Demurrage Definition
Demurrage in the context of cryptocurrency is a type of fee that is incurred for holding a certain type of digital coin for an extended period without spending it. It is basically a “storage cost” or “carrying cost” aimed at incentivizing faster circulation of the cryptocurrency and discouraging hoarding. The origin of demurrage is from an old practice in freight transport where a user was penalized for keeping a shipment in the port longer than the agreed time.
Demurrage Key Points
- Demurrage is a term used to refer to the fees for holding onto a particular cryptocurrency for a longer time frame without using it.
- It is used to encourage the active circulation of the cryptocurrency within the economy, similar to the negative interest rates applied by banks.
- The amount of demurrage fee typically increases proportionally with the length of time the coins are held without being used.
What is Demurrage?
Demurrage is a unique concept that was first experimented in cryptocurrencies using an economic model designed to promote spending and circulation, rather than holding onto the currency.
Why is Demurrage Important?
In a conventional economy, money is hoarded for its potential future value, a behavior that is discouraged in a demurrage system. Such a system promotes an active digital economy and fights deflationary pressures.
Where does Demurrage Apply?
Demurrage applies to certain cryptocurrencies that have incorporated this economic model. Freicoin was one of the early cryptos to introduce this concept.
Who uses Cryptocurrencies with Demurrage?
Investors and users who believe in the concept of money as a medium of exchange or intend to use cryptocurrencies for daily transactions, may prefer cryptocurrencies that implement demurrage.
When Does Demurrage occur?
Demurrage charges usually apply when users hold onto their coins beyond a certain time period, which varies depending on the protocols of the cryptocurrency in question.
How Does Demurrage Work?
In digital currencies implementing demurrage, a fee is automatically incurred by holders overtime. The aim is to discourage holding and encourage spending or digital transactions among users, thereby keeping the currency in circulation.
