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On the quantity theory of money for tokens

Warren Weber
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The Quantity Theory of Money has been increasingly used to study and explain cryptocurrencies, but for this theory to apply, we must consider it in terms of tokens rather than common currencies.

General Quantity Theory of Money: MV = PQ

The product of the quantity of money in the economy (M) and the number of times a unit of money is spent in a given period (V) is equal to the product of the quantity of output in the economy (Q) and the price per unit of output (P).

Quantity Theory of Money for Token Economy: MV = PQ

Here, M, P, and Q must be redefined. - M - the number of tokens in existence - Q - total output within the economy that uses these tokens in a period - P - price of a unit of output in terms of the token (not USD or other currencies) With these definitions in place, the quantity theory of money can be used in a token economy.

Correct applications:

  1. P = MV/Q: This indicates that the price level is a function of the quantity of the token available.
  2. M = PQ/V: This function outputs the necessary quantity of token to support a given amount of expenditure within a token economy. Note, these equations cannot be used directly to yield results in terms of USD or other currencies. Failure to consider this can lead to fallacious logic and incorrect results. Thus, we must take great care to use the Quantity Theory of Money correctly to describe a token economy.
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