Demurrage

Demurrage is a monetary mechanism where held currency loses value over time — essentially negative interest on savings. As a coordination mechanism, demurrage incentivizes circulation over hoarding, ensuring that money flows through a community rather than accumulating in the hands of a few. It inverts the logic of conventional interest-bearing currency, where holding money is rewarded.

How It Works

1. A currency is issued with a decay rate — tokens lose a fixed percentage of value over time (e.g., 5% per month)
2. Holders are incentivized to spend or invest — holding the currency is costly, so participants actively seek to exchange it
3. Velocity increases — the currency circulates faster through the economy, supporting more transactions
4. Value is redistributed — decayed value can be recycled back into the system as new issuance or funding for commons

Advantages

• Increases money velocity — capital circulates rather than stagnating
• Reduces wealth hoarding and inequality within the currency system
• Encourages local spending and investment over long-term accumulation
• Creates natural funding for commons when decayed value is redistributed
• Aligns monetary design with regenerative economic principles

Limitations

• Counter-intuitive to users accustomed to value-preserving currencies
• Can drive capital flight to non-demurrage alternatives
• Difficult to implement in systems where users can easily convert to other currencies
• May discourage savings and long-term planning
• Requires careful calibration — too much demurrage kills adoption, too little has no effect

Best Used When

• Local or community currencies aim to maximize circulation and local economic activity
• The goal is redistributive — reducing wealth concentration within a system
• Combined with other mechanisms (UBI, commons funding) that benefit from recaptured value
• The community is committed to the currency and switching costs are meaningful

Examples and Use Cases

The Worgl Experiment (1932) — during the Great Depression, the Austrian town of Worgl issued a local currency with 1% monthly demurrage. The result was a dramatic increase in economic activity and near-elimination of local unemployment, demonstrating demurrage's power to stimulate circulation.

Freicoin was a cryptocurrency implementing Silvio Gesell's demurrage theory, with a 5% annual demurrage rate redistributed to miners.

Grassroots Economics (Sarafu) uses demurrage-like mechanisms in community currencies across Kenya, encouraging rapid circulation and local economic activity.