An Exploratory Inversion of Micropayments
Aligning Market Incentives and Increasing Information Symmetry With Smart Contracts
"The opposite of a good idea can be another good idea." - Rory Sutherland
Table of contents:
1. The Current State of Micropayments
2. Defining Macropayments
3. Unique Use Cases for Macropayments
4. Nth Order Consequences of MacropaymentsThe Current State of Micropayments
This article will axiomatically define micropayments as having the following characteristics:
Low fees.
Short settlement time.
Non-repudiation, meaning they cannot be reverted or disputed.
The reasons for that choice are as follows:
Low fees enable low-value transactions. Low fees also encourage more transactions as more opportunities offer net positive value to the transacting agents when fees are low.
Short settlement time reduces agents' risk from price movements in volatile markets. From a psychological perspective, short settlement times allow users to build up a habit of sending transactions regularly and even to enter a flow state without damaging user experience. Statistically, transactions that pass or fail quicker in a lossy or noisy system will allow the transacting agents more tries to reach a successful transaction before they become disinterested due to the opportunity cost. Overall, these factors create a transaction experience that is qualitatively distinct from traditional digital banking.
Non-repudiation means that once these transactions are sent, they are final and typically not of significant enough value for any party to dispute the outcome. Normally, bank transactions are repudiable and can be disputed.
A few use cases that micropayments have enabled are:
It is widely accepted that micropayments are a significant unlock of crypto. I propose that crypto also unlocks the inverse type of payment. Macropayments.
Defining Macropayments
Taking the inverse of micropayments, we shall define macropayments as having the following characteristics:
High fees.
Long settlement time.
Repudiation, meaning they can be reverted or disputed.
The following explores transactions that meet these criteria:
High fees: Funds will likely be held in escrow via smart contract, and compute units will be used to write to multiple accounts. Depending on the implementation, an NFT could be generated, or off-chain data could be pulled on-chain with an oracle. A smart contract is more expensive than a standard transaction, so fees will be relatively high. However, the fees would be higher than for domestic bank transactions, which are free in many countries.
Long settlement time: The transaction is designed to take a relatively long time to settle as the transaction depends on future events, not the network's speed.
Repudiation: The final completion of all or part of the payment depends on an outcome; therefore, it is not guaranteed. On-chain repudiation will require that the macropayments are made via a smart contract.
The best analog comparison for this concept would be a traditional legal contract, historically used only by those with legal representation. I will make the case that macropayments could become as commonplace as contracts or traditional lines of credit today. Another suitable name for macropayments might be, automated escrow management.
Unique Use Cases for Macropayments
This section covers some everyday economic actions that I think could benefit from macropayments. Tying payment for a good or service to the desired outcomes can help align incentives. When using macropayments, vendors who fail to meet the customer's long-term interests will not receive maximum pay.
I envision that when paying for a service, the purchaser can choose to pay X% more for the option to delay the payment or to vest it over T years. Where longer vesting better aligns incentives but would be more expensive due to time preference discounting.
EBay is a centralized company that does this on a smaller scale. They hold user funds in escrow before successful delivery.
Some services have a high fixed cost that might make delaying the entire payment less feasible. In these cases, a percentage of the payment could be delayed, or for services with an ongoing cost, such as cloud costs in SAAS, the payment could be streamed to the vendor over a given duration.
Any payments held in escrow should be in a yield-bearing asset to reduce opportunity costs for both parties. The assets would likely be staked $SOL or a yield-earning stable coin such as $OUSG or $YBX. These are tied to US Treasuries and on-chain staking, respectively. Whichever party ends up keeping the payment will benefit from the interest earned.
Scenario 1:
Imagine a new boiler repair person is installing a new boiler in your home. If the boiler breaks after four years, the repair person has little incentive to return and fix it if they have already been fully paid. If the boiler repair person is paid via a macropayment on-chain, they are monetarily incentivized to help the customer until the desired outcome is reached. In this scenario, the outcome might be successful streaming of the boiler statistics via a smart meter or successful operation of the boiler for five years.
Scenario 2:
Depending on their jurisdiction, vendors may prefer the tax benefits from a payment that vests over the long term, especially if they are nearing retirement age. This would allow them to spread their tax burden over many years, thus lowering their tax liability in countries with a progressive tax system. Within the traditional banking system, the administrative costs for a sole trader to set up such a contract are not feasible. In the future, setting up macropayment contracts will have minimal overhead. The steps involved are: opening an app, scanning a QR code, and setting a slider for the vesting period.
Scenario 3:
Imagine the payment to your health insurance or doctor vesting over time. The payment would be complete when the outcome is determined. This would help combat incentives from third parties, such as pharmaceutical representatives, who are known to give doctors a kickback for recommending their own products. These products may or may not be ideal for the customer. The doctor's average patient outcome could be indexable on-chain, allowing patients to choose doctors with high success scores. On-chain metrics would dramatically help patients as there is typically information asymmetry in healthcare transactions because the patients have much less knowledge than the doctors regarding what they require. In this scenario, the outcome might be successful surgery, a blood test marker, or life expectancy.
To earn extra income, agents might choose to sell their data if it isn't already open source on the blockchain. Depending on the use case, the smart contract might be pulling data on-chain from the following sources:
Satellite data for construction projects.
Health data from smartwatch devices.
IoT smart data for electronic purchases.
Ultimately, depending on market incentives, agents may rely on existing, familiar escrow solutions. Or fall back on customer protection law or business law with a conventional legal team. Relying on traditional law is notoriously unreliable for international transactions, though. Agents may also choose to implement a smart contract and agree that unsettled disputes should fall back to regional law or a selected dispute settlement DAO.
Nth Order Consequences of Macropayments
After many years of macropayments, a vendor who builds up a track record of a low dispute rate will become trusted, in the same way, that an eBay seller with many five-star ratings might be. The expected value for pending macropayments to this vendor's wallet may change over time as more data points are gathered on the quality of their services. Vendors may be able to sell their interest in a macropayment, for a discount to access the cash quickly, to a DAO or guild that has vetted and trusts them. Speculators may wish to buy the vendors' interests in a given smart contract off of them and trade on the likelihood of payment being disputed if they know the vendor is of higher quality, but the market has not figured it out. Efficient market trading would reduce the discount that future payments to high-quality vendors trade at. High-quality vendors could offer customers lower prices for delayed payment, compared to their competitors.
These interests in future payments could be packaged in bulk and formed into a financial instrument similar to a Collateralized Debt Obligation (CDO). Financialization of everyday transactions would unlock new market efficiency. For example, the market could judge the effectiveness of a given country's health policy interventions if enough doctors use macropayments.
In certain situations, NonTransferable tokens might be used to prevent the vendor or consumer from selling their interest. Non-transferable tokens ensure that long-term interests remain aligned.
Given the high maintenance costs of business bank accounts, macropayments may become particularly appealing for ultra-long-term contracts exceeding ten years. Changing bank accounts or moving to another country has a high administrative cost for existing contracts when compared to permissionless wallets. Switching will become more popular in the era of the network state, as companies and people will be able to change countries without moving locations.
Given the value of macropayments for aligning market incentives I suspect that, in the future, customers will come to demand the option to pay with macropayments. Consumer Dapp engineers will likely settle on a trusted selection of pre-made macropayment smart contracts. High demand for enterprise customization of these contracts will probably create new jobs. These jobs would require blockchain engineers who understand the law and who might also have a mix of IoT skills and domain knowledge in alternative data.