We launched an exciting feature today: off blockchain micro-transactions between Coinbase accounts!
Here is a bitcoin transaction I just sent myself for 1 satoshi (that is 0.00000001 Bitcoin).
- arrived instantly
- confirmed instantly
- cost zero in fees
This was possible because it did not touch the “blockchain” (the public ledger of all bitcoin transactions), and instead was sent directly between two Coinbase accounts.
What does this mean?
Bitcoin is an incredibly efficient protocol for moving money with low fees. However, it does have a “miner fee” ($0.05 – $0.01 at current exchange rates) if you want your transaction to be sent and confirmed quickly.
Coinbase pays these fees for our customers (on transactions above a certain amount) so they don’t have to worry about adding them, and in general they aren’t too much of a hassle (especially compared to fees associated with credit cards or international wire transfers).
But they aren’t zero, and there is still one area where these fees can be prohibitive: micro-transactions.
Examples of micro-transactions include:
- songs on iTunes
- in-app or in-game purchases
- tipping or donation services like Flattr and Gittip
- new business models which haven’t been invented yet
I tend to consider anything under $1 to be a micro-transaction.
Why are micro-transactions difficult?
I say “new business models which haven’t been invented yet” because micro-transactions have been very difficult historically due to the fee structure of credit cards (they have a base fee of roughly 20 cents in addition to the 2-3% fee).
So if you buy a song on iTunes for 99 cents with your credit card, Apple could pay up to 20 cents plus 2.x% (another few cents) in fees – or about a 20% transaction fee! It’s frustrating to see so much of your payment go to payment processors instead of the artist (or others in the chain).
There is no reason that a base fee that high needs to exist today. The technology exists to send payments much more efficiently, and it could be eliminated, if it weren’t generating so much in profit for payment processors.
And the fees get worse (as a percentage) as the amount you are sending decreases. What if you wanted to send $0.01 or $0.001? There are many business models which are not even feasible today because of the fee structure on credit cards (such as price points under a dollar).
What could micro-transactions be in the future?
Most investors today believe that mobile is the future. Yet in many ways mobile is still looking for a good business model.
Traditional display ads that worked so well on desktop/laptop displays don’t have enough screen real estate on mobile devices and haven’t worked as well. Paid content (entertainment, games, apps, and in-app purchases) seems to be the business model that will win, but these are almost all micro-transactions with expensive fee structures. This is part of the reason you see such high % fees (in the 30% range) on in app purchases across iOS, Android, Facebook, and other platforms.
Bitcoin has the potential to help this problem by generally lowering fees. But things get really powerful with off blockchain transaction like we launched today, because it literally brings the fees down to zero.
And once you’ve accumulated at least 0.01 BTC of value, you can send it back on the blockchain (and we’ll still gladly pay the miner fee).
Nine out of 15 teams at the Bitcoin Conference hackathon used our API, and built some great apps with it. We’re excited to see what the developer community can come up when combining free micro-transactions with our API.
In the future you might be able to:
- Read the rest of a New York Times article for a few cents using BitWall, instead of signing up for a full monthly subscription
- Buy in-game credits without paying 30% in fees to the platform or payment processors
- Pay for wifi internet metered by the minute (or second!) if you just need to check one email
- Support your favorite artists or coders with a tip
- And many more ideas.
We’re excited to see what you come up with.