With the usual drumbeat of bad news continues, fraud, price manipulation, opaque actors, extortion, and just plain “oopsies”, a disinterested observer can be forgiven for wondering if the end is near for crypotcurrencies.
Bitcoin itself is increasingly controlled by giant mining combines who effectively control the Bitcoin network. This situation was assumed to be impossible in the original Nakmoto design , but here it is. And it is leading to a catastrophic crackup (AKA the “hard fork”), possibly as soon as August.
Meanwhile, this blog is ticking off the long list of supposed use cases for Bitcoin and blockchains. Supply chains? Yes. Remittance? Not on a public blockchain. Local currencies? Nope. Identity? Mostly not.
This week there is yet another use case that isn’t happening: Microtransactions.
From the start, it was imagined that Bitcoin technology could support transactions of any size, down to fractions of a penny. The cost of doing a transaction could be small, possibly even zero, and if so, then there is no reason not to do lots of tiny transactions. This would open the way to all kinds of new business (pay as you go for web content, metered use of services, etc.) including automatic management of IoT resources.
How is this admittedly exciting use case holding up?
Chuan Tian reports in Coindesk that “SatoshiPay to Stop Using Bitcoin Blockchain for Micropayments” StoshiPay is a nicely developed concept that has, for instance, a plugin for WordPress that would let me charge you a tenth of a penny (in Bitcoin) to read this deathless prose.
Their business model is to take 10% of every transaction—when you paid me, they get 1/100 of a penny.
The original approach was to just use Bitcoin, putting the transactions on the Bitcoin blockchain. Even bundling a bunch of them, these are small transactions, so the cost of pushing them out to the ledger obviously has to be small enough for the 10% cut to be profitable.
As Tian points out, the “essentially zero” transaction costs seen even two years ago are long gone, and more than one company has abandoned microtransactions with Bitcoin. At $2 and more per transaction, it is economically infeasible to implement microtransactions directly in Bitcoin. (By the way, these transaction costs for Bitcoin are now in the range with conventional financial systems.)
Why has this happened? Congestion.
The same scaling issues that are threatening to crack Bitcoin into multiple rival networks have pushed transaction fees higher and higher. The big players who are collect these fees (their entire business model is to collect these fees) have blocked engineering changes that would likely reduce congestion, and lower fees.
It is possible that transaction fees might go down, who knows. But the fact is there isn’t any good reason why you need to use the public ledger to implement microtransactions at all. So companies are moving to other technology.
SatoshiPay is said to be moving to IOTA, which is a blockchain-inspired system targeting the Internet of Things. IOTA implements a cryptographically secured peer-to-peer network, with their own protocol and data structures. They argue that transaction fees will be very low, or even zero.
Actually, the IOTA protocol and data structures are completely different from Nakamoto . IOTA is based on familiar concepts used in large scale data systems, with a peer to peer twist inspired by Bitcoin. They use cryptography and the idea of consensus, but in a way that allows a lot more throughput, along with other interesting features such as smooth offline operation (i.e., you can cut off part of the transactions and merge them back later).
There are some funky things about the protocol (e.g., there is a knob for how confident you want to be about the validity of the transaction tree) but there are no miners and therefore no transaction fees.
IOTA aims to do IOT things, smart machines bargaining with each other. (No puny humans involved!) They call thing the Economy of Things or something like that. But what they have built should also be good for something like SatoshiPay.
As in many Bitcoin use cases, people using SatoshiPay or services that use it will never notice the transaction technology behind the scenes.
Will we finally see digital microtransactions? I dunno. But it won’t be on the public Bitcoin blockchain, that seems clear.
So this use case for blockchain might come true, but, as IOTA puts, with No Blocks and No Chains.
Inspired by Bitcoin, yes.
But implemented by more sophisticated technology, designed for this use case.
- Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. http://bitcoin.org/bitcoin.pdf
- Dominik Schiener, A Primer on IOTA (with Presentation), in IOTA Blog. 2017. https://blog.iota.org/a-primer-on-iota-with-presentation-e0a6eb2cc621
- Chuan Tian, SatoshiPay to Stop Using Bitcoin Blockchain for Micropayments Coindesk.July 17 2017, http://www.coindesk.com/satoshipay-stop-using-bitcoin-blockchain-micropayments/