(For the procedure to defragment freespace, see this topic.)
The Freespace Fragmentation Problem
Your hard drive's freespace will become fragmented over time as Windows writes, modifies, and deletes files. Eventually, the available drive space will not be located in a single contiguous block, but will be scattered in small fragments across the drive.
This causes further file fragmentation, since Windows must write new files as fragments in order to fit them into the available ranges of free clusters.
Benefits of Freespace Defragmentation
By defragmenting freespace on your hard drive, you'll notice improved file system performance whenever Windows writes new files. This process will also prevent new files from being fragmented in the future, to some extent.
How Defraggler Defragments Freespace
Defraggler moves files or large file fragments in order to create a single continuous block of free clusters. It starts from the beginning of the drive, filling empty blocks with file clusters taken from locations later on the drive.
Defraggler has two options for defragmenting freespace: