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Freicoin: a P2P digital currency delivering freedom from usury (freico.in)
37 points by maaku 1787 days ago | hide | past | web | 64 comments | favorite

While technically interesting, this project is riddled with fallacious economic ideas that undermines its credibility. I do appreciate it that new kinds of money are being developed though!

A few particularly ridiculous notions from the about page:

- that money-hoarding is the primary cause of wealth disparity

- that the role of money as both a savings instrument and a transactional instrument is problematic and leads to financial crises

- that demurrage would benefit working class people

If governments adopted a currency like this (or if it otherwise became forced upon us), banks or other institutions would issue alternatives and people would flock to them.


Maybe I'm naive but they don't sound too ridiculous to me... could you point out some specific fallacies?

To elaborate:

- that money-hoarding is the primary cause of wealth disparity

There are many causes of wealth disparity. But consider what factors are leading to wealthy people getting wealthier: technological advances, leveraged financial speculation, high education costs, corporate subsidies. And then consider what factors are leading to working class people not accelerating their wealth at the same rate: high medical costs, skill irrelevancy, overexposure to credit. Money sitting in banks is not causing the disparity. If anything, people using money in the economy in order to invest is causing much of the disparity.

- that the role of money as both a savings instrument and a transactional instrument is problematic and leads to financial crises

The durability and reliability of a particular kind of money is the reason people use it for transactions. This also makes it useful for storing value. Why would this dual use lead to financial crises? Some of the greatest financial crises are actually related to money becoming un-savable (due to inflation).

- that demurrage would benefit working class people

Making money more complex would not happen in a vacum. In terms of storing wealth, who would really be in a position to protecting and growing their wealth in an economy running on a financial complexity like demurrage? Educated elites. By default, the little savings that working class people could set aside would dwindle, and they would begin to place trust in more reliable means of wealth storage like hoarded commodities. Of course, savings instruments could also be made available to working class people, but educated elites would still hold the upper-hand.

Apparently it worked for Worgl, Austria during the Great Depression.

If I remember correctly, in Worgl they basically issued some currency and dumped it on the population, that is, they gave money to everybody. I don't think the experiment was run long enough to conclude that it was actually the demurring aspect of the currency that did the trick.

I'm too lazy to look it up atm (did it some years ago), but if my memory was wrong, perhaps I'll look it up again. I do remember thinking back then that there were other aspects besides the demurring to consider in Worgl.

Edit: I just read on Wikipedia, so the city didn't have any more money and they printed their own money which they used to pay people. I don't see the conclusive evidence that Freigeld was the important aspect of it.

Demurrage, not freicoin mind you, worked over a very short term in Worgl, and there are questions about whether the success there was sustainable[1]. Demurrage on it's own doesn't operate very differently than the mildly inflationary currencies used in the real world (dollars, euros, etc.). Freicoin on the other hand is promising all sorts of other things.

[1] Quoting at length from:


"So, would this be sustainable? If not, why not?

I believe the activity would not have been sustainable. I believe that once the taxes in arrears were completely paid and once the people paid in advance to the degree they felt sufficient (one year in advance? Five years in advance? I don’t know, but at some point they would stop), the scrip would lose a key part of its attractiveness.

One way a government can ensure the demand for its currency is to demand (or accept) that taxes are paid in the subject currency. The other way is through monopoly legal tender laws. Wörgl obviously could not legislate or enforce monopoly legal tender, so the demand for the scrip could certainly be attributed to the need to pay taxes.

The demand could certainly not be attributed to the demurrage – not when there was the national schilling available – paying interest, and at a one-for-one exchange (setting aside the conversion fee).

Once this tax need was satisfied, what would happen to the desirability of a depreciating-value scrip vs. currency that did not come with a 1% monthly penalty? The answer to me is clear, not that we have to agree. I suspect the depreciating scrip would begin trading at a discount, and sooner than later would be regularly returned to the bank for the national currency, even with the 2% loss. Two percent might be too big a loss when one owes taxes and can satisfy these taxes with the depreciating scrip at full face value. However, when there is no benefit to holding a depreciating currency to the national one, I suspect many would eat the one-time 2% charge to avoid paying the recurring 1% charge.

In my opinion, this is exactly the situation that was immediately in front of Wörgl when the national government put an end to the experiment. Depending on which estimate of taxes in arrears used (see the discrepancy as pointed out in my first article), within one month, but not more than six, all taxes in arrears would have been paid. At that point, I suspect demand for the scrip would have fallen – resulting in the exchange for national currency that I described above."

Time-preference (and therefore a non-zero interest rate) is an inherent feature of being a human being, for the simple reason that we all have a limited amount of time to live.

Present goods really are worth more than future goods, and interest is just a reflection of that difference.

Anybody who really "value[s] present and future holdings equally" is advised to try eating next year's crops this year.

But that is precisely the point - we each have our own time preferences. I'd rather have 1 apple a day for 1,000 days than 1,000 right now, but if I was a baker making apple pie, I don't know what I would do with just one fresh apple a day.

However both inflationary (USD) and deflationary (BTC) currencies force an external influence on our time valuations. With inflation I'd rather buy things now if possible because the price could go up at any time, whereas deflation results in the opposite: exchanges are delayed as you can get a better price in the future.

Demurrage allows interest rates to drop to zero, which eliminates the influence monetary policy has on time preference, allowing me to be free to choose when and how much I buy without penalty.

Someone has invented a digital currency based on EVEN more dubious economic ideas than bitcoin itself!

We did it!

Theres a lot more where that's coming from:


I'm confused. Why would anyone hold assets in a currency designed to penalize people who hold assets in that currency?

When I was five I asked this question and got a simple answer. I'm not an economist so it is probably incompletely or completely wrong.

If you notice that your money is worth more tomorrow, you are going to save your money and spend it tomorrow. This is true in situations of "deflation".

This sounds good to you, because all you have to do is wait and you'll be better off tomorrow. You don't even have to work to get more stuff.

However, you aren't the only person with this idea. Everyone saves their money in the bank. The people who sell goods and services, sell fewer goods, and maybe go out of business.

The economy slows down.

On the other side, if you design an economy so that inflation exists. People want to spend because in the future their money will be worth (a little bit) less.

Money flows around a lot. People who sells things make money and stay in business. People have jobs and the money is still worth something.

Remember money isn't worth something, trading good fluidly and efficiently is worth something. Money lets us do that. So a currency that lets us do that is good.

If anyone knows more about the situation, please add it. I don't know any economists so this story is probably pretty incomplete.

I'm not asking a deep economic question. I'm saying, why would any real business accept payments in a currency that overtly and deliberately penalizes them for holding that currency when alternatives that don't do that are even more available? It just makes no sense to me.

Because the customer wants to pay in freicoins, and tools exist (or will exist - I'm talking from the future) to make acceptance hassle-free, and the value will be stable long enough to convert into the currency of your choice.

(Of course the macroeconomic recession-proof nature of demurrage currency makes it desirable for merchants as well, and the zero-interest loans are a boon for entrepreneurship. I'm just saying even if you're skeptical, that shouldn't be a barrier to acceptance.)

Why would anyone want to make an interest free loan with an arms length party? I understand that from time to time these things happen, like KIVA, but seriously why would I lend out my money for the opportunity of not getting it back?

Then add appropriate interest representative of the risk you are taking on.

When we say zero-interest, we're talking about basic interest/liquidity premium: the interest which is attached to loans simply because of the opportunity cost of lending, not the risk taken on.

I don't get it either, interest isn't inherent to a currency, when I hold dollar bills I don't accrue interest, but if I put them in a bank, or other security they do.

If that argument were correct, Moore's law would destroy the computer industry as everyone would perpetually wait to buy.

As this hasn't happened, it may be worth considering the effects of time preference in both examples.

That's taking the argument to an unrealistic extreme. Rather, non-zero interest rates and resulting inflation/deflation incentivize market inefficiencies. Not a big enough inefficiency to drive an industry out of business (unless we're talking hyperinflation), but enough to be measurable consequences.

As evidenced by the large number of merchants that accept semiconductors as payment for goods and services.

But if this were true, wouldn't we be in deep trouble as soon as just one deflating currency or commodity existed? All wealth would be hoarded in the form of that one thing. And gold exists.

Even if you are correct and the existence of gold is detrimental to the economy, I don't see how you can prevent the effects of an existing devaluating currency/commodity by creating a new inflating one.

Well there is also this theory that people saving their money are actually giving a gift to the economy. They gave something they received money for in return, if they don't spend that money they basically sold their goods for free.



I suspect few rich people keep their riches in cash.

If people hoarded cash, deflation would stop pretty quick, so doesn't the problem rather solve itself?

You wouldn't, which is entirely the point. Demurrage currency incentives people to only hold what they need for cashflow purposes, and to re-investing the rest into real capital. It's the distinction between money as store-of-value and medium-of-exchange. Traditional money tries to be both and creates problems in the process. Freicoin is designed to be a medium-of-exchange only, and converted into other assets (treasury bonds, stocks, etc.) for long-term storage of wealth.

Still confused. How does a currency that overtly disincentivizes its own use solve the problem of the hoarding of other currencies?

The demurrage encourages it's own use as a medium of exchange - use it or lose it. Hoarding of other currencies is not a problem.

I recommend reading David Graeber's "Debt: The First 5,000 Years". IIRC it has a good chapter on demurrage, as well as covering many historical currencies which by accident of design were similar to modern demurrage currency in operation.

What incentive exists for anyone to use this currency at all? Why would I ever accept a "freicoin"?

Well there's all the advantages that bitcoin has (low transaction fees, quick processing, no chargebacks, etc.). We're also working on tools & services that would make transacting in Freicoin as easy as possible, so that for example you can set a limit on how many freicoins you want to hold, and the remainder will automatically be swept into an exchange account and converted into bitcoins or dollars.

I'm not a bitcoin believer, but what advantage can you come up with for "freicoin" that bitcoin won't simply adopt?

"Come over and get kicked in the nuts! Free car service and short lines!"

I have the feeling this is in reaction to the capped total value of the bitcoin monetary system which generates deflation over time and incentivizes sparing currency instead of using it.

By adding a component of inflation, you increase exchanges.

Let's just get rid of the cap and keep things simple.

edit: Of course from a micro-economic perspective this doesn't make sense unless it was forced onto us by a government as a de facto standard.

You don't really increase exchange with other currencies if its low friction to do transactions in BTC as the optimal strategy is to keep your savings in assets that increase the most in purchasing power and only move value out at the moment of a purchase and only for the amount of the purchase. Likewise, the seller prefers to receive the highest appreciating asset in exchange if friction is low.

Inflation and demurrage do not have exactly equivalent effects, as we discuss in the about page http://freico.in/about/

AFAICS, no rational person would without external incentives.

People are right now. This currency is live, transacting, and secured by a rapidly increasing amount of computer power. On the subject of their rationality...

Would you be willing to take a bet on where this currency will be in terms of net worth vs BTC in 5 years?

No, because that would be illegal, and a possible conflict of interest for me.

Private social bets are not generally illegal, but if you're really concerned, offer the proceeds to charity.

Ok, so I am a Bitcoin fan and I am a demurrage fan but I couldn't figure out how you could combine these two.

5% of all coins disappear per year. (BTW: Gesell's Wörgl had a much much higher demurrage.) I read this would be equal to the block reward which I guess is the asymptotic value and not the truth from day one (constant block reward as opposed to halfing block reward like bitcoin with 5% demurrage will lead to an equilibrium).

Proof of work: Approximately the amount of money goes into mining that newly mined coins are worth. If the client shows me that I have less in my wallet every day, the block reward is simply worth more. The proposed system means that 5% of the freicoin's money reserve is spent on mining per year. Today's banks most likely burn the same order of magnitude of world's money supply. Hmm, might work but it's a waste of resources to burn 5% of the world economy to keep book of transactions.

Proof of stake: As mining might get excessively expensive if the value of Ƀ rises faster than the reward halves, proof of stake is an option to bring this waste of resources to an end. In Freicoin this would directly reverse the demurrage.

I assume the developers of Freicoin picked 5% exactly because of these issues. Else 25% would be much more reasonable. 5% is the average weekly volatility of bitcoin and was the average daily volatility last year. $ vs € have this volatility yearly. Calling this demurrage is a joke.

[My approach was to have - high - demurrage be cashed out evenly to people as a basic income. Only problem is that you would have to qualify as a natural person to get such a cash-out address which would lead to very very schizophrenic scammers or to total control if governments pick up the idea.]

Ok, quite a bit to tackle. Here we go:

5% of all coins disappear per year. (BTW: Gesell's Wörgl had a much much higher demurrage.) I read this would be equal to the block reward which I guess is the asymptotic value and not the truth from day one (constant block reward as opposed to halfing block reward like bitcoin with 5% demurrage will lead to an equilibrium).

The initial distribution is split 20% to miners and 80% through foundation grants via an open, transparent, competitive selection process. The 20% miner subsidy started at approximately ~255frc per block, and linearly decreases to ~95frc per block over 3 years of block time, at which point it will perpetually sustain a monetary base of 100MM freicoins.

Proof of work: Approximately the amount of money goes into mining that newly mined coins are worth. If the client shows me that I have less in my wallet every day, the block reward is simply worth more. The proposed system means that 5% of the freicoin's money reserve is spent on mining per year. Today's banks most likely burn the same order of magnitude of world's money supply. Hmm, might work but it's a waste of resources to burn 5% of the world economy to keep book of transactions.

It is excessive in the long-run; the 5% value was chosen for other reasons. However we have ideas for fixing this, but would require a hard-fork (and therefore community acceptance).

Proof of stake: As mining might get excessively expensive if the value of Ƀ rises faster than the reward halves, proof of stake is an option to bring this waste of resources to an end. In Freicoin this would directly reverse the demurrage.

And here you get to the meat of the issue, although I'm not sure what you mean by "directly reversing the demurrage". With proof-of-stake along the lines of Meni Rosenfeld's proposal (not PPCoin), proof-of-stake voting could be used by a plurality of stakeholders to mandate that a portion of the perpetual subsidy go to groups other than the miners. On the freicoin.org forums we've put together an outline of a proof-of-stake proposal nicknamed "republicoin" that would resemble parliamentarian system of proxy-voting for parties which enter majority-vote governments giving them to right to claim budgetary control over a portion of the perpetual subsidy, the amount of which would be negotiated with the proof-of-work voters. Government-by-protocol, if you will.

This would obviously represent a hard fork. There are a lot of issues to sort out first, which is why it's been shelved for the moment.

Baby steps :)

I assume the developers of Freicoin picked 5% exactly because of these issues. Else 25% would be much more reasonable. 5% is the average weekly volatility of bitcoin and was the average daily volatility last year. $ vs € have this volatility yearly. Calling this demurrage is a joke.

To be pedantic, it's closer to 4.89% per annum (1-20 per block), but 4-5% was the design goal. The reason has to do with interest rates, specifically what Gesell calls "basic interest" and what modern economists call the "liquidity premium." The reasons why demurrage should equal the liquidity premium of money is outlined on our about page and covered in detail in Gesell's manuscript, Natural Economic Order (http://www.ces.org.za/docs/Gesell/en/neo/index.htm).

Original discussion on HN during it's Indiegogo campaign:


As long as we're in the business of building cryptographic financial systems to test out the theories of economics -- I want a "market basket of commodities" currency to test out Hayek's theories.

(I am not sure if I could make a sustainable business out of it, or even a fundable business, but a chaumian blinded digital token system (software and then multiple hosting options) where people got to then run their own arbitrary currencies, with a lot of them choosing to do commodity or equity/debt currencies, would be a pretty awesome thing. It would probably cost $2-5mm to do, though, and while I think you could avoid most legal challenges by separating out the software dev vs. hosting mints vs. hosting exchange vs. currency underwriting vs. marketing vs. wallets vs. merchant services vs. end users, I'm not sure how you could realistically make money doing it.)

You might want to look into Open-Transactions [1], which is a Chaumian blinded token system supporting basket currencies out of the box. You'd presumably have a list of reliable issuers that mint their own tokens backed by real-world assets, then do a basket currency over all of them together.

[1] https://github.com/FellowTraveler/Open-Transactions

I wonder who that is (is he public?)

The fundamental flaw with Chaumian token systems is that the trustworthiness of the currency is completely concentrated in the identity of the exchange. The kind of institutions which build up and delegate trustworthy identities (eg governments, banks) are inherently predisposed against anonymous transactions.

The point of a decentralized system would be to have large numbers of issuers, each of which might have independent ways to become trusted.

The exchange itself doesn't need to be particularly trusted; you could do a transaction either instantaneous and of low value, or some more complex protocol. There's also no inherent monopoly for the exchange, although there's a natural monopoly for any given pair of currencies.

Assuming everything is automated and low friction, you could be in and out of a given currency to make a transaction pretty fast, so arbitrarily short risk. You could split transactions up into smaller transactions so arbitrarily low financial risk per transaction.

If you can't be confident that an exchange (blind token signing key) will hold value for the long term, the exchanges are really only functioning as short-term mixes for some 'real' currency (as you describe), and the problem remains creating a currency issuer that won't eventually work to prevent anonymous transactions.

In your described system, the issuers still face the fundamental problem of having to have a good reputation, but being unable to obtain this reputation in the standard way (real-world identity in a powerful "rule of law" jurisdiction), lest the delegator 'discourage' them from facilitating anonymous transactions. Multiple competing issuers do not help the situation due to the catastrophic failure mode of each - bank run and worthless currency.

Creating a widespread reputation that isn't derived from real-world identity is the problem that bitcoin is attempting to solve, which is why the novel part of it is solving a coordination problem and not a problem from cryptography.

Simply buy a basket of commodities futures, or create an ETF/Index fund that trades a basket of commodities futures.

I'd bet Vangaurd or another major IB has a product similar to what you're looking for.

It's easy to own commodities futures, but hard to use them to buy stuff directly. The closest you can get is having a brokerage account and using the debit card or checks to make purchases, liquidating investment portfolio as you go. But even there, you're using USD as the unit of account.

The point of most of these currencies (bitcoin, freicoin, et al) is to avoid the consequences of inflation. Yet because of the volatility inherent in the small monetary base they expose the holder to more inflationary risk. In laymans terms, the USD has never lost 90% of it's purchasing power in a month or two.

Commodities futures are far more liquid than bitcoin, freicoin, etc. USD has far less inflationary risk than bitcoin, etc.

Economies don't run on math, they run on confidence, there is little confidence in bitcoin/freicoin. That's the quintessential problem, like it or not, far more people have confidence in the $5 wrench (fiat) than computational complexity (cryptography).

5% fixed seems pretty arbitrary. Would be nice if this could be variable to get the desired liquidity properties, in some kind of feedback control system. I doubt there is one permanent ideal depreciation rate that could be determined ahead of time.

I realize that would be harder to design but isnt a fixed depreciation just a hacky band aid solution compared to a properly designed "control system"?

The ideal target variable might be: what % of existing money that was transacted per month perhaps? Make 50% the target and adjust the depreciation to track this target. Then we get into a debate about that 50% number, but at least we are getting closer to measuring the effect we want.

Demurrage's value is equal to miners' reward. This greatly limits Freicoin to not set a too high percentage. Imagine 50% of the existing money reserve going into bookkeeping of Freicoin transactions. To put 5% into perspective consider exchange rate changes between well established currencies. 5% per year is nothing.

Jokingly: perhaps a board of governors meets every so often and decides what the rate should be?

Congrats to the "Freigeld" proponents to actually put something in motion. I wish this would see some adaption so that they could finally get a reality check of their theory (which I personally think wouldn't be very positive)

this entire thing is nonsense. seriously.

> Freicoin's parameters are carefully chosen to eliminate the basic interest component of investments, called the liquidity premium by economists

Liquidity is a real thing, not a product of currency "parameters" (whatever that means). I prefer to hold dollars over gold because I can go to McDonalds and buy a cheeseburger with dollars, but I cant do that with gold. Thus, if someone was like, would you rather have a dollar bill, or $1.01 worth of a gold bar, most people would probably say the dollar bill. If you wanted to eliminate the liquidity premium of a currency, you would have make the currency super illiquid. (Ironically, they've already achieved this because nobody accepts Freicoin right now)

> Usurious non-zero basic interest distorts the free market, incentivises poisonous greed, excess, and short-term thinking, and perpetuates a vicious cycle of boom/bust recessions

No they don't. Maybe if this "argument" had some reasons behind it, I could refute it.

> When business is conducted in Freicoin, participants value present and future holdings equally, and favor sustainable processes.

This sounds pretty magical. Do YOU value present and future holdings equally? Would you rather that I give you a iPhone now, or in 1 year? Okay, now let's say that iPhone is denominated in Freicoin, what now?

> Separation of money's roles as store-of-value and medium-of-exchange allows money to flow when it is needed, in good times and bad

Is money flow an issue? In the modern era, has the quantity of cash available ever deterred anyone from spending money?

If there's anything on this Earth that's subject to network effects it's currency. If the creators of Freicoin appreciate Bitcoin enough to name their efforts after it, why would they even try to fragment it in the first place? Does demurrage make it that much better?

I would argue that the network effects belong to cryptocurrencies in general. Since there can't be any barriers of entry to implementing cryptocurrency exchanges, exchanging them from one to another will always be trivial and cheap, if they have any kind of market.

In fact, it is possible to make a hosted bitcoin wallet, which can be integrated with an exchange, and users can pay in any cryptocurrency the merchant requests.

So I believe that the more different cryptocurrencies, the better.

Don't you fuel asset bubbles by targetting 0% interest at all times ?

If your incentive is to just get rid of your money because of the inherent penalty, aren't you tempted to, say, buy overpriced houses, to use a recent example ?

It's too lengthy an explanation to get into, but it's the combination of inflation plus low interest plus the usurious liquidity premium that leads to asset bubbles. Gesell covers this in great depth in his work, Natural Economic Order (http://www.ces.org.za/docs/Gesell/en/neo/index.htm).

With Freicoin we're talking about counter-balancing that liquidity premium (which, historically, has always been around 5%), thereby eliminating basic interest and keeping price levels stable.

does it require an external port to listen on? i started the client but it doesn't seem very happy (i am behind a firewall with no way to open a port).

It listens on port 8639, but a firewall rule is not required (it does help). You should be able to connect to other clients that are port forwarding.

There's a small chance that you might have connected to a bad peer and therefore have a limited view of the network. Try restarting the client if the block chain doesn't start downloading within 30 seconds.

ok, so i tried again and have the same result (still says "out of sync") and there's what looks like an error icon with a red x bottom right (this is the QT client).

if you want i can file a bug report? if not, no problem (i was just curious, don't have any plans to use it, particularly since it doesn't contain a miner so i'd need to buy something just to play around).

A bug report would be helpful if you include the debug.log file in your Freicoin data directory (~/.freicoin on UNIX, Library/Application Settings/Freicoin on Mac OS X, %APPDATA%\Freicoin on windows).

There's a couple of faucets popping up where you can get some free starter coins: Here's one: http://endlessfreico.in

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