Demurrage Definition
Demurrage is a concept in monetary systems that imposes a cost on holding currency over time. It’s a built-in depreciation mechanism that encourages spending and circulation of a currency, rather than hoarding it. In the context of cryptocurrency and blockchain, demurrage is used as a mechanism to incentivize the use of a particular cryptocurrency and discourage its accumulation.
Demurrage Key Points
- Demurrage is a depreciation mechanism for a currency over time.
- It encourages spending and circulation of a currency, discouraging hoarding.
- In the context of cryptocurrency, it is used to incentivize the use of a particular cryptocurrency.
- Demurrage can be seen as a form of negative interest rate on stored currency.
What is Demurrage?
Demurrage is a concept that originates from the traditional monetary system, where it refers to the costs associated with storing and transporting physical currency. However, in the context of digital currencies and blockchain, demurrage takes on a slightly different meaning. It refers to a built-in depreciation of a cryptocurrency over time, which is designed to encourage the use and circulation of the currency.
Why is Demurrage Important?
Demurrage is important because it discourages the hoarding of a currency. By imposing a cost on holding the currency, it encourages users to spend or invest the currency rather than simply holding onto it. This can help to stimulate economic activity and prevent stagnation. In the context of cryptocurrencies, demurrage can help to ensure that the currency is actively used and circulated, rather than simply being held as a speculative asset.
Where is Demurrage Used?
Demurrage is used in various monetary systems, both traditional and digital. In the traditional monetary system, demurrage can be seen in the costs associated with storing and transporting physical currency. In the digital realm, demurrage is used in certain cryptocurrencies as a mechanism to incentivize use and circulation. One example of a cryptocurrency that uses a demurrage model is Freicoin.
When is Demurrage Applied?
Demurrage is applied over time to the holdings of a currency. The exact rate and method of application can vary depending on the specific currency and monetary system. In some cases, the demurrage rate may be fixed, while in others it may be variable. The demurrage rate is typically set by the currency issuer or governing body.
How Does Demurrage Work?
Demurrage works by gradually reducing the value of a currency held over time. This is often achieved through a form of negative interest rate. For example, if a user holds a certain amount of a currency with a demurrage rate of 5% per year, then after one year the user would only have 95% of the original amount. This reduction in value encourages users to spend or invest the currency, rather than simply holding onto it.
