restricting transferability (e.g., only within the app or among whitelisted addresses),
• imposing depreciation or expiration dates (encouraging timely usage and reducing hoarding), and
• tying redemptions to specific goods or services (aligning utility with economic intent).

These features help reinforce the token’s value as a medium of exchange — not a speculative asset — and can be encoded programmatically onchain. Put simply: Arcade tokens can help bootstrap growth, encourage engagement, and manage the operations of internal economies, all while affording their maintainers a level of control. 

The power of interoperability

As we’ve already described, arcade tokens issued on public blockchains are similar to loyalty points or airline miles — but they have one major difference: They’re onchain, which means they can be open, interoperable, and composable.

Unlike traditional loyalty systems, which trap value inside closed ecosystems, blockchain-based arcade tokens are able to be permissionlessly shared, accepted, and redeemed across multiple players — even, in principle, among competitors. Portability is a benefit: In this model, users can carry loyalty across services and status can be transferred easily (unlike in today’s convoluted airline “status match” processes, for instance). This portability encourages market participants to compete on the quality of their products and services — instead of on pure lock-in — and it can turn fragmented loyalty programs into public goods. 

One of the best onchain examples of an arcade token to date is the token $FLY issued by Blackbird, from the founder of Resy and Eater. This arcade token creates a loyalty program for restaurants, a bit like Starbucks Stars or MyMcDonald’s Rewards. This may sound familiar, but it has a twist: The same token can be used across many different restaurants. Patrons receive the tokens when they make a purchase at an establishment in the Blackbird network, and then they can redeem them for discounts and other perks at any participating restaurant. Because the underlying protocol is on a blockchain, all this can happen without those restaurants having to interact with one another. And just as an individual restaurant’s rewards program reinforces customer loyalty, here $FLY strengthens loyalty across the entire restaurant network at once. 

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

The result is coopetition (as opposed to classic competition): Your local coffee shop and Starbucks could both gain from accepting the same token, for instance. While at first it might sound like neither coffee business would want that to happen, a shared loyalty program mediated by an arcade token could actually benefit both. The arcade token could enable the Starbucks and local coffee shop experiences to complement each other, so that going to either one generates perks that enhance the value of both. If one of them gives out free mochas in exchange for the arcade token, for example, then this boosts the value customers get from purchasing coffee at either place. Deals like this can reinforce customers’ loyalty to the network and get those customers to spend a larger share of their budget on coffee overall. 

Such coopetition results in more total surplus for the network, which can be shared among all the providers in proportion to the sales they generate. Put differently, instead of competing over slices of the pie, you grow the size of the pie overall.

Design tradeoffs (and opportunities)

Arcade tokens aren’t right for every project. They don’t make sense in situations that could require a speculative asset. For example, layer one blockchain networks that have their own network tokens generally do not need arcade tokens to function. 

But for many projects — especially those with spend-centric economies or physical-world integrations — arcade tokens can be a compelling option. They offer:

• Price stability: Through ceiling and floor mechanisms and controlled issuance.
• Usability: Intuitive and stable value that helps users understand what they’re spending.
• Accounting clarity: Their cost on your balance sheet is the opportunity cost of what they’re redeemable for — no more, no less.
• Control: Issuers can manage them in a way that resembles what central banks do.

We’re also seeing an emerging role for arcade tokens as complements or precursors to network tokens. Blackbird’s $FLY token allows users to redeem it in any participating restaurant, and that redemption behavior is managed on a purpose-built blockchain layer powered by a network token. A decentralized computing network might, for example, use a network token for security and incentives among compute providers, while using an arcade token to establish network effects among the customer base. Alternatively, a marketplace might bootstrap participation using an arcade token, and then introduce a network token later on as it decentralizes its operating protocol. In these cases, arcade tokens can serve as an on-ramp that catalyzes early demand and helps to grow initial traction, before a network shifts to a more decentralized system in the long-term.

Regulatory outlook

An early arcade token example is Quarters, from the blockchain-based gaming platform Pocketful of Quarters. Players can use Quarters tokens to access features and rewards in participating games. Relevant to the idea that arcade tokens are not investable assets, Pocketful of Quarters received a no-action letter in July 2019 from the Securities and Exchange Commission, wherein the agency said that it recognized that people were using the Quarters only to participate in gaming and not for speculation or investment. 

Despite this positive precedent, the Quarters no-action letter and many state regulatory regimes have shortcomings. They take a skeptical view of interoperability, for one thing, viewing it as a bug rather than a feature. Their reasoning stems from the mistaken view that where interoperability exists, a priori, assets may become more readily tradable, taking on the characteristics of financial instruments. This view overlooks the fact that trading demand still depends on whether an asset has speculative upside — which, as we’ve already explained, is generally not the case for arcade tokens. Meanwhile, interoperability is one of the most exciting promises of onchain arcade tokens, offering substantial consumer benefits, including reduced friction and more choice.

Smart design can mitigate regulatory concerns. Arcade tokens don’t need to be kept within closed networks. Mechanisms like capped pricing, faucet-and-sink models, and usage-linked redemption allow issuers to programmatically dampen speculative activity. Consumers also benefit from interoperability, as it enhances usability, fosters competition, and creates broader network effects — ultimately promoting innovation and delivering greater value to users without relying on financial speculation.

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Though arcade tokens aren’t for every use case, they represent a critical building block in the evolution of crypto networks. Just as stablecoins unlock new forms of commerce, and network tokens enable decentralized value-sharing and governance, arcade tokens can power digital economies at scale. 

With greater regulatory clarity, we expect more builders and users to recognize the benefits of arcade tokens as more projects — including those not native to crypto — explore their utility. 

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Acknowledgements: The authors would like to thank Robert Hackett, Tim Sullivan, and Sonal Chokshi for superb editorial input; as well as Sam Broner, Kate Dellolio, Chris Dixon, Liz Harkavy, Steve Kaczynski, Michele Korver, Emily Westerhold, and Liang Wu for insightful comments.

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