The Value of Microtransactions on the Blockchain
“Microtransaction” is a term you’ve most likely heard in the context of mobile games. Games take time and money both to produce and to maintain. Many games and apps on your app store, however, are perfectly free to download. How, then, are the developers making any sort of money? One way to go about recuperating costs on a free-to-play game is by showing ads—but this is a notoriously unpopular technique.
Another way to make money off of a free product is by implementing microtransactions, or opportunities for the user to purchase in-game content that is desirable but optional. Despite being free-to-play, you might pay a few dollars to get extra lives on Candy Crush, or a cool new skin in Fortnite.
The utility of microtransactions should not be limited to games on your phone, however, and the idea of making virtual payments might immediately remind you of another term: crypto. So, what do these two terms have to do with one another, and how useful can microtransactions be beyond free apps on the app store?
The power of microtransactions
Unfortunately, in a system that forces people to monetize their talents in order to make ends meet, putting free content out into the world just isn’t sustainable. As a consequence, many of the “free” products that we use every day come with a cost in one way or another. Take Instagram, for example. It was born as a free platform to share and enjoy mostly personal content with your friends. Cute, extremely popular, and…not very profitable. Now, as the parent company pushes to make Instagram a more lucrative space while keeping the cost-of-use nonexistent, changes are regularly met with passionate disapproval.
The free-to-use Instagram model may be too familiar and non-negotiable to rescue the app, but for other potentially new social media apps and other similar experiences, another model might be useful: the microtransaction. Not the dreaded pay-to-win microtransaction model, but one that filters out undesirable features like bots and manipulative UI designs. With proper implementation, users can pay and be reimbursed for the content and experience they want to see on their favorite platforms.
This model can be useful far beyond social media. Many different kinds of developers make content for free or nearly for free, as with open-source software and indie video games. A properly implemented micro-transactional model can make it easier for users and consumers to properly reimburse these passionate creators. However, a few obstacles often get in the way.
Limitations to microtransactions and the scaling problem
What’s stopping companies and individuals from adopting a micro-transactional model? For many, it has to do with processing fees. Especially when it comes to in-game purchases, transactions are a tricky problem. Consumers may never run into the problem first-hand, but transactions take energy and cost money. Usually, the purchase sum is enough to warrant the processing fee, but when the sum is small enough, the company may be losing money in the process—these small sums are microtransactions. This is why, especially for in-game purchases, users must buy a larger sum of in-game currency in order to use any of it at all. You might only need a dozen or so “coins” for a certain item, but you have to purchase at least several hundred (or so) if you want to purchase any at all. Even though you might only want to use what would be real-world cents in the game, a transaction amounting to cents on the dollar makes the company negative amounts of money.
This microtransaction dilemma is something that happens with credit card processing, and a similar thing happens with cryptocurrency as well. As things stand, transaction fees for crypto are notably larger than they are for plastic, making microtransactions particularly infeasible if you’re planning to pay with Bitcoin or Ethereum. As these things tend to go, demand is a big issue. More and more people are wanting to get in on the blockchain, and there is not enough space on the ledger or time for verification to go around. As a result, people are willing to pay more money to make sure their transactions can go through, which in turn makes paying for your coffee with Bitcoin a laughable idea.
This doesn’t have to be the case, however. In this presentation, Bitcoin Association Founding President Jimmy Nguyen makes the case that transaction costs can actually be brought down tremendously. Claiming that the information capacity of the original blockchains had been unnecessarily limited, expanding block size from a megabyte to several gigabytes might be an ingenious way of taking transaction costs down from several dollars to just fractions of a cent. This would practically eliminate the hurdles on microtransaction implementation, and allow crypto payments to compete with credit card transactions even at the small-sum level.
If the micro-transactional model is the path towards a cleaner, healthier, and more fulfilling internet and technological experience, then the blockchain may just become the gold standard for implementation.
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