The Not So Micro Potential for Micropayments

I say this with some remorse: bitcoin is on the verge of being dethroned. In the last few weeks of 2017, bitcoin’s status as the reigning emperor of crypto was severely threatened. In what was a monumental year for mainstream acceptance of cryptocurrencies, the crypto industry’s growth also simultaneously drew greater attention to bitcoin’s failures to scale. Rising transaction costs, slowing processing speeds, and governance issues continue to plague Satoshi’s brainchild and create prime opportunities for alt coins to pull away strength from their aging Titan father.

Look, bitcoin still has a lot going for it. Network effects from mainstream acceptance and relatively strong liquidity have created a formidable moat. Yet, scaling issues are becoming unavoidable and are rapidly eroding bitcoin’s competitive advantage. For instance, it is difficult for bitcoin to remain as the base currency for entering the crypto world when it can take hours to move bitcoin across exchanges. Payments, which remain the blockchain’s killer application, are no longer a viable use case for bitcoin. Without delving into the reasons for why the path to scaling bitcoin is excruciatingly challenging, let me discuss what many bitcoin followers believe will be its saving grace: the Lightning Network (LN).

The LN whitepaper is a fascinating read that proposes micropayment channels, with instant payments and high volume transaction processing capabilities. Micropayments have been a long term vision for bitcoin since it’s inception. As Satoshi writes:

Forgot to add the good part about micropayments. While I don’t think Bitcoin is practical for smaller micropayments right now, it will eventually be as storage and bandwidth costs continue to fall.
It can already be used for pay-to-send e-mail… “Send X bitcoins to my priority hotline at this IP and I’ll read the message personally.”

Nearly ten years have passed and while bitcoin still lacks a proper micropayments channel, many other cryptocurrencies have either successfully implemented features that mimic micropayment channel functionality or have feasible plans of doing so in the near future. For example, Ripple’s XRP has payment channels, ETH has Raiden, and Iota has the Tangle. With at least six out of the top ten cryptocurrencies by market cap having a game plan for their own micropayments channels, it is clear that whoever nails the micropayments use case will seize the competitive edge.

What are micropayments, why are they just coming to fruition, and what are some potential use cases?

Micropayments are defined as small value payments transacted over the internet, typically for sums less than ten dollars. Prototype iterations of micropayments existed at least as early as the mid 90's. With the advent of the Internet, a number of micropayment schemes emerged, with a series of complex issues resulting in their failures.

Nearly all of the reasons cited as faults in the viability of micropayments are remedied through blockchain technologies. For instance:

The problem with most existing micropayment schemes is the heavy load on the trusted, centralized broker. A broker is required to handle accounts, distribute and cash coins, provide security and a host of other tasks. Eventually the broker has to take some action for every transaction. As a result, the broker load is always O(n) in the number of transactions. Brokers therefore present scalability traffic jam for any system using micropayment schemes [5]. Token-based systems are generally those that have scalability problems, originating from the fact that they have a central administration for the issued or received e-coins/tokens. DigiCash’s eCash is an example of such a payment system. In general, brokers have to register the issued tokens in a central database. In such schemes, the number of tokens to be issued was much higher than the number of accounts administered [6].

Scalability of micropayments is no longer an issue since most micropayment channels today eliminate the broker model and eliminate central administration of tokens. Micropayments are now viable through technological developments. Yet, technology does not permeate unless there is a pain point being solved. Where will we see micropayments implemented successfully?

Broadly speaking, micropayments use cases can be split up into three different types:

  • Resources on Demand
  • Content on Demand
  • Services on Demand

Resources on Demand are essentially pay-as-you-go business models. These are typically resources that customers pay for in bulk, but could be charged for based on metered usage. For example, how many times have you avoided paying fifteen dollars for a wifi hotspot at an airport? Imagine being a casual traveler who only needs a few minutes of reliable wifi to download emails and text their family. Why would such a customer pay for a whole hour of internet usage? Micropayments allow for companies such as Boingo to charge amounts such as $0.21 and $3.04 since the transaction costs are small enough to make charging for such amounts possible. As a result, providers such as Boingo can gain access to a new set of customers.

Content on Demand is similar to the old iTunes business model, where instead of purchasing the whole album or subscribing to Spotify, the customer has the ability to purchase just one or two songs. The most popular use case is likely to be for news outlets that are increasingly torn between paywalls and ads. Such outlets could offer instant micropayments to purchase articles after the reader skims through the blurb. Another example of content on demand applies to video games. Allowing players to purchase additional lives or features at fractions of a dollar limits the barrier to entry and can keep gamers active for longer periods of time without having to resort to distracting ads in game.

Lastly, Services on Demand (SoD) allow people to transact with other people for microservices. This category applies best to Balaji Srinivasan’s use case with Earn. Essentially, SoD allow Alice to message a very busy Bob. If Bob replies to the email, Alice will pay a small reward sum to Bob. Such payments increase the likelihood that folks like Bob will reply. On the flip side, the fact that Alice is paying a small fee per email reply will limit spam to Bob’s inbox. Services on demand allow for new business models around the small tasks folks do for us.

The three use case categories will evolve and take more granular shape over the next few years. The economic effects of micropayments business models are yet to be examined and it is unclear what effects such transactions will have on consumer interactions. However, one thing is certain: micropayments are coming and will be here to stay. Keep a close eye out for the cryptocurrencies that are used in strategic partnerships for linking micropayments with resources, content, and services- perhaps with a Boingo, a WSJ, or a Linkedin.

Note: All views expressed in this article are mine and are not in anyway affiliated with or endorsed by any firm.