Batching Mental Transaction Costs
There’s a popular American pastime that involves flinging dollar bills at scantily clad dancers. Canada, Europe, and the UK lack small-denomination banknotes, so strip club patrons have limited ability to express appreciation for their performers. Customers can either pelt the dancers with coins, which is rude; or shower them with large bills, which is extravagant. The transaction costs are unnecessarily high, and onstage tipping is rare.
In Australia, the smallest banknote is a five. While living in Sydney, I discovered (not from personal experience!) that gentlemen’s clubs sell fake banknotes for guests to use as tips. The dancers exchange the fake dollars for real money at the end of the night.
How terribly exploitative! Instead of peer-to-peer payments, the house intermediates every transaction with self-issued fiat. It probably even takes a cut.
But… maybe it’s not so bad. I endured many a childhood birthday party at Chuck E. Cheese, where parents would hand each kid a stack of tokens and set them loose. Tokens could be used to pay for rides and games and candy, and were functionally equivalent to a quarter.
We already have quarters. Why did Chuck E. Cheese go through the hassle of minting its own coinage when it could have simply installed a laundromat change machine?
Chuck E. Cheese and Aussie strip clubs employ the same brilliant strategy of batching mental transactions. Every monetary exchange incurs a cognitive cost, if from nothing more than the conscious decision to spend money. The overhead is nominal for most standard transactions, but relatively massive compared to a micropayment.
By forcing customers to make a large upfront commitment, these establishments avoid imposing a cognitive load on every subsequent exchange.
Casinos employ the same strategy with poker chips and slot tokens: Gamblers wager more freely with play money they’ve already bought. Sure they can cash out, but that’s an additional transaction cost.
People have been failing to effectuate micropayments since the early days of the internet. A machine-payable web, where you pay for the content you consume, or pay-per-byte internet protocols – these sound like great ways to finely optimize the allocation of resources. But no matter what fancy new technology is employed – Digicash! Millicent! FirstVirtual! CyberCash! Blockchain! – micropayments never cease to be a bad idea.
And now the Bitcoin Lightning Network. With instant transactions and exceptionally low fees, This Time is Different.
Maybe. A user funds a Lightning channel with the intention of fully spending its contents (it is a hot wallet after all, and costs money to cash out). In these early days, each channel has limited utility. If a channel commitment represents a one-way payment for a certain set of services, then it functions more like a subscription fee than a series of microtransactions. Like buying a stack of tokens at Chuck E. Cheese.
This model isnt great for Lightning-as-a-liquidity-provider, but it does bode well for Lightning-as-enabler-of-micropayments. Who knows.
