Security Notes: Digital Cash And Micropayments

Gideon Samid • Gideon@BitMint.com

The three awfully young programmers intercepted me on my way to class, asking if BitMint can do micropayments. They explained that they have developed a smart-map application that colors urban streets according to crime statistics at any given hour of the day. The idea is to help joggers and dog walkers choose a safe route.

They were struggling with finding investors. Most told them: “Google will build the same thing and wipe you out.” So they figured if they could charge even 3 to 5 cents per map, they could bootstrap their operation. It’s hard to compete with Google’s “free” pricing, but for a unique added value like safety, people might be willing to pay a nickel or less. “This is all we need to stay afloat,” they told me. I replied that our BitMint digital currency is inherently a good fit for micro, or even nano, payments, and I thanked them for the following insight.

Innovation economics has been demonstrated to be directly related to investment threshold. In primitive societies, there are no banks, there’s virtually zero credit, and there’s very little innovation. Traditional banks will fund an innovative expansion of a healthy business, but no startup. So innovation economics came into being. Then nominal venture capitalists popped up to invest in startups that have proven their viability. That led to more innovation.

And then early-stage VCs gave rise to “idea-only” startups, yielding more useful innovation. Recently, there has been crowd-sourcing as a way for innovators to raise money without the hurdle of convincing a single VC. This repeatedly reduced investment threshold keeps America the king of startups. So, what’s next?

Micropayments! The crime-mapping application may be downloaded 10,000 times an evening, per a city, which at a nickel per download amounts to $500/city, per evening, or $350,000 per hundred cities per week. Not bad for a trio of twenty-somethings in a garage.

Come to think of it, the “free” mode for online data is not the blessing it appears to be. The Googles, the Yahoos, and the Facebooks make their money off of a massive number of users. But their free offers act as a barrier to newcomers who need a deep-pocketed sponsor to fund them until they have a critical mass worth paying for.

By charging such a ridiculously small amount that users will regard it as close to free, a new wave of innovators can grab a foothold in the business world and bootstrap themselves. They can grow up holding 100% of the equity and not be hostage to an exit strategy dictated by their investors.

Micropayment technology on the Internet would allow unknown artists to sell a song for a dime; a far-away cook to sell a cake recipe for a quarter; and a smart SQL engine to answer the question, “Which stock appreciated the most in the last twelve days?”

Micropayments will allow people to put up their computer for hire when they go to sleep. Their computer will offer its number-crunching capacity to a bidder who might pay in micro and even nano payments. Micropayments will be a dominant reality in the coming Internet-of-Things, where, for example, bikers will rent a bike per minute used.

Today, publishers and media vendors resort to a subscription model to charge their clients. This model is inherently flawed because light users subsidize heavy ones. By contrast, pay-per-use allows for a fair distribution of revenue. After all, that is what money is for, to allow satisfied users to pay a provider and keep him or her in business.

Much as we are on guard when a slick salesperson offers us free this and free that, so we should be on the alert for the culture of the free Internet utility. By paying for reading a magazine online, however micro the payment, we signal the publisher that its content is helpful and worth paying for.

Today’s card-payment paradigm cannot support micropayments, and the variety of solutions on the market seem to require some sort of registration and other prerequisites. The impact on our innovation economy is likely to be so profound that a fitting solution is sure to be found. From a technological standpoint, the account-based paradigm is a nonstarter. For micropayments to be a reality, the market will have to move to cryptologically derived digital cash.

This is where we are headed, as is clear enough to anyone following the economic news.