Tiny and inexpensive-to-deliver payments can fling open markets for small digital services and goods. So, can the emerging wave of crypto-based startups plug the gap?
Marc Andreessen, the author of the famous essay, “Why Bitcoin Matters” in 2014, argued that a technologically, almost incomprehensible magic internet money had the potential almost like fiat money.
Andreessen Foresaw Micropayments, But they Evolved into a Different Thing
About a decade later, Andreessen is actualizing what he foresaw through his Andreessen-Horowitz firm, a venture capital enterprise that focuses on cryptos and Web3 investments. In the essay, Andreessen highlighted one major pillar, which was later knocked down or seriously crippled.
“A third fascinating use case of Bitcoin is micropayments ….” wrote Andreessen.
The fee for one transaction on the Bitcoin blockchain is about USD 1.5-2, which makes it not viable for transactions of less than USD 2 (sub-payments). Andreessen hyped Bitcoin because he was an early crypto bull but never saw the fee growth that resulted in the shuttering or decline of Bitcoin-based micropayments.
Fees low enough for sub-dollar transactions or payments have remained a dream. Even with the cheaper proof of stake (POS) protocol and Lightning Network owned by Bitcoin, low transaction fees only remain a concept. So, can cryptos solve the problem of micropayments?
Many models have been brought forward analyzing the feasibility of digital micropayments. The bulk of these are focused on allowing users to purchase media on an “a la carte basis” instead of being part of the subscription. The goal is to drift people from ad-based content, which is the thesis underlying the design of the Brave browser.
Stefan Thomas, the CEO of web-content micropayment Coil, indicates that people take micropayments as small payments, but it is a completely different thing. They are based on customer psychology because of business implications. Thomas agrees with Nick Szabo, who was a pioneer of blockchain technology way back in the late 1990s that it is all about “mental transaction costs.”
Machine/Machine Payments and Market Control
When doing his research on micropayments, Melvin Klein indicated that people making micropayments end up getting annoyed by having to regularly repeat the process. This is the reason more Americans online opted for monthly subscription services.
The bigger potential for micropayments might be in machines. For example, high-speed, machine-to-machine transactions, such as the sale of utility services, have been a subject of study. BitTorrent, which is owned by Tron, has also vouched for the automation of micropayments for download bandwidth.
Apple App Store is another example of micropayments. The app is an attempt to get wealth from people via a controlled choke point. This is why they are able to nip 30% of the sales from content creators. Also, they fiercely fight against allowing independent in-app purchases.
The examples in this post demonstrate that selling products or services outside the heavily intermediated market is challenging. It is a major inefficiency in the economy, which is likely to increase with digitization. The only way to free the economy from the constraints is through functional and widespread micropayments!