Isaac Morehouse shine spotlight on payment channels in ‘Tiny Payments are a big deal’ part 4

This article focuses on part four of a video series by Isaac Morehouse called Tiny Payments Are a Big Deal. In the series, Isaac explores the revolutionary potential of micro and nano payments and fleshes out his thinking on the subject.

In Part 4, Isaac interviews Cyprian to talk about payment channels and tiny payments. The conversation lasts for two hours, so you can watch it here or read the summary below.

When did the micropayments element of Bitcoin get Cyprian excited?

Cyprian says it’s the first thing that got him excited. He bought his first bitcoins in 2012 and sold them for a 60x profit. In 2014, Cyprian discovered that a few large companies have patents on slot machine technology that haven’t changed since the 80’s. This led him to look to Bitcoin for potential solutions to what he wanted to work on.

Isaac recalls that it took him a while to realize that getting Bitcoin adopted depends on offering something fiat can’t do. Cyprian agrees with this point, recalling an early interview with Amazon founder Jeff Bezos in which he explains his reasoning for starting Amazon and concludes that “if you can do something in the established way, you should.”

Early applications, full blocks, and losing faith in Bitcoin

Reminiscing how it was once possible to have transactions put onto the Bitcoin blockchain fee-free, Cyprian details how he created games that recorded dollar transactions on the blockchain using satoshis for accounting purposes. In 2014, he had an application built to get transactions onto the blockchain with zero fees. He said it could take up to five blocks for that to work but that it was worth it. However, around six or seven months later, he noticed that fees started to go up significantly, so that application was no longer viable.

Isaac reflects on this and laments the opportunity costs of not increasing block sizes once they get full. He likens it to Jeff Bezos limiting the number of books sold on Amazon. That would mean he’s only doing what the brick-and-mortar stores were, and he would have lost his competitive edge, and Amazon would never have realized its potential.

Cyprian totally agrees and says that he counted Bitcoin out at this point. “People who make bad decisions rarely make only one bad decision,” he says, speaking of the people who decided to keep block sizes small. This made him reluctant to further bet on Bitcoin and turned his attention to Ethereum since more interesting things were happening in that ecosystem.

The BCH split and Cointext

On the advice of a friend, Cyprian looked into BCH after the split. He dusted off his old applications and tried them on BCH, and voila, they worked again. This reignited his interest in Bitcoin.

However, Cyprian still noticed that nobody was paying attention to onboarding people with ease. He also saw a lack of understanding of working with or around existing regulations.

After reflecting on this, he started building Cointext to solve the problem of getting Bitcoin into people’s hands without friction. This allowed people to send bitcoins to someone’s phone via SMS text messages. They rolled out the company in eight countries with the goal to reach every country worldwide. Cointext took off and ended up in 40 countries within a year. Cyprian gave Kenya’s M-Pesa some credit reflecting on his inspiration for the idea. Cointext had done what Cyprian spoke about earlier: it made it possible to do something with Bitcoin that wasn’t possible with fiat.

How did Cointext make money? Micro fees. After seeking legal advice, they discovered that charging a percentage based on the amount sent could put them in the realm of being a money transmitter business. However, charging a fee per bye (data metering) would leave them free and clear.

Cyprian then tells the story of how Cointext almost got integrated into WhatsApp, but Facebook pulled the plug at the last minute. While he experienced this as a letdown, he looks back and realizes that the timing was fortunate and that a huge lesson from it is platform risk. Ultimately, it was a painful lesson, but nowhere near as painful as it could have been if it had happened several months later. After this, over about the course of a year, they started to wind Cointext down. They recently sold it off to another company.

Protocols not platforms

Isaac asks Cyprian to elaborate on something he heard him say on another podcast; protocols, not platforms.

Cyprian uses the analogy of an island covered in bananas. He says to imagine that one family controls all of the banana imports to the stores. However, one day the family leaves to move elsewhere, and there’s a shortage of bananas in the store. This is a strange state of affairs on an island covered in bananas, right? In Cyprian’s example, the family that controls the imports is a platform, and a machete is a protocol. The platform can shut down and leave you with no bananas, whereas a machete allows you to go out and harvest them on your own.

“Every platform uses a protocol. They abstract it out and act as an intermediary, and you pay them for their use of the protocol,” Cyprian says. He also notes that the more people who have access to the protocol, the better it is for the consumer. This is due to competition forcing the platforms to stay sharp.

Payment Channels

Going back to his original point about wanting to do things that fiat currencies and credit card networks can’t do, Cyprian explains that the corollary is that you also have to be able to do the things they can do. He says that one of the things nobody has done well on Bitcoin yet is payment channels.

Isaac notes that often money exists in a sort of state of purgatory where it could go to person x under certain conditions, but it could go back to person y under certain conditions. Cyprian follows up by saying that there are many benefits to this intermediate state, and nobody on Bitcoin has solved this yet.

What is a payment channel? It’s a channel where two people escrow funds and can do many different transactions, which change the balance between them many times. Cyprian gives the example of video on demand. He imagines a scenario where people pay by the minute but escrows the full amount for the whole movie upfront, and the two settle out when the viewer stops watching. This is one transaction with a single fee rather than paying for a separate transaction every minute. This makes no difference to the user but adds up to a big difference to the provider on the back end.

What about the Lightning Network? This doesn’t work as a payment channel in the way Cyprian is describing. He explains in detail how the Lightning Network has routing issues. Rather than opening a channel between two people, the Lightning Network turns this into a convoluted mess that is not peer-to-peer in nature. There are other problems such as the costs associated with opening and closing channels that mean it ultimately hasn’t solved this problem satisfactorily.

Cyprian then describes the different ways to do payment channels on different platforms. He explains using multi-sig wallets on BTC and BSV and using other techniques on BCH such as covenants. He also describes how time-lock features can be used in payment channels to make settlements happen at a specific time in the future. The possibilities are endless.

Why are tiny payments a big deal?

Isaac finishes with an important question: why are tiny payments a big deal?

Cyprian answers that it allows us to think about the economy in a whole different way. If we can monetize data, it changes everything, opening up all sorts of transactions that were never possible before and unlocking untold value. Isaac agrees and finishes by likening data to oil. We’re all producing it in drops but can only sell it for $50 barrels. Tiny payments allow us to sell the drops. This will undoubtedly change the internet as we know it.

Watch: CoinGeek New York panel, Future of Digital Asset Trading & Financial Services