Unlike Bitcoin, Freicoin has a demurrage fee that ensures its circulation and bearers of the currency pay this fee automatically. This demurrage fee was proposed by Silvio Gesell to eliminate the privileged position held by money compared with capital goods, which is the underlying cause of the boom/bust business cycle and the entrenchment of the financial elite, and has been tested several times with positive results.
Demurrage forces the entire stock of money to circulate irrespective of the desires of usurious money-holders to accumulate and store non-productive assets. Banks, financiers, and large corporations can no longer hoard money waiting for higher interest rates or a more favorable investment climate as the demurrage acts as a tax on stagnant money. Money-holders lose their privileged position at the and are instead given incentive to seek out productive investments in new ventures and real capital goods. Under demurrage money is eternally losing value, so the incentive is to spend or invest it as soon as possible on the necessities of life or in longer-term ventures that also provide stimulus for a growing economy, typically creating real jobs in the process. Demurrage money becomes a sort of “hot potato” that is passed around as quickly as possible, in a virtuous cycle of investment and consumption. No longer are there incentives for financiers to withhold credit from those in need simply to wait for fairer economic winds or a better negotiating position.
How it works
In Freicoin, currency is produced through a process called “mining”, the automated solving of mathematical problems required to keep the network running and secure. Every Freicoin client is capable of performing these tasks, but in practice mining is the domain of computer enthusiasts and IT professionals with tuned top-level hardware. New currency is created in strictly limited amounts according to certain math algorithms implemented in the Freicoin client. The total amount of currency in circulation will smoothly increase for approximately 3 years following launch, until it stabilizes at 100 million coins.
During the 3-year initial distribution, part of the newly created currency is given to the miners in proportion to their contribution, starting at 30% of new coins (on launch) and decreasing to 5% (at the point of stabilization). While the network is small and young, it needs more care and attention than when it’s become mature. The remaining currency is distributed through the Freicoin Foundation, a non-profit organization aiming to promote Freicoin and support a sustainable world. 80% of the total will be distributed through the Foundation.
Freicoin introduces the concept of a small holding fee, called demurrage, to virtual currencies. Currency owners automatically pay this fee. This promotes currency circulation and encourages sustainable investments. This fee, 5% per year, re-enters the economy through miners who use a large portion of it to pay for operating costs.