Can Bitcoin Fix Micropayments?

Micropayments were all the rage in the 1990s. The idea of allowing customers to pay tiny fees for physical or online products was thrilling and received a lot of attention. 

However, early micropayment models failed to solve the problem of incurring large costs on processing tiny transactions. This is why micropayments haven’t taken off, years later after the idea was conceived.

But Bitcoin may offer — finally! — a workable model for micropayments for businesses and customers. We’ll explore how Bitcoin facilitates microtransactions and what benefits this technology offers.

Micropayments typically refer to transfers below a specific value threshold. Think of a micropayment as a really small transaction or payment — like the $1.20 you pay for a cup of coffee.

Micropayments have received considerable attention from companies and researchers, and for good reason: Micropayments have the potential to unlock new income streams for businesses and increase value for customers.

Let’s imagine you visit Billy’s shop downtown for a cup of coffee, which costs $3.20. You don’t have any cash on you, so paying with a credit card looks like the best option. 

But there’s a slight problem: Billy won’t accept transactions below $5 because the payments provider often charges a base fee in addition to a percentage of the full cost for processing payments. 

For Billy to break even, the value of the transaction must be higher than the processing cost. Paying a fee on your meager purchase would simply be economic suicide. 

The transaction breaks down, with both sides losing out on benefits. You can’t get your caffeine fix and Billy loses potential income. 

The latter point may seem trivial until 10-15 customers face similar issues and walk away empty-handed.

Micropayments represent a new opportunity for businesses and customers to maximize their utility. Businesses can provide low-value services to customers without incurring losses. The concept also affords customers more freedom of choice and reduces barriers to purchasing items.

The idea of micropayments has been around for as long as the internet itself, as articles like this one shows. Microsoft was one of the firms working on enabling micropayments until it scrapped its plans.

Historical experiments with micropayments have followed the same principle: aggregate tiny fees into a considerable amount before releasing them to merchants. 

In most cases, the user would have a digital wallet where they could deposit a fixed sum and authorize withdrawals for certain payments. 

However, the early solutions faced a big problem from the get-go: centralization. Just like credit cards, the digital wallets used for micropayments were controlled by third-party services. 

This created security risks for users, especially if hackers breached company servers. Moreover, users had to hand their personal information to companies, giving companies the freedom to sell their data.

Moreover, the minimum payment unit of fiat currencies like the U.S. dollar makes them impractical for true micropayments. 

For example, the cent ($0.01) is the smallest unit of a dollar. Which means we physically cannot use it for payments lower than one cent.

As programmable money, Bitcoin doesn’t have the same minimum-unit problem as fiat currencies. For instance, you can divide one bitcoin into 100,000,000 sub-units to get a “satoshi” — which is worth less than a fraction of one cent.

Bitcoin exists as a decentralized, secure and trustless payments network. To make micropayments, you only need a Bitcoin address, which you can create in minutes. 

No company is holding your wallet or identity details, reducing the risk associated with using micropayment services. Finally, Bitcoin enables instant, near-feeless transactions through “payment channels,” which we explain later in this article. 

Payment channels allow two parties to bundle several transactions into one, removing the need to pay fees on all but one transaction.

A Bitcoin skeptic reading this article would have a hard time believing bitcoin can be useful for small transactions. 

Why would any sensible person opt to pay expensive miner fees and wait about 10 minutes to buy a cup of coffee with bitcoin?

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