I recently came across Marc Andreessens items from 2014 Bitcoin (BTC). It’s visionary in many ways (no surprise). I’ve been in the industry for four years now, with my main focus being on the social impact of blockchain. It amazes me that in 2014, before there was an institutional presence of Bitcoin – or indeed a widespread understanding of this new technology – Andreessen was able to outline its potential economic and social implications for the future.
Almost eight years after he wrote his words, I’d like to address one of the topics from his article: micropayments. I’m going to explore how blockchain could help transform micropayments, not only enabling the monetization of certain aspects of businesses that need a solution, but could also help the most vulnerable in society.
Micropayments are not a new concept. Micropayments have enjoyed varying degrees of popularity since the mid-1990s. Micropayments are by definition transactions with a value that is less than a certain threshold. It is important that the transaction fee incurred below this threshold makes up a significant part of the total transaction value and is therefore not economical. Another important aspect is that due to the tiny amounts of money, micropayments only relate to digital transactions of intangible goods. Any additional processing and shipping costs can add a hundred fold to the original transaction value, making it completely irrelevant.
Credit card companies offer merchants several types of pricing plans for the fees they charge. These plans usually include a lump sum per transaction and a percentage calculated from it. Unsurprisingly, this information is not openly available by the card companies themselves, but is made public by others who to compare these tariffs as a service for dealers. With that in mind, let’s examine what fee a merchant would be charged for a micropayment.
We assume the following:
● The lowest fee we discovered was 1.29% of the transaction value and no flat fee was charged.
● Since the smallest building block of (most) fiat currencies is 1/100 of the whole – i.e. $ 0.01 – this would be the minimum fee the credit card company charges, regardless of whether it is higher than 1.29%.
If we plot the fraction of the transaction fee as a function of the transaction value, we get the following graph. For example, there is a 100% fee for a $ 0.01 transaction, while the fee for a $ 0.10 transaction is “only” 10%. This, of course, shows the irrationality of performing micropayment transactions on these payment platforms.
Blockchain has a solution
However, there is now an alternative. Blockchain technology offers the perfect solution for micro payments for many reasons. It provides the infrastructure for digital payments, which are getting faster by the day, and most importantly the minimum payment unit of Bitcoin and Ether (ETH) is incredibly small, as shown in the following table:
In addition, crypto wallets can be easily embedded in any digital device, be it a cell phone, laptop or other Internet of Things device. And while fees can vary widely on different networks and on different occasions, fees are not a problem with many protocols and can be a fraction of a cent.
Last but not the least is user privacy. Due to the asymmetrical encryption of the blockchain, the payer only gives his publicly Paying address that provides practically no information for someone looking to hack their wallets. Unfortunately, this does not apply to a credit card transaction in which the payer has to provide his full credit card number and hope that the payment platform is properly secured.
Real use cases for micro payments
Now that the technological aspect is covered, there is only one question left: can I get something for a millionth of a dollar? Well, I’m not sure about a millionth, but there are many use cases for micropayments. Below are a few:
Alternative to the subscription model: It makes no sense to reiterate the economic reasons behind the subscription model for consuming online content and its success in recent years, be it video content, music, newspapers, etc. While this model has several advantages, it is nowhere near perfect and still has certain reservations. For example, what if someone just wants to buy a single item instead of opting for a subscription? Suppose Alice was subscribing to two online magazines when she discovered an interesting article in a third. She won’t opt for a third subscription even though she is willing to pay for that item only. From the magazine’s point of view, the item is already there, so why not ask someone for it? Micropayments allow Alice and the magazine to maximize their economic benefits.
Digital copyrights, royalties and referrals: As in the previous case, there is no need to explain what copyrights, royalties, or referrals are. Micropayments provide a relatively simple mechanism for immediate settlement, with virtually no limit on the amount, in contrast to the complicated solutions available today.
IoT transactions: This use case is very visionary, although sooner rather than later it is likely to become as banal and trivial as a light switch. To date, the IoT has hardly matured to a fraction of its enormous potential. One possible reason for this delay is the lack of a simple, easy-to-implement monetization model. Micropayments on the blockchain could be the answer. Think about all the data that can be collected from your car, from road conditions to traffic and more. Exchanging data gathered from mass users in real time could be invaluable for traffic planning and road maintenance. And why not pay for it? The added value of the blockchain is an improved mechanism for anonymizing the data and protecting the privacy of users – again a profitable combination. This could of course work with any other IoT device, from smart meters to home appliances and more.
Social Influence: This is the easiest use case on this list (and my favorite, of course). Micropayments on the blockchain can be revolutionary in two ways. The first is that donor recipients can easily set up accounts to receive funds that enable donations direct to them, without any intermediaries and overheads. However, it’s important to note that this feature is a double-edged sword that could turn out to be its biggest trap. Fraudsters could just as easily create fake accounts and attract donors. There will be a need for ratings and audits, similar to current online services that rate charities on multiple criteria (e.g. Charity Navigator, Smart Giving, Council of Nonprofits, and others) to ensure and provide better visibility for donors. Since a minimum donation amount will no longer be an issue, we can also see donations of small amounts. The World Bank categorized a country with a gross national income per capita of less than $ 1,025 as “low income”. In other words, that means a daily salary of less than $ 3. From 2020 data, there are 27 low-income countries. Micropayments could be an excellent mechanism that needs to be carefully monitored for fraud in order to donate funds to those in need in these countries. I think you can see how this, if managed well, could result in more efficient giving and a more direct impact.
Companies could become more efficient and monetize more of their offerings. Whole communities could be transformed or lifted out of the economic depression through direct and personal help without intermediaries. Kudos to Andreessen for his vision eight years ago – blockchain could be the breath of fresh air the world is waiting for.
This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.
The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.
Netta Korin is a co-founder of Orbs and the Hexa Foundation. Prior to Orbs, Netta served as Senior Advisor to General Mordechai Hod on Special Projects in the Israel Defense Ministry and Senior Advisor to Deputy Minister for Diplomacy Michael Oren in the Prime Minister’s Office. Netta began her career on Wall Street as an investment banker and later became a hedge fund manager. She has extensive philanthropy experience and has served on multiple boards in Israel and America for over 15 years, and has held high-level positions on executive committees.