Microtransactions and Microtrust

Micro-transactions

Consider a person (economic agent), who encounters virtual currencies and off network payment systems regularly. For example, they:

• Engage with websites having the notion of credits
• Regularly rent movies or purchase music through various online services
• Have multiple avatars in multiple games or online worlds, each allowing in game purchases of non real world objects.
• Regularly make purchases using payment systems like paypal
• Periodically use social networks which utilize credits

Each of these examples typically rely on micro-transactions.

The cost of processing a micro-transaction is disproportionate to the value of the transaction, making them economically impractical.

The ability to process micro-transactions outside of the payment networks, and within the domain of the corresponding service provider has become common. Typically either:

• Virtual currencies for use within the domain are offered in return for a standard monetary transactions. 1000 domain-currency for $10. This domain-currency is then used to complete small purchases.
• Representative balances are created within a domain specific account correlating to larger standard monetary transactions. $10 may be credited to an account balance, and then swapped between users when making purchases without interacting with the payment network used for withdrawals and deposits.

Common to all of these examples, is the notion of microtrust. We trust these service providers to manage minor amounts of real world currency on our behalf. The benefits range from decreased latency in purchase speed through to decreased cost of goods purchased.

Micro-transactions within Crypto Currency

Within crypto-currency the cost of processing micro-transactions is also disproportionate to the value of the transaction, leading them to often be considered as spam or denial of service attacks.

Leading cryptographers and digital money experts are currently working on technical solutions to this problem. Sidechain allows currency to be moved from one blockchain to a sidechain, and back again. This allows a faster chain to be used for micro-transactions within specific domains of need.

Once mature, this technology will still be relatively expensive to adopt for existing companies. There are adoption costs for each company ranging from education through to implementation, integration and support. It is also a big decision for a company to decide to move from a trust-me model to a decentralized publicly accountable and verifiable cryptographic model.

Paving the way

There must be some incentive for companies to adopt a Sidechain based model in the future. A major incentive will be continued business from users, if users give social pressure to companies to become more transparent and interoperable by adopting sidechain based methods rather than trust-me based approaches. This scenario will be far more likely to come about if both the users and the service providers are already using cryptographic currencies.

There exists then a period of adoption and migration to crypto currencies by both users and service providers, each encouraging the other.

An interim step is to encourage service providers to add support for cryptographic currencies, not for micro-transactions, but for those deposits and withdrawals of non domain specific currency.

In turn this enables greater fluidity of money between services.

The ability to transfer money between domains, from a media provider to a gaming platform, to a friend, or to a personal account, is a huge enabling interim step for users.

For service providers, the ability for users to send money from competitors, from disused or redundant account balances, to use their "spare change" is of benefit, and provides a potentially significant increase in revenue. The reduced cost in payment processing is also of consideration.

Successful participants in the crypto-currency space will recognise the importance of existing micro-trust based services, and their ability to handle micro-transactions is of importance. Key Bitcoin players such as Coinbase have already taken this approach.

Bitmark will target existing trust-me micro-transaction enabled services and marketplaces, and their user bases, and the content creators of the Internet.

We must prioritise steps to ease and enable adoption by those willing. Payment gateways, automatic exchanges, ease of integration, and usability, will then be a priority for the Bitmark Project.