Just recently, technological giant Facebook, together with 27 other top organizations including MasterCard, Visa, PayPal, Uber, eBay etc. published the Libra white paper. This was initially revealed by Mark Zuckerberg, the CEO of Facebook, through a post on his official Facebook account. Zuckerberg stated, “We aspire to make it easy for everyone to send and receive money just like you use our apps to instantly share messages and photos”. Libra is planned to be launched in 2020 and is powered by ‘blockchain technology’. If this becomes a success it is promised to turn the financial and banking world upside down, staging the degree of impact blockchain technology is having on the world. Nowadays, the use of coins is becoming occasional as people are unwilling to carry them around anymore. For an instance, think of the things you could do with a mere one-rupee coin in Sri Lanka. You will realize that the options are less than a handful. The bus ticketing system in Sri Lanka is one example of such, where the conductors do not even bother in returning the balance couple of rupees to the passenger. These types of transactions, which involves a small amount of financial payments are known as ‘micro-transactions’. What if people can use these pittances for something useful; like paying for an online content?
Rise of Micro-Transactions….
There are lot of definitions for the term “Micro-Transaction”. PayPal defines micropayments as anything below 12 USD. Defining the value for a micro-transaction depends on the country, region and the context. From a commercial perspective, micro-transactions enable businesses and people to monetize small content/information which allows efficient payment and revenue distribution. Imagine a situation where you scroll through a video content website and suddenly coming across a very interesting video that you would like to watch. As soon as you click on the play button, a huge popup window appears on the screen, talking about a subscription payment of $99 per month. So, the person is ought to take the decision of using his credit card to pay and subscribe to the website or skipping the video. Most of the time people do not tend to subscribe for a website just to watch a video. On the other hand, there is always the uncertainty of finding the other content in the site less interesting than the first video you came across, making it a waste of money. Due to this, the website creator or the business running the website loses a number of these kinds of micro payments.
What if a person could pay around $0.13 just to view that particular video? The time required to unlock the video would be a couple of seconds, and he could always skip the next video if the following content is less interesting. This is an example for one of the main use cases of micropayments called “Content on Demand”. Let’s take another scenario called “Online Tipping”. Think about online forums like Quora or Stack Overflow. Imagine a person getting a solution from a Quora respondent or getting an impressive answer from Stack Overflow for his problem and he is willing to give a small reward or so called traditional ’tip‘ to this respondent. It’s like buying a cup of coffee or a candy bar for him. For an example one ‘upvote’ on stack overflow will reward the respondent with $0.01. From this perspective, micropayment use cases are limitless, including donations, online contents and so many other applications. Ultimately these use cases will appreciate the value of coins, once again. People could use it for something useful without acting like coins do not exist anymore.
Problem with Traditional Online Payment Systems…
Can a person purchase a small item from store which costs 10 rupees and pay with his VISA card? Of course, the answer is no. Why traditional online payment systems like PayPal, Visa, MasterCard etc. are not facilitating micro-transactions? The reason is a common underlying problem which all the above-mentioned payment processing companies face. “Transaction processing companies should maintain the transaction profitable; so, in order to do that, the minimum, economically viable transaction amount they could process is too large.”
Whenever we go to a store to buy something, there is a minimum amount our bill should surpass in order to use our credit card for the payments. That is because the store needs to pay for the processing company (VISA, AMEX etc.) a fee when an online transaction happens. Reason to charge this fee is to run an electronic payment system which involves a lot of computational power and people, to ensure fraud prevention and errors in the transactions. With this transaction fee, existing online payment systems could not facilitate micro payments. For an instance, consider using PayPal to complete a micro-transaction. As mentioned in the PayPal website, “If your transaction size averages less than $12,
- In Canada or the U.S. – a fee of 5.0% + Fixed Fee based on the currency.
- Outside Canada or the U.S. – a fee of 6.0%
- Fixed Fee based on the currency.”
[ source: https://www.paypal.com/ca/webappsmpp/merchant-fees ]
Therefore, completing a micro-transaction is clearly not an economically viable scenario. If you do a $0.5 transaction with PayPal, the total transaction amount will be around $0.6, which is a considerable transaction fee compared to the value of the transaction.
Can Blockchains Solve This?
Consider the following scenarios.
- Web browsers have an inbuilt online wallet which has a small amount of money in it. In the above video content scenario, when you scroll through the site and if you decide to watch that video, it is just a matter of a click. Wallet will automatically pay that small amount of $0.13 and in no time, the video will be unlocked.
- Messaging apps like WhatsApp, Messenger has a virtual wallet built in. So, if you want to send money to your friend, pay a minor restaurant bill or donate a small amount for a charity, you can send money from your WhatsApp wallet just like sending a message, without going through all the difficult and time-consuming bank money transferring processes.
The above-mentioned situations could be made possible with blockchain technology. One of the main characteristics that can be seen in the traditional payment systems is centralization, where a centralized entity or an organization is always governing all the processes. The same scenario applies in the banking industry, making this centralised property the main reason that leads to the heavy burden of transaction fees. Blockchain can be defined as a “decentralized and a distributed ledger”. Blockchain is a software protocol which can be used to securely transfer unique instances of value (Eg: Property, Money, Credentials etc.) via the internet without any of third-party intermediary involving in the transaction process such as a bank or a government organization. With no third-party intermediary facilitating the transactions, the transaction fees decrease drastically. “Coinbase launched a new feature, Bitcoin micro-transactions with no fees. New feature was first tested by Coinbase CEO sent himself 1 Satoshi (0.00000001 Bitcoin) which equals to 0.000096 US dollars. And it was super-fast.” [Source:https://99bitcoins.com/bitcoin-micro-transactions-without-any-fees-yep-thats-the-new-coinbase-feature/]
Crypto payments like bitcoin, Ethereum faces the problem of delays in the network. Transactions in bitcoin network normally take a couple of hours to complete, which is a huge limitation regarding micropayments. A solution for this problem was followed up with the lightening network concept. Lightening network moved the transactions ‘off the blockchain’, increasing the processing speed up to thousand transactions per second. Basically, lightening network creates a second layer on top of blockchain which will open a payment channel between two wallets. This was specifically designed to facilitate micro-transactions. So instead of processing ten small transactions separately on blockchain, with lightening network all these ten transactions will happen on the ’off chain‘ layer. After all the transactions are completed between the wallets, it will process all ten transactions as one on the blockchain network. With this lightening network concept micropayments became a reality.
Embrace the Change
Soon we will be sending money to our friends on WhatsApp like a message, tipping a stack overflow user for his great support or paying 0.03$ to unlock a video. All these use cases will be possible with the instant, secure, fast and cheap micro transactions. This will open a whole new world of e-commerce business models and mobile payments. Blockchain is promised to turn the financial world upside down, while micro-transactions will benefit from blockchain revolution instantly. “It’s money 2.0, a huge huge huge deal.”-Chamath Palihapitiya, the previous head of AOL instant messenger”
Exposition Magazine Issue 15
Department of Industrial Management
University of Kelaniya