Micropayments were popular in the 1990s. The idea of letting customers pay a minimal fee for physical or online products was intriguing and garnered a lot of attention. However, early micropayment models failed to solve the problem of incurring significant costs in processing micro-transactions. This is why micropayments haven’t even started yet, years after the idea was conceived.
But Bitcoin may advance – finally! Practical model for micro-payments for businesses and customers. We will explore how Bitcoin facilitates micro-transactions and the benefits this technology offers.
Brief introduction to micropayments
Micropayments usually refer to transfers that fall below a specified value threshold. Think of a micropayment as a really small transaction or payment — like the $1.20 you’d pay for a cup of coffee.
Micropayments has received a lot of interest from companies and researchers, and for good reason: Micropayments have the potential to unlock new revenue streams for businesses and increase value for customers.
Let’s imagine you visit a downtown Bailey store for a cup of coffee, which costs $3.20. You don’t have any cash, so paying with a credit card seems to be the best option. But there is a slight problem: Billy will not accept transactions under $5 because the payments provider often charges a base fee plus a percentage of the full cost of processing payments. For Billy to break even, the transaction value must be higher than the processing cost. Paying a fee on your meager purchases would simply be economic suicide. The deal collapses, with both sides losing interest. You can’t have caffeine and Billy will lose potential income. The last point may seem trivial until 10-15 customers have similar issues and walk away empty-handed.
Micropayments represent a new opportunity for businesses and customers to maximize their benefit. Companies can provide low-value services to customers without incurring losses. The concept also gives customers more freedom of choice and lowers barriers to purchasing items.
After understanding the value of micropayments, let’s see how Bitcoin fits into the picture.
Why use bitcoin for micro payments?
The idea of micropayments has been around for a long time on the Internet itself, as articles like this show. Microsoft was one of the companies enabling micropayments until it canceled its plans.
The historical experiences of micropayments have followed the same principle: accumulating small fees into a large amount before releasing them to merchants. In most cases, the user will have a digital wallet where he can deposit a fixed amount and authorize withdrawals for certain payments. However, early solutions ran into a big problem right from the start: centralization. Just like credit cards, digital wallets used for small payments were once controlled by third-party services. This created security risks for users, especially if hackers compromised the company’s servers. Furthermore, users had to hand their personal information over to the companies, giving the companies the freedom to sell their data.
Moreover, the minimum payment unit for fiat currencies such as the US dollar makes them impractical for real micro payments. For example, a cent ($0.01) is the smallest unit in a dollar. Which means we can’t actually use it for payments of less than one cent.
As a programmable money, Bitcoin does not have the same minimum unit problem as fiat currencies. For example, you can split one bitcoin into 100,000,000 subunits to get a “satoshi” – which is worth less than a fraction of a cent.
Bitcoin exists as a decentralized, secure and untrusted payment network. To make small payments, you only need a Bitcoin address, which you can generate in minutes. No company keeps your wallet or identity details, which reduces the risks associated with using micropayment services. Finally, Bitcoin allows almost instantaneous transactions through “payment channels,” which we will explain later in this article. Payment channels allow two parties to aggregate multiple transactions into one package, eliminating the need to pay fees on all but one of the transactions.
How do bitcoin micropayments work?
A Bitcoin skeptic reading this article will find it difficult to believe that Bitcoin can be beneficial for micro-transactions. Why would a sane person choose to pay exorbitant fees to miners and wait about 10 minutes to buy a cup of coffee with Bitcoin?
Enter the Lightning Network.
The Lightning Network is a Layer 2 infrastructure built to run on top of Bitcoin. Because the Lightning Network uses off-chain payment channels, transactions do not have to go through the blockchain, which reduces fees and wait times dramatically.
We will use the example of buying coffee from a Billy store to explain how the Bitcoin micropayment powered by Lightning works:
To open the Lightning Network channel with Billy, you must first deposit some bitcoins on the main network. Once this transaction is broadcast and confirmed on the blockchain, the channel becomes active. All payments you make to Billy are deducted from your initial bitcoin deposit.
If your initial deposit runs out, you can choose to refill the channel with more bitcoins. Otherwise, you both agree to terminate the transaction and broadcast the final state of the channel to the Bitcoin network. All previous transactions are combined into one and recorded on the blockchain.
Although many transactions have passed through the payment channel, the Bitcoin blockchain does not record all of them. Instead, it records the first transaction that opens the channel and the final transaction that closes the channel.
With this system, you can open a tab with Billy and keep buying mugs of coffee for weeks or even months. Bailey won’t have to pay a huge fee to process these small payments. And you can exceed the payment limit to get your coffee every day. A win-win solution.
Bitcoin micropayment apps
Buying coffee isn’t the only Bitcoin micropayment app. The Internet itself is ready to introduce revenue models based on micropayments. Here are some of the bitcoin micropayment apps for online users:
For years, online content creators have found it difficult to monetize content. Instead of any sustainable monetization system, many have turned to digital advertising to recoup investments in content creation. But digital ads have attracted negative coverage in recent years, and these ad blockers are quickly making an unviable income mechanism.
The most common approach for content creators is to charge consumers a subscription fee to access content. However, subscription forms are not the ultimate solution. For starters, subscription models require a higher level of commitment from customers. If you like a product, paying a subscription fee can seem simple. Someone else may be unwilling to commit so much that they feel served.
Let’s not forget that subscription models have many bottlenecks. Subscribers need to have a credit card, but getting one is not the easiest thing to do. Putting content behind a paywall means losing out to unbanked customers or those who prefer an easier way to pay for content.
Bitcoin micropayments can succeed where traditional subscription models and digital advertising fail in terms of helping creators create revenue streams. Intangible micro-payments — the kind that Bitcoin promises with the Lightning Network — could allow creators to extract value from their work.
A video creator can charge viewers for every second of the video they watch. The writer can ask readers to pay a small fee per piece instead of asking for a full subscription. Musicians can charge for individual song streams instead of forcing listeners to purchase an entire catalog.
This technology is likely to be a game-changer for content creators who are struggling to make money. Micropayments offer a better alternative to intrusive ads and unwanted subscription models.
Integrating the Lightning Network into social networks can make it easier for followers to support their favorite creators. Users can continue to pay small amounts as virtual tips cheaply and quickly, without the hassle of attaching credit cards.
Tippin.me is a project that uses the Lightning Network to enable micropayments on Twitter. Users link their Twitter accounts to the Lightning Network wallet and can share QR codes that anyone can scan to send a small tip. Users can then cash these tips via Tippin.me.
Earlier, we talked about the problems associated with charging subscriptions to consumers of digital content. However, the subscription model also extends to the field of services we use every day.
Think of the times when you’ve needed an API or web app for a one-time mission critical – only to receive a monthly subscription offer. Just like the situation with a coffee shop, forcing users to make purchases above a certain value limit hinders transactions.
With micropayments, service providers can process many one-time payments from users. By making it easier for customers to pay small amounts, an online business can significantly increase profits.
Most importantly, users can get the full value for their money. Instead of paying for an entire month’s subscription – which they won’t use in full – they can control how much they pay for the service.
The pay-as-you-go subscription apps are endless. This includes paying for SaaS tools, APIs, serverless technologies, content distribution, one-time services and many undiscovered use cases.
Marketing and Sharing
Brave, a privacy-focused browser, has demonstrated the potential to boost online marketing and engagement with cryptocurrency. Users get paid BAT tokens any time they see an ad, but they can also pay a non-significant amount to skip those ads.
In the future, sites may integrate the Lightning Network to pay users who interact with content, for example, watching a video. Businesses can get better value for their content and users are rewarded for their participation. Once again, a win-win solution.
Gaming is another industry that could use a well-designed micropayment system. This is especially important for independent game developers who may invest a lot of effort, time and money into making games, without any means of making a profit. Charging a subscription fee may fix the problem, but it will only turn off potential players.
Alternatively, game developers can charge users a small fee to unlock new characters and features and access special levels. Since these transactions have reasonably low values, players will not feel pressured for money and developers will be rewarded for their creative efforts.
Years ago, British mathematician Cliff Humby declared, “Data is the new oil.” Today’s digital economy is fueled by data, as companies invest heavily in data collection, management, and analytics. However, users rarely get any value from the data that companies use to fuel their operations. Now, with more awareness, people are looking to monetize their subjective data.
With micropayments, we can make this a reality. For example, websites may pay users for their online activity. Companies can pay owners for data generated by Internet of Things (IoT) devices such as smart electricity meters. It can even extend to data generated by health devices, such as wearables.
Small Payments Can Extend Bitcoin Adoption
While the use cases of microthrust mentioned in this article are experimental, they may reach critical mass in the not too distant future. Of course, Bitcoin’s price volatility can hamper micropayments, but mass adoption is expected to stabilize the price.
Most importantly, micropayments can be a killer Bitcoin app. Bitcoin-powered micropayments can be applied to many business models, leading to global adoption and increased network effects.
This is a guest post by Emmanuel Awosika. The opinions expressed are their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.