What Is Demurrage?

Demurrage is a fee charged for using an asset beyond a certain time period. It is typically used in the context of transportation, storage or lending and is designed to encourage the efficient use of resources by penalizing those who hold onto them for longer periods.

The fee is typically calculated as a percentage of the value of the used good or asset. For example, if a bank charges demurrage on the use of a loan, the fee might be a percentage of the loan's value. The length of time for which the demurrage fee is charged can vary. It is usually based on a predetermined period (e.g. a week, a month, etc.) or a specific date. Demurrage fees are also sometimes used in the storage industry, where they are charged for using warehouse space beyond a certain period. 

Pros and Cons of Demurrage

Demurrage can encourage the efficient use of resources by incentivizing people to use them and return them promptly. This can help reduce waste and improve overall efficiency. However, it can also be seen as a burden for those using the good or asset, as it is an additional cost to using the resource. Moreover, if the demurrage fee is set too high, it could discourage people from using the goods or assets altogether.

Demurrage in Crypto

Demurrage is also used by some cryptocurrencies. For example, Freicoin uses demurrage by automatically subtracting a small percentage of the value of a Freicoin from the balance that has not been used for a certain period. This is a fixed percentage and is designed to encourage people to use their coins rather than hoard them. 

Benefits of Demurrage in Crypto

One of the main benefits of demurrage is that it helps to ensure the currency's circulation as opposed to hoarding. As a consequence, the utility of the currency and its adoption can rise. It can also help reduce the currency's volatility by reducing the incentive for people to speculate on the price. However, demurrage is also a tax on holders. Additionally, if the rate is set too high, it could discourage people from using the currency altogether.