{"id":4984,"date":"2023-03-04T13:00:00","date_gmt":"2023-03-04T13:00:00","guid":{"rendered":"http:\/\/ci02b923303000261b"},"modified":"2025-02-20T05:35:13","modified_gmt":"2025-02-20T10:35:13","slug":"with-bitcoin-micropayments-can-work","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/culture\/with-bitcoin-micropayments-can-work","title":{"rendered":"Nick Szabo Was Wrong: With Bitcoin, Micropayments Work"},"content":{"rendered":"
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This is an opinion editorial by Jared Nusinoff, the founder and CEO of Mash, a Bitcoin- and Lightning-Network-based micropayments platform.<\/em><\/p>\n

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I\u2019m sick and tired of hearing about Nick Szabo\u2019s \u201cMicropayments And Mental Transaction Costs<\/a>\u201d post from 1999.<\/p>\n

When talking about micropayments, there are many doubters and detractors. For them, micropayments is a \u201cdirty word.\u201d They almost always reference the \u201cfailed\u201d attempts related to creating a digital currency akin to bitcoin \u2014 like the eCash payment system<\/a> by David Chaum\u2019s Digicash in the \u201980\u2019s and \u201990s. Yes, it failed. But that\u2019s not about micropayments.<\/p>\n

They occasionally reference failed attempts at bundling content, charging users subscription fees and then micro-distributing the revenue based on usage. But that\u2019s not about micropayments, either.<\/p>\n

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They don\u2019t consider the successes of the online applications of micropayments from over 15 years ago, as seen in gaming and digital media. They don\u2019t reconsider what is possible now that we have enabling infrastructures like Bitcoin and the Lightning Network. They all reference and anchor on this \u201ckill shot\u201d essay by Nick Szabo.<\/p>\n

\u201cThis will never work. Haven\u2019t you read \u2018Micropayments And Mental Transaction Costs\u2019 by Nick Szabo?\u201d<\/p><\/blockquote>\n

\u201cIs Szabo wrong about something? Is that even possible? That can\u2019t be!!!!\u201d<\/p>\n

Or maybe, Szabo may have been right at the time and things have changed in the subsequent 24 years.<\/p>\n

There are always detractors.<\/strong><\/p>\n

It didn\u2019t work then, it won\u2019t work now. Did they forget to ask \u201cwhy now?\u201d and \u201cwhat\u2019s changed?\u201d Did they pause to properly consider what the Szabo article was actually arguing? Do the use cases referenced apply to the experiences in question?<\/p>\n

It\u2019s been 24 years. Things have changed. Technology changes. The internet is different. Money is different. The opportunities to apply micropayments to experiences are different.<\/p>\n

And let\u2019s not ignore that Szabo\u2019s opinion has been further articulated, and that it changed. He wrote a follow-up paper<\/a>, in 2007, mentioning some of the places that micropayments (not nano-payments) are working. And the extra discussion in the comments sections is fantastic, and add color to his thoughts, some of which are referenced below.<\/p>\n

Yes, Mental Transaction Costs Matter<\/h2>\n

\u201cThe lesson for micropayments is that mental costs usually exceed, and often even dwarf, computational costs. (Big) reductions in computational costs (are) often economically insignificant\u2026 (mental) costs will increasingly come to dominate.<\/p>\n

\u2013Szabo<\/a>, 1999<\/p><\/blockquote>\n

The article\u2019s high-level point is that making a decision to purchase something is a huge hassle, forcing you to incur a large mental transaction cost \u2014 and this decision point for people is the critical and most challenging obstacle for micropayments to work. It isn\u2019t the reduction in the costs for providing the product or service \u2014 that was simply a necessary enabler to having the cost structure for charging micropayments. If you want to purchase something for, say $0.01, the human thinking cost is what matters.<\/p>\n

It all boils down to addressing questions like these, which apparently people ask themselves when making a purchasing decision: How much will this cost? How much will I have to spend on other things? What am I buying? How does it meet my needs? How does it compare to other options? How do I figure out the best choice? Did I get what I paid for? How do I account for and know when\/how I am paying?<\/p>\n

But do people really ask all of these questions? Do these questions apply to every potential purchase?<\/p>\n

In light of these mental transaction costs, the previously-enforced size limits from contemporary payments networks and their lack of interoperability, you can lean into the mentality of: Think once and subscribe. Aggregate it. Bundle it all up. Or give it away for free and toss on some ads and perhaps some donation requests.<\/p>\n

End of story? No!<\/strong><\/p>\n

These are surmountable when applied to the right things that benefit from a highly-granular payments system \u2014 with amazing user experiences that remove the mental transactions costs.<\/p>\n

Let\u2019s not get it twisted. Szabo was really talking about \u201cnano-payments\u201d for utility type experiences, like internet packets.<\/strong><\/p>\n

\u201cNowadays many people call even a dollar a \u2018micropayment\u2019 because it’s smaller than your typical credit card payment, and this muddles the issue. PayPal and some services like iTunes have shown that there’s at least a significant niche market below typical minimum credit card payment, but it hasn’t shown that micropayments of the kind I talked about are feasible.\u201d<\/p>\n

\u2013<\/em>Szabo<\/a>, 2007<\/p><\/blockquote>\n

\u201cPeople are not going to run around bidding two cents here\u2026 just to be able to get good bandwidth or response time.\u201d<\/p>\n

\u2013<\/em>Szabo<\/a>, 2007<\/p><\/blockquote>\n

When people reference this article, they are talking about a completely different definition of micropayments than what the article was focused on. And they are applying it to a much broader set of use cases than could have even been imagined back when the original article was written \u2014 not in the way that Szabo was focused on.<\/p>\n

Szabo was primarily talking about the challenges of consumer nano-payments for generalized things like internet packets, storage space, bandwidth, energy, text messages and more \u2014 thinking about the cost of a phone call or text message every single time. If you were micro-charged for use of something that you will spend a lot of money on, how would you account for it and keep track?<\/p>\n

Let me just buy an unlimited texting package and not think about it. There\u2019s no differentiation, it\u2019s a utility and it should just work. Got it. And I agree! That\u2019s because it is a personal math value\/cost problem for users \u2014 because these are utilities that are abstracted away from what individual people really value.<\/p>\n

What is missing in the nano-payments-for-utilities equation are the experiences that people care about. Ones to do with status, access, connection, beauty. Experiences that are interactive, and that connect you. The end product, not the plumbing that enables it.<\/p>\n

Things Have Changed<\/h2>\n