Micropayments, Tipping & On-Chain Social

Micropayments have captured the imagination of many since the dawn of the internet. Are we on the verge of seeing micropayments hit the ‘Net at scale via on-chain social in the near future?

Let’s dive in!

As a PS, this post is not meant to endorse any specific app or protocol, but to illustrate the key concepts around Micropayments, Tipping, & On-chain Social.

As of right now, these are mobile-only experiences via specific Web3 apps built on top of certain on-chain social protocols.

What are Micropayments?

Micropayments are small, individual P2P (peer-to-peer) payments.

As the transition in the social media model shifts from primarily a corporate, ads-based model towards more payments-based, creator model there will requisite innovations that need to emerge. Micropayments tops the list.

Micropayments Business Model

Many attempts have been made to bring micropayments into the Web 2.0 (the web as we know it today), but blockchain technology enables micropayments in a fashion that just isn’t possible with traditional payment rails.

With credit cards, merchants typically pay 2-3% credit card fees, not to mention the need for terminals and different accounts. The friction is high and doesn’t scale well online for micropayments.

At the blockchain or digital currency level, there are fees (gas or transaction fees), but the continual innovation at the technology level will likely enable micropayments to work at scale. This can be principally achieved through L2 (Layer 2 technologies).

Creators are likely to be one of the primary beneficiaries at this junction in history.

What is the Creator Economy?

Creator Economy Posts

The Creator Economy is essentially an informal network of creatives across categories such as art, design, photography, music, and more.

We all know the archetype of the starving artist.

Marrying creativity with a long-term, sustainable business model is one of the great challenges of this era.

‘On-Chain Social’ via Web3

Let’s say that you have a pretty sweet photograph that you took on a recent trip, and you want to try and monetize that creativity. Where are you going to sell it?

On most the traditional stock photography platforms, you would need to upload thousands of images and build a reputation on social media, etc. to earn $500+ per month.

Phutorial

Or what if you just recorded a really cool song that you think will resonate with a substantial niche audience. Where are you going to stream it?

On a platform like Spotify, an artist will earn a few dollars per 1000 streams.

The Hustle

When we start talking about the ‘business model of creativity,’ it is pretty much a dead end on any “Web 2.0” platform unless you hit the top few %.

The combination of platform fees, payments fees, and the overall mass-volume business model for platforms, makes driving commerce for small creators very difficult.

Enter the controversial and much-maligned Web3 space. The simple principle behind Web3 is that both blockchain (payments) and NFTs (content) enable a “creator” to monetize their content directly into “currency.”

A new crop of on-chain social media applications are built on the rails of Web3, meaning that to plug into them as either a consumer or creator, you need to have a digital wallet.

There is still a lot of friction and risks inherent in these applications, but once plugged in, they help creators monetize.

Farcaster and Orb are two of the new, leading “on-chain” social applications:

  • Farcaster is built on the Base blockchain (L2 of Ethereum), and as of early Q2 ’24 has 300K users, and has more than 100K DAUs (Daily Active Users)
  • Orb is built on the Lens protocol (Polygon blockchain), and as of early Q2 ’24 has 10s of thousands of users and strong ‘Active’ base

But how does on-chain social correlate with micropayments?

Minting and Tipping ‘On-Chain’

Imagine that instead of trying to upload art, photography, design, or music to a typical web platform where you will earn pennies on the dollar, you try and upload or “Mint” to a Web3 platform like those listed above, what can happen?

These platforms above each have an embedded ‘digital currency’ that allows, principally, two types of transactions:

  • Minting: minting is a transaction that can be ‘free’ or thousands of dollars (the creator prices it and can control supply), but it essentially creates an ownership record via tokenization of a certain media asset; therefore, you can mint a photo (ie. NFT) onto a platform, and users can mint your photo as a collector or use it for their own purposes
  • Tipping: whether sharing art, a meme, or a witty comment, these networks enable tipping (or will in the near future), meaning that a user with currency can ‘tip’ another user to incentivize continuous and ongoing creativity

Both Farcaster and Orb have their own native, digital currency to Mint. Tipping is on Farcaster, but not yet on Orb. These types of micropayments can happen with very little friction or fees on these social platforms, but are extensible into the wider Base and Lens ecosystems as well.

Tipping happens within the structure of the social network, where you reply to the user with a $BaseCurrency ‘comment.’ Imagine you like someone’s work (art, writing, meme, etc.), you can go ‘/reply Amount $BaseCurrency’ and that user will receive that amount.

The system logs that payment from the tipper to the receiver – as of now the tipping transaction is not hashed. The tips are logged as points in a database, until the “airdrop,” at which point tips are distributed as tokens (currency) on the layer 2 blockchain (Base).

The system itself is still very early stage, but there are rules about who can tip. Reputational scoring underpins the system, as it is obviously a system that will be targeted for gaming in many ways.

For example, you could tip another user the equivalent of 1 USD for their work. As a one off, this doesn’t sound like much. But x 100 it starts to become an incentive to produce more. There is no need to reach a threshold of 100s or 1000s of uploads to start making money.

Once a user “earns’ these types of profits via either minting or tipping, they can theoretically withdraw them from their on-chain wallet and convert them into a digital currency like Ethereum or Bitcoin. From there, this money can become real cash by moving it to their bank account.

Thus while it may seem ‘gimmicky’ to some, digital artists and artists alike have a strong financial incentive to try Web3 compared to other art-related sales channels, whether digital (platforms) or physical (local galleries or shops).

This space is very early stage, but the basic driver in many cases is to fund creativity, a process that is virtually impossible on typical social media or major media platforms.

It is not easy or free, as paying gas fees (protocol-level transactional fees) for minting and an investment of time are typically required. But on a per unit basis, an artist or musician can earn a lot more than they can on many of the contemporary alternatives.

Scaling Payments on Layer 2

Major, well-known protocols such as Bitcoin and Ethereum are considered Layer 1, whereby they issue the unit of the digital currency (BTC and ETH) and validate the transactions through their own network of miners or validators.

Layer 2 is a protocol-layer innovation that has been in the works for the last few years. On Bitcoin it is Lightning, on Ethereum it is ZKSync, Base and others.

Layer 2 sits on top of Layer 1 and essentially batches the transactions before validating them, thereby freeing up space on the L1 chain and enabling faster, more scalable payments with less friction. This translates into much lower fees per transaction, at scale.

The technology is getting close to being ready for global usage, meaning that a lot of the current problems happening at the wallet level are going to be reduced.

The friction and security risks in Web3 are a major barrier to global adoption, but L2 innovations are on the horizon and that means there will be an arms race for creator talent.

Opportunity abounds for creators who make the jump and get their content onto the right platforms, whether on Bitcoin, Ethereum, Polygon, or other chains.

The experimentation era of on-chain social and micropayments is in full effect, and the likely ripple effects across consumer-facing social media will likely multiple in the latter half of the year as the L2 technology push takes effect.

More Web3 + Micropayments Posts

Thumb Pic: KaboomPics

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