Bitcoin's Unfinished Business: Why Micropayments Still Matter

One of the most important moments in the evolution of cryptocurrency was powerhouse investor Marc Andreessen’s landmark 2014 essay “Why Bitcoin Matters.” This was the man who had seen the promise of transformational companies from Lyft and Facebook to Dollar Shave Club and Airbnb (and many others since), arguing in the pages of the New York Times that a technologically near-incomprehensible magic internet money had the same kind of potential.

Most of a decade later, Andreessen’s venture capital fund Andreessen-Horowitz is at the bleeding edge of cryptocurrency and web 3 investment. But looking back on that essay, it’s striking to note that one of the pillars of Andreessen’s Bitcoin thesis has definitively crumbled.

This article is part of CoinDesk’s Payments Week series.

“A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments,” Andreessen wrote. “… It is not cost-effective to run small payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The fee structure of those systems makes that nonviable. [But] all of a sudden, with Bitcoin, that’s trivially easy.”

Cue record scratch. You may be wondering how we got here.

The fee for a single transaction on Bitcoin in the Year of our Lord Two Thousand and Twenty-Two is nearly $2, according to BitInfo, making it not just extremely nonviable for sub-$1 payments, but also more expensive than a credit card even for many larger payments.

Fees have risen so dramatically because Bitcoin has a competitive market for transaction fees, which fund network security, and rising demand has made transactions more pricey. The last time Bitcoin fees were low enough for anything close to micropayments was June of 2015, when the cost of a simple send broke five cents. They haven’t looked back since. Even in the deep dark doldrums of the 2019 bear market, with the bitcoin (BTC) currency trading as low as $3,000, fees were consistently above 10 cents.

Andreessen wasn’t the only early crypto bull who hyped micropayments on Bitcoin but didn’t see the fee hike coming. The steady rise has contributed to the decline or shuttering of some early Bitcoin-based micropayments projects, such as ChangeTip.

But while it’s not going to happen on the Bitcoin base chain, fees low enough to support sub-dollar payments have remained both a technical Holy Grail and a common promotional refrain in crypto. Everything from less expensive proof-of-stake systems to Bitcoin’s own Lightning Network have hype-farmed the concept ­– yet it remains, by and large, just a concept.

See also: The Lightning Network Is Bringing Payments Back to Bitcoin

And so we find ourselves asking: Can crypto, or any other technology, actually solve the problem of digital micropayments? What might that solution look like? And most importantly, what does the world stand to gain when it finally arrives?

Micropayments: An entirely different thing

There has been endless speculation about new business models that can be realized once digital micropayments are feasible. Much focus over the years has been on allowing users to buy media, such as individual news articles, on an “a la carte” basis – that is, piece by piece, rather than as part of a subscription or with intrusive advertising. The general argument is that this would allow a transition away from ad-supported content on the internet, which is still the thesis behind the Brave browser and its tokenized browsing model. But this and similar concepts may be barely the tip of the iceberg.

“People think about micropayments as smaller payments, but really you should think of them being an entirely different thing,” says Stefan Thomas, CEO of web-content micropayments platform Coil. “It’s like if you thought of the internet as a fax machine that could send smaller faxes more cheaply. Instead, you can do entirely different forms of communication.”

Thomas, an early Bitcoin contributor, says much of his career has been defined by the quest for workable micropayments technology. It was part of his motivation for serving as chief technology officer of Ripple before forming Coil.

Micropayments are “an entirely different thing” at least as much because of their consumer psychology as because of their business implications. Over the past five years, the discourse around micropayments has become much more attuned to the problem of “mental transaction costs,” a concept developed in part by Bitcoin pioneer Nick Szabo way back in 1999.

The essence of the problem is that even if we solve the technical challenge of micropayments, users would find the decision to spend a dime or a nickel more annoying than the actual act. This would be a particular problem if micropayments were to become omnipresent on the Web, demanding that you make various small payments ten or 20 times a day.

An unintentionally hilarious illustration of the problem of mental transaction costs came recently during Meta/Facebook’s (FB) Metaverse launch video. Near the start of the presentation, while a group of folks are admiring a virtual sculpture, it starts to fade away. One of them has to “tip the artist” to look at the sculpture for more than a few minutes. There’s no clearer illustration that Meta’s pitch was aimed at investors rather than consumers, because a metaverse where you’re constantly micro-tipping artists would clearly be a gigantic pain in the ass. If micropayments make life worse for consumers in the way envisioned by Mark Zuckerberg, they’ve obviously failed.

Melvin Klein, a researcher studying micropayment applications at the University of Hamburg, points out that there’s more than a bit of déjà vu to this core problem. “With America Online, people were annoyed by the ticking clock – there’s another minute you have to pay for [being online]. People were so annoyed that in the end they had to transition to a monthly subscription.”

Read More: Bitcoin Payments Remain in Their Infancy But There Are Green Shoots Everywhere

That’s why Coil and several other projects have begun emphasizing what’s sometimes known as “streaming micropayments.” Coil is effectively a membership subscription, but instead of one large publication or platform, it grants access to several smaller outlets. Those outlets then get paid in tiny streams as the user browses them.

Part of Coil’s tech stack are a pair of standards called Open Web Monetization and Interledger. The standards can interact with cryptocurrency networks, but also with other systems. “It’s like a layer on top of the blockchain,” Thomas says of Interledger. “Each transaction is extremely efficient. It really is free, and it really is infinitely scalable … [for] true micropayments. I wish more people were paying attention to the Interledger protocol.”

A project even more rooted in the crypto world is Superfluid, which CEO Francesco Renzi takes pains to emphasize is not really about “micropayments,” again because of the mental transaction cost issue. “Fundamentally the way it works doesn’t require the user to understand that small payments are happening,” says Renzi. “Those small payments are more of a problem than they are a solution.“ (Pro tip: Renzi says he often sees micropayments pitches at hackathons, and “we have to go and explain [to the developers] why it’s not a good idea.”)

Instead, Superfluid is a cryptocurrency standard for streaming payments. “Streaming is built into the token,” according to Renzi. “You give me an address, I open a stream, every second your balance is ticking up.” So far, Renzi says Superfluid’s biggest market is decentralized autonomous organizations (DAO) using it to pay contributors.

What’s most notable about Superfluid’s model is that the “stream” is a single transaction for the purpose of on-chain fees. “You say, I want to send David a dollar every minute, and after that you’re done. You click the button once, you pay forever … Effectively, money itself is now moving on-chain automatically.” It also means that the longer a stream continues, the cheaper the relative transaction cost gets.

Machine-to-machine payments

But even if the streaming approach takes off, transactions between people may not wind up being the most interesting application for micropayments: Many argue the real potential lies in high-speed, machine-to-machine transactions. Examples include the sale of electricity from home solar installations, which has been explored by a crypto project called Brooklyn Microgrid, or streaming payments for electric vehicle charging. BitTorrent, now owned by Tron, has touted an automated micropayments system for download bandwidth which, at least in theory, can improve throughput for decentralized file sharing.

With micropayments added to digitized systems, “everything becomes more automatic,” according to Marvin Klein. For example, “You can think about directly paying taxes when you buy a product, so the shop doesn’t have to do all the accounting.”

Read More: The Future of Crypto Payments Will Be Centralized

“Another use case is artificial intelligence,” says Stefan Thomas. “Some people are thinking about a future where there’s a marketplace for internet user data. [But] you’re not going to think about selling this or that piece of data, there will be a user agent that does that on my behalf.”

Thomas also thinks micropayments could become key to building out modular and composable AI systems: “You can plug into multiple APIs, but you need a payments system to pay them all.”

Micropayments and market control

A more familiar example of the transformational potential of micropayments is the Apple App Store – not, that is, how micropayments could improve it, but how they could destroy it.

The App Store, you see, is the ultimate example of digital rent-seeking: an attempt to extract wealth out of other people’s creations by controlling a systemic chokepoint. It’s notorious for the 30% cut of sales Apple (AAPL)takes from app creators, and Apple’s ferocious opposition to allowing independent in-app purchases. Part of that rent is paid-for access to the iPhone ecosystem itself, which Apple has locked down to prevent users from installing programs from any source other than the App Store.

But payments technology plays a surprisingly large role in Apple’s ability to control the market. Many mobile apps, as you’ve probably noticed, are priced at ninety-nine cents or less. This could be a big challenge from a payments perspective, since 10% or more of such small purchases would normally wind up with credit card or other payment processors.

Apple is able to work around the problem solely because of its centralization and scale. To save money on fees, the App Store bundles all of a customers’ payments over the course of a month, according to Klein, then processes them in a batch. For instance, a purchase of two apps and a Coldplay album would be processed as a single transaction of $15, instead of three smaller transactions, cutting the processing fee as a percentage of the purchase substantially.

But even in a world where iOS was more open, a developer trying to sell a 99 cent app directly to users would not have access to this workaround. Since the vast majority of sales would be one-offs, there would be no option to reduce fees by bundling multiple payments from each customer.

This is just one example of how the absence of functional digital micropayments contributes to the clustering of digital commerce around a few players. Facebook, now known as Meta, apparently foresees that stranglehold continuing: it has said it will charge a cumulative 47.5% cut of digital creator sales in its Horizon Worlds environment.

Tip the artist, indeed – but Zucky gets to wet his beak a little, eh?

A smarter market for a richer world

Finally, there is a more abstract problem that functional digital micropayments would solve: market transparency for low-priced digital goods.

One of the most important roles of markets in a society is to discover the level of demand for goods and, in turn, how much of that good an economy should produce. That’s complicated by the zero marginal cost nature of digital goods (once a piece of digital content is created, each additional copy is essentially free), but it still broadly holds when it comes to things like software development.

But the current structure of digital transaction fees creates a shocking blind spot in the market for digital goods that might be priced at under a dollar. That could range from trivialities like video game skins and novelty non-fungible tokens (NFT) to more impactful products like niche applications or highly tailored data streams. It could also include real-world services like on-the-go cell phone charging.

Read More: Fast, Fluid, Frictionless Payments Are the Future

But the entire category remains underdeveloped because payments limitations have proportionally higher influence over pricing than actual consumer demand does. In effect, any digital good that would be appropriately priced at less than a dollar must either be sold through an intermediary, priced above market equilibrium in a way that makes it less likely to succeed, or, probably most often, simply not produced at all.

Cell phone charging is a great example. Right now, paid cell-charging services are largely limited to airports, where rushed, higher-income flyers are willing to pay far above the actual cost of a charge. But if payments tech made it possible to charge a more appropriate a la carte price for charging (probably just a few cents per hour including a healthy profit margin), intuition suggests charging services would be much more widely available. It’s a market failure caused entirely by the lack of functional micropayments.

There are likely many similar potential examples – including many we can’t even imagine. But right now, it’s near-impossible to sell such goods outside of a relatively limited set of siloed, heavily intermediated markets. Most likely, this means there is immense unfulfilled demand for low-cost digital goods, data distribution, mobile charging, and other services that the market is currently fulfilling.

That’s an economic inefficiency that will only grow as the economy digitizes – unless widespread and functional micropayments free the market from its technological constraints.

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