The highly-anticipated 21 Bitcoin computer, which has the bitcoin protocol as part of its operating system, has been touted as a long-hoped-for solution to enabling micro transactions over the Internet. But one technology observer has voiced doubts about this based on the amount of power the device will require.
Timothy B. Lee, a senior editor at Vox Media, wrote an extensive article why the 21 Bitcoin computer will not become the solution for micropayments. He claims the computer will consume too much electricity to be profitable for users, will be hackable, and will need to be replaced every few years.
The company behind the 21 Bitcoin Computer, 21 Inc., has raised $120 million from investors including Paypal co-founder Peter Thiel and Andreessen Horowitz.
21 Inc.’s backers believe that the ability to generate small quantities of bitcoins will become a standard component in digital devices, similar to a WiFi-chip today. They further envision a future where digital currency serves a variety of electronic transactions not possible with today’s computers. This could provide a feasible system for paying for content and online services with micropayments. An example would be the ability to power a jukebox that plays ad-free music, or a camera that automatically rents its own online storage.
21 Inc. believes the ability to generate a few pennies per day worth of bitcoins will open up new types of markets that don’t currently exist. The existing proof of concept for the device that 21 Inc. is currently selling is aimed at developers who will create applications that use the 21 chip’s capabilities. Over the next few years, 21 Inc. expects the chip will get smaller and less expensive, to the point where it can be built into various third-party devices. An example would be a small speaker that acts as an ad-free jukebox system. You plug it in, select a song, and the device starts playing. The jukebox then generates a fraction of a penny for each song played and sends it to the relevant copyright owner.
The technology brings an immediate application for enabling micropayments.
The existing overhead of credit card networks causes transaction fees to account for a higher portion of a transaction the smaller the transaction. Below a dollar, the economics of credit card payments don’t work well.
“Technologists have been dreaming of building practical micropayments for a very long time,” Lee wrote.
There have been a number of attempts to build micropayment systems, and so far, none of these systems have really taken off. The investors behind 21 are making a big bet that Bitcoin is the technology that will finally make the concept work.
But in practice, there would be serious difficulties, Lee wrote. If there are a dozen devices in a house with the 21 Bitcoin mining chips in them, the electric bill could become suddenly higher than expected.
“Maybe it was just a hot month and your air conditioning was running on overtime. Maybe some of your 21-based devices got hacked, and bad guys are stealing your electricity to generate bitcoins for themselves. Maybe your teenage son recently bought a new off-brand device that generates a lot more bitcoins (and wastes a lot more power) than it promised on the box — and sends the extra cash back to its sketchy manufacturer.”
Also read: 21 Inc. Unveils A New $400 Bitcoin Computer
Homeowners will have a hard time determining which appliances are responsible for the higher bills since the electric bill will not itemize each device in the home. “You’d be forced to start measuring the power consumption of the devices around your house — exactly the kind of accounting hassle 21’s technology was supposed to eliminate,” Lee noted.
Once a few devices get hacked or a few manufacturers start overcharging customers, customers will steer clear of these devices.
Another problem Lee noted is the fact that bitcoin mining hardware becomes obsolete quickly. As new, more efficient chips are introduced, the older chips will generate fewer bitcoins.
Over time, the electricity needed to power a 21 Bitcoin device could increase while the amount of bitcoins generated decreases. This, Lee noted, could require users to replace their devices with more expensive ones.
“Of course, a device that only works for a couple of years could still be useful,” Lee wrote. “But in that case, it might be more efficient to just load it with pre-generated bitcoins — or even better, just have the manufacturer provide the necessary services for free and charge an extra $10 or $20 for the device. Customers like clear and transparent pricing; effectively billing costs to your electricity bill is just the opposite.”
Image from 21 Inc.