Blockchain technology can make micropayments finally work

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I recently came across Marc Andreessen’s 2014 article on Bitcoin (BTC). It’s visionary in many ways (no surprise). I’ve been in the industry for four years now, with a focus on the social impact of blockchain. It amazes me that in 2014, before there was an institutional presence of Bitcoin – or even a popular understanding of this new technology – Andreessen was able to describe its potential economic and social implications for the future.

Almost eight years after writing his words, I would like to touch on one of the topics of his article: micropayments. I’ll explore how blockchain could help transform micropayments, not only by enabling the monetization of certain aspects of businesses that need a solution, but could also help the most vulnerable in society.

Micropayments

Micropayments are not a new concept. Micropayments have enjoyed varying popularity since the mid-1990s. By definition, micropayments are transactions whose value is below a certain threshold. It is important that below this threshold, the transaction costs incurred represent a considerable part of the total value of the transaction and are therefore not economical. Another important aspect is that due to the small sums, micropayments are only for digital transactions of intangible goods. Any additional handling and shipping charges may increase the value of the original transaction by a hundred, making it totally irrelevant.

Credit card companies offer merchants several types of pricing plans for the fees they charge. These plans typically include a lump sum per transaction and a percentage calculated from it. Not surprisingly, this information is not openly available by the card companies themselves, but published by others who compare these rates as a service to merchants. With that in mind, let’s take a look at the fees that would be charged to a merchant for a micropayment.

We assume the following:

● The lowest fee we found was 1.29% of the trade value and no flat fee was charged.

● Since the smallest element of (most) fiat currencies is 1/100 of the set – i.e. $ 0.01 – this would be the minimum fee charged by the card company credit, whether or not above 1.29%.

If we plot the fraction of the transaction fee against the value of the transaction, 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 carrying out 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 accelerating day by day, and most importantly, the Bitcoin and Ether (ETH) minimum payment unit is incredibly small, as shown in the table below:

Additionally, crypto wallets can be easily integrated into any digital device, be it a cell phone, laptop, or other Internet of Things device. And while the fees can vary widely from network to network and on different occasions, the fees aren’t a problem with many protocols and can run into fractions of a dime.

Last but not the least is user privacy. Due to the asymmetric encryption of the blockchain, the payer only reveals their public address at the time of payment, which provides hardly any information for someone who wants to hack their wallet. Unfortunately, this does not apply to a credit card transaction where the payer must provide their full credit card number and hope the payment platform is properly secured.

Related: The crypto industry royally messed up privacy

Real use cases of micro-payments

Now that the technology aspect is covered, there is only one question left: do I get something for a millionth of a dollar? I’m not sure what the millionth is, but there are many use cases for micropayments. Below are a few:

Alternative to the subscription model: No need to recall the economic reasons for the subscription model to consume online content and its success in recent years, whether it is video content, music, newspapers, etc. If this model has several advantages, it is far from perfect and certain reservations. For example, what if someone just wants to purchase a single item instead of opting for a subscription? Let’s say Alice subscribed to two ezines when she discovered an interesting article in a third. She will not opt ​​for a third subscription even though she is willing to pay for that item only. From the magazine’s perspective, the article is already there, so why not ask someone? Micropayments allow Alice and the magazine to maximize their economic benefits.

Copyrights, royalties and digital references: As in the previous case, it is not necessary to explain what copyright, royalties or references are. Micropayments offer a relatively simple immediate settlement mechanism with virtually no limit on the amount, unlike the complicated solutions that are common today.

IoT Transactions: This use case is very visionary, although sooner or later it will likely become as mundane and trivial as a switch. To date, the IoT has barely reached a fraction of its enormous potential. One possible reason for this delay is the lack of a simple and easy-to-implement monetization model. Blockchain micropayments could be the answer. Think about all the data that can be collected from your car, from road conditions to traffic and more. The exchange of data collected from mass users in real time could be invaluable for traffic planning and road maintenance. And why not pay? The added value of blockchain is an improved mechanism for anonymizing data and protecting user privacy – again a cost-effective 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 recipient donors could easily create accounts to receive funds that would allow them to donate directly to them, eliminating all middlemen and overhead costs. However, it’s important to note that this feature is a double-edged sword that could prove to be its biggest trap. Fraudsters might as well create fake accounts and attract donors. Evaluations and audits 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) to ensure better visibility for donors and to offer. Since a minimum donation amount will no longer be a problem, we may also see donations of small amounts. The World Bank classifies a country with a gross national income per capita of less than US $ 1,025 as “low income”. In other words, it means a daily wage of less than $ 3. According to 2020 data, there are 27 low-income countries. Micro-payments could be a great mechanism that needs to be carefully monitored in the event of fraud in order to give funds to those in need in those countries. I think you can see how that, if managed well, could result in more effective giving and more direct impact.

Related: Digitizing charity: we can do good better

In recent years, micro-payments have lost their prestige. While the concept was ahead of its time, technology fell behind and prevented it from becoming a reality. Andreessen was right and revolutionary in pointing out the ability of the blockchain to transform micropayments. I’ve barely scratched the surface here in terms of use cases and potential.

Businesses could become more efficient and monetize their offerings more. Entire communities could be transformed or lifted out of economic depression with direct and personal assistance without intermediaries. Kudos to Andreessen on his vision from eight years ago – blockchain could be the breath of fresh air the world has been 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 before making a decision.

The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.

Netta Korin is co-founder of Orbs and the Hexa Foundation. Prior to Orbs, Netta was Senior Advisor to General Mordechai Hod on Special Projects at the Israeli Defense Ministry and Senior Advisor to Deputy Diplomacy Minister Michael Oren in the Prime Minister’s Office. Netta started her career on Wall Street as an investment banker and then went on to become a hedge fund manager. She has extensive experience in philanthropy and has served on several boards of directors in Israel and the United States for over 15 years, and has held senior positions on executive committees.


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