As the use of digital wallets and cryptocurrencies grows, new use cases for micropayments will be investigated and developed.
I recently came across Marc Andreessen’s 2014 article on Bitcoin (BTC). It is, in many ways, visionary (no surprise). I’ve been in the industry for four years, with the majority of my attention focused on the social impact of blockchain. It astounds me that in 2014, before Bitcoin had any institutional presence — or even a popular understanding of this new technology — Andreessen was able to outline its potential economic and social impact for the future.
I’d like to discuss one of his article’s topics, micropayments, nearly eight years after he wrote it. I’ll look at how blockchain can help transform micropayments, allowing not only the monetization of certain aspects of businesses that need a solution, but also assisting society’s most vulnerable.
Micropayments are not a novel idea. Since the mid-1990s, micropayments have grown in popularity to varying degrees. Micropayments are transactions with a value less than a certain threshold. Importantly, below that threshold, the transaction fee becomes a significant portion of the total transaction value and, as a result, is not cost effective. Another important distinction is that, due to the small monetary amounts involved, micropayments only refer to digital transactions involving non-tangible goods. Any additional handling and shipping costs could result in a hundredfold increase in the original transaction value, rendering it completely irrelevant.
Credit card companies provide merchants with a variety of pricing plans for the fees they charge. These plans typically include a lump sum charge per transaction as well as a percentage charge deducted from it. Not surprisingly, this information is not freely available from the card companies; rather, it is published by third parties who compare these rates as a service to merchants. Let’s look at what a merchant would be charged for a micropayment in that context.
We make the following assumptions:
The lowest fee we found was 1.29 percent of the transaction value, with no lump sum fee.
Because the smallest building block of (most) fiat currencies is 1/100 of the total — i.e., $0.01 — this would be the minimum fee charged by the credit card company, regardless of whether it is higher than 1.29 percent.
The chart below shows the proportion of the transaction fee as a function of transaction value. A $0.01 transaction, for example, incurs a fee of 100%, whereas a $0.10 transaction incurs a fee of “only” 10%. Naturally, this demonstrates the irrationality of conducting micropayment transactions through these payment platforms.
Blockchain technology has a solution.
However, there is now another option. For a variety of reasons, blockchain technology is the ideal solution for micropayments. It provides the infrastructure for faster digital payments, and, more importantly, the minimum payment unit of both Bitcoin and Ether (ETH) is incredibly small, as shown in the table below:
Furthermore, crypto wallets can be easily embedded in any digital device, such as a smartphone, laptop, or Internet of Things device. And, while fees can vary greatly between networks and occasions, many protocols have no fees and can be as low as a fraction of a cent.
Last but not least, there is the issue of user privacy. Because of blockchain’s asymmetric encryption, the payer only exposes their public address when paying, which provides almost no information to someone attempting to hack their wallets. Unfortunately, the same cannot be said for a credit card transaction, which requires the payer to provide their entire credit card number and hope that the payment platform is properly secured.
Real-world Applications for Micropayments
Now that the technological aspect has been addressed, there is only one question left: Can I get anything for a millionth of a dollar? I’m not sure about a millionth, but micropayments have many applications. Here are a few examples:
She will not purchase a third subscription, despite the fact that she is willing to pay only for that article. From the magazine’s point of view, the article already exists, so why not charge someone for it? Alice and the magazine can both maximize their economic utility by accepting micropayments.
Digital copyrights, royalties, and referrals: As in the previous case, there is no need to define copyrights, royalties, or referrals. Micropayments, in contrast to the complicated solutions that exist today, provide a relatively simple mechanism for the immediate settlements involved, with practically no minimum limit to the amount charged per each.
IoT transactions: This use case is very forward-thinking, but it will most likely become as mundane and trivial as a light switch sooner rather than later. To date, IoT has only reached a fraction of its full potential. One reason for this delay could be the lack of a simple, easy-to-implement monetization model. Micropayments on the blockchain may be the solution. Consider all of the data that your car may collect, from road conditions to traffic and more. Sharing data collected in real time by large numbers of users could be extremely useful for traffic planning and road maintenance. As a result, why not pay for it? The added value of blockchain is an improved mechanism for anonymizing data and protecting user privacy — a winning combination once again. This could, of course, work with any other IoT device, from smart meters to home appliances and beyond.
Social impact: This is the simplest use case on this list (and, obviously, my favorite).Micropayments on the blockchain have the potential to be revolutionary in two ways. The first is that donation recipients can easily set up accounts for receiving funds, allowing donations to be made directly to them, eliminating all intermediaries and overhead costs. Having said that, it is important to note that this feature is a double-edged sword that could prove to be its major weakness. It would be just as simple for fraudsters to create bogus accounts in order to entice donors. In order to ensure and provide better visibility to donors, rating and auditing will be required, similar to current online services that rate charities on multiple criteria (e.g., Charity Navigator, Smart Giving, Council of Nonprofits, and others). Furthermore, because a minimum donation amount will no longer be an issue, we may see micro-donations. The World Bank classifies a country as “low income” if its gross national income per capita is less than $1,025 USD. To put it another way, this equates to a daily wage of less than $3. There are 27 low-income countries according to 2020 data. Micropayments could be an excellent mechanism for donating funds to people in need in those countries, but they must be carefully monitored for fraud. I believe you can see how, if properly managed, this could lead to more efficient giving and a more direct impact.
Businesses may become more efficient and able to monetize a greater portion of their offerings. Direct and personal assistance, without the use of an intermediary, has the potential to transform or lift entire communities out of economic depression. Andreessen deserves credit for his vision eight years ago — blockchain could be the breath of fresh air the world has been waiting for.