micro paymentsIn a recent video released by software engineer James Poole, the demonstration of micropayment channels shows how Bitcoin can be used for transactions in amounts as small as a fraction of a penny. In fact, micropayment channels can make microtransactions denominated in satoshis much more practical in the real world. Right now, it costs roughly $0.04 to broadcast a transaction on the Bitcoin network. While this is much cheaper than other payment networks, sending one satoshi becomes rather impractical.

With a micropayments channel, a Bitcoin user can setup a trustless environment with a server that allows them to send multiple payments without broadcasting each transaction on the Bitcoin network. This leads to much lower transaction fees overall, and it also makes nanotransactions a practical means of payment. Payment channels are not necessarily a new idea. In fact, the concept was implemented in bitcoinj last summer.

Bitcoin Microtransactions’ Advantages Over Current Solutions

Although there are already a few methods for handling nanotransactions right now, the currently available solutions use a centralized model. For example, a user of Coinbase can send bitcoins to other Coinbase users without a fee. The same concept applies to ChangeTip where you can tip someone as little as a single satoshi over the Internet. The main problem with these services is that they don’t follow the same decentralized principles found in Bitcoin. In fact, they are more like traditional payment options, such as PayPal or banking institutions, than Bitcoin itself. Micropayment channels solve this issue by creating a trustless environment where the client and server create a mutli-sig agreement rather than giving the server complete control over the user’s account balance.

Real World Applications

So where would people actually use this kind of micropayment channel?

  • Tipping wallets – The most obvious place where this kind of solution for micropayments is needed right now is in tipping wallets. While tipping services, such as ChangeTip, are already pretty awesome, they still have the problem of being liable for your entire account balance. If ChangeTip used a micropayments channel server, the account balances could not be stolen by a hacker or rogue employee at the company. Bitcoin is about removing as much trust as possible from third parties, so it would make sense for any online Bitcoin wallet to implement this security upgrade.
  • “Pay as you go” Wi-Fi – This is the usual example given for the power of micropayments. Instead of purchasing a day pass or monthly plan for Wi-Fi access at an airport or cafe, it could make sense for some people to make micropayments to the entity providing Wi-Fi access. Perhaps a user could have 5 satoshis automatically sent to the Wi-Fi provider every time they download a KB of data. You can watch Vitalik Buterin discuss this concept in the video below.
  • “Pay as you go” web hosting – Web hosting services could also benefit from the “pay as you go” model. Instead of charging a flat, monthly fee, website owners could make micropayments to a hosting provider every time someone visits their website. This option becomes even more interesting as a possible payment model for decentralized web hosts, such as grids on the Bitcloud network.
  • Content distribution – Imagine making micropayments to Netflix for each second of a TV show or movie you watch on their platform.

Still Room for Improvements

I reached out to James Poole on Twitter after seeing his demo video, and he talked about building a platform, MicroTrx, for various applications to use as a micropayment gateway. Poole noted, “My end goal is to build a micropayment gateway to allow any third party to integrate [trustless microtransactions] and also provide tools for anyone [who needs assistance].”

On the topic of removing trust from the equation entirely, I pointed out that centralized entities still had to be trusted to eventually deliver the bitcoins to the correct party. Poole pointed out that it’s not just the centralized servers that you have to trust to deliver the microtransactions. Poole agreed, and he explained, “They are open to many attack vectors: MtGox style, hackers rerouting payments, employee theft, loss of coins, etc.”

Having said that, this is still a move in the right direction when it comes to removing trust from micropayment servers. Perhaps we’ll have to wait for Monetas or a decentralized micropayments application built on top of Bitcloud to enjoy the “Holy Grail” solution, but this option can definitely help us with sending tiny amounts of bitcoin across the globe right now.

Images from Shutterstock.