The two big pieces of Bitcoin are the currency and the network. The Bitcoin network enables electronic payments, not such a big deal really, there are lots of payment systems. However the Bitcoin network lets you transfer money (bitcoins) in an incredibly efficient manner, and one which is not dependent on any central control or central point of failure. Each financial transaction is cheap, really really cheap.
One logical extension of this efficient, inexpensive financial transaction network is the ability to create extremely small transactions. It is reasonable and feasible to create electronic payments that are worth less than a penny. This is actually a BIG DEAL! It means, for example that a WiFi network could be created that lets you connect and stay online for a few minutes and you just pay for that miniscule amount of time. To top it off when using the Bitcoin infrastructure you don’t even have to identify yourself to the network other than verifying you have the means to pay.
In a wonderful video “Bitcoin Fireside chat with Marc Andreessen and Balaji Srinivasan“, the two VCs discuss micropayments (and a lot of other stuff) a bit and point out classic use cases. First bitcoin could have solved the email spam problem by charging a tiny amount to send an email which would quickly bankrupt the spammers and have no effect on normal users. Secondly, using bitcoin micropayments to allow for payment of a penny or a few cents to read articles on websites (like this one!), enables reasonable compensation of authors without depending totally on the advertising model. The efficiency of the Bitcoin payment network allows such transactions whereas the overhead of other payment systems make such payments prohibitive.
Without getting into the gory details let’s just think more precisely about what all this micropayment stuff really means. If I travel to a local coffee shop and want to get on to their WiFi hotspot I must explicitly state, somewhere/somehow, that I am willing to pay for the service. The service provider, the coffee shop, must be willing to take my money. This means that we have to setup some type of contract between me, the consumer of a service, and the coffee shop, the vendor of a service. It must be possible to specify this contract within the context of the Bitcoin protocol, and in fact it is possible! As pointed out in the micropayments section of https://en.bitcoin.it/wiki/Contracts a “micropayment protocol” can be specified on top of the lower level Bitcoin protocol to accomplish this task.
The concepts of micropayments and details as specified in the bitcoin.it wiki acknowledge:
“ Many of the ideas underlying Bitcoin contracts were first described by Nick Szabó in his seminal paper, Formalizing and Securing Relationships on Public Networks. These pages (the bitcoin.it wiki) were written by Mike Hearn. Contact him if you have an idea for a new type of contract. You can watch a video of a talk on contracts that was presented at the Bitcoin 2012 conference in London.”
Also as described in the micropayments protocol section of the wiki, we want the contract to have certain characteristics. The contract should be between untrusted parties and automatic. I’ve never been to the particular coffee shop and they don’t know who I am, our lack of trust should not be an impediment to accomplishing our transaction. The transaction should be automatic, making it seamless from a usability point of view, as the last thing I want to do is futz with my phone and specify a bunch of payment options when all I really want is to look up the weather and check my twitter account. The micropayment protocol allows these contract characteristics to be realized. Personally I can’t wait till this type of thing gets out to the real world!
To summarize Bitcoin micropayments is a truly enabling technology that lets us accomplish financial transactions that we can not accomplish with existing systems. The efficiency and programmability of the Bitcoin network enable new applications. These applications such as automated subscriptions to network services (walking into a WiFi hotspot); payment to authors for single articles or paragraphs; highly efficient tip jars for artists and content producers of all types are finally practical and pragmatic.
So when is this all going to become a reality? Not too quick, however code to enable micropayments is being actively developed by core bitcoin developers (see Jeff Garzik’s https://github.com/jgarzik/mcp for the more technically adventurous).
Bitcoin just keeps getting more and more interesting