The business of tokens
Exploring the role of arcade tokens within onchain economies. Plus the latest crypto moves from Uniswap, the SEC, SoFi, and more.
IN THIS EDITION
Arcade tokens, explained — and how companies can use them
To fee or not to fee is not the question — more on when, not whether, to flip the fee switch
News and updates — from the SEC Secretary on categorizing tokens to the latest industry moves incorporating crypto
THE BUSINESS OF TOKENS
Arcade tokens: The most underappreciated token type
Scott Duke Kominers, Eddy Lazzarin, Miles Jennings, and Tim Roughgarden
One of the least explored and most underappreciated types of tokens out there is the arcade token.
Despite the playful name, arcade tokens are a powerful, programmable economic tool that unlocks a new area of the crypto design space; they’re uniquely useful for crypto companies looking to manage economies or grow their network effects without the noise of speculation.
So what is an arcade token? They’re tokens with a relatively stable value within a specific software or product ecosystem, often managed by an issuer (like a company). Think of them like the blockchain-based equivalent of airline miles, credit card points, in-game digital gold, and so on.
All of these are currencies that are internal to, and support the functioning of, a marketplace economy. For example, frequent flyer miles and rewards points can encourage brand loyalty and be used for flight upgrades.
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.
To expand on the 7 different types of tokens we’ve shared, this new post answers the most common questions we’ve heard 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.
More on what is — and isn’t — an arcade token
At a technical level, arcade tokens are just digital currencies intended for spending within their associated application ecosystems — with supply and demand managed flexibly to maintain price stability. Think of them foremost as currencies within a digital economy.
Whether or not 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. Hence the phrase “arcade token”.
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).
Moving on: What isn’t an arcade token?
First, arcade tokens are not typically investment products. Unlike other types of tokens, arcade tokens are largely useless for investment and speculation, because people can only spend them within a given application or ecosystem.
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 they 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 typically fall outside the scope of U.S. securities laws.
Second, arcade tokens are not the only type of token with “utility.” 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 article on token types for more on this.)
Read the full post for more on:
What arcade tokens are good for, and why builders should consider using them
How arcade tokens work — and their economic dynamics, explained
Why not just accept stablecoins as payments?
The power of interoperability
Design tradeoffs (and opportunities)
Regulatory outlook
SCAN, READ, LISTEN
a16z crypto’s Miles Jennings on network tokens, and why they should have onchain revenue (also here):
A comprehensive taxonomy of 7 token types — including arcade tokens, network tokens, collectible tokens, memecoins, and more.
A deep-dive discussion on tokens: What they are, what they aren’t, and what they’re capable of…
COMPANY BUILDING RESOURCES
When to flip the fee switch, that is the question
Pricing is one of the most common conundrums for marketplace builders. Many marketplaces heavily subsidize user activity to bootstrap initial growth and liquidity — giving their product or service away for free or at a steep discount.
Other businesses wait too long to charge fees — or they set prices too low. But that’s not sustainable: At some point, if builders want a network to be valued for the business it generates, the network has to start taking meaningful fees.
Flipping the “fee switch” can seem scary because when a marketplace starts charging for something that was previously free, usage is virtually guaranteed to decrease, at least in the short term. Nevertheless, it’s important to remember that while raising prices is likely to divert some customers away, it also means making more money from those who stay. Even if you end up with fewer users, the fact that those users are paying can actually increase the value of the network.
The question isn’t whether to flip the switch, but when. In this piece, we help builders understand fee switches and work through the logic of answering:
Why protocols charge fees
How to think about timing
When to flip the switch
INDUSTRY NEWS AND UPDATES
Uniswap Labs’ Hayden Adams, among others, recently submitted a proposal to Uniswap governance to turn on protocol fees and align incentives across the Uniswap ecosystem.
SEC secretary announces next steps in Project Crypto, including establishing a framework/token taxonomy to categorize digital assets under U.S. securities laws.
SoFi becomes the first and only nationally chartered U.S. bank to offer trading of dozens of cryptocurrencies — including Bitcoin (BTC), Ethereum (ETH), and Solana (SOL) — with the launch of SoFi Crypto
Square (Block)’s previously announced rollout of Bitcoin went live earlier this week, making it (according to founder Jack Dorsey) “the first fully integrated Bitcoin payments and wallet solution for businesses that will enable sellers to accept Bitcoin payments and automatically convert sales into Bitcoin.” U.S. sellers using Square can now “receive btc to btc, btc to fiat, fiat to btc, or fiat to fiat”, per Dorsey, as reported here.
Cash App (also part of Block) will let users send and receive stablecoins, according to a spokesperson via Fortune, starting next year. Solana shared that they will be powering this, at least initially.
The U.S. Treasury Department had issued a request for comments on Advance Notice of Proposed Rulemaking for implementation of the GENIUS Act; a16z crypto submitted its response — more on that here. To summarize, we recommended:
Clarifying definitions — decentralized stablecoins ≠ payment stablecoins
Promoting competition and a level playing field
Supporting AML goals with practical, tech-driven solutions
Ensuring tax rules reflect real-world use
— a16z crypto editorial team
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