Ron Rivest Suggests Probability-Based Micropayments 336
Karl J. Smith writes "Rivest has solved the micropayments problem with encryption and statistics. You throw away some transactions so that you don't have to pay bank fees, and process the rest. Hiawatha Bray has written an article and Rivest's new company is PepperCoin."
What a strategy (Score:5, Insightful)
Why Peppercoin is DOOMED (Score:4, Insightful)
BUT, not anytime soon, and you've identified the exact reason why: peppercoin patent monopoly. No reasonable merchant nor consumer should bet on a scheme that locks you into one vendor, especially for something as vital as your very revenue source. We like money because it is 100% transferable -- I can get it from anyone willing to trade with me. Credit cards are also competitive -- if I don't like Visa, I can try AmEx or Discover or MasterCard, and most vendor's have a single machine that can take any of the above. If I don't like peppercoin, there's no alternative I can switch out for -- the system is closed, patented, and sealed. Sure, there are other micropayment schemes that have lived and died, but if I wanted to start a peppercoin-compatible service, tough luck; it'll be at least 17 years before we get a legal shot at that.
Re:What a strategy (Score:3, Insightful)
If Rivest were to use an intelligent license, a patent wouldn't pose all the large of a hurdle. Rivest could allow anyone to use the patent for free in perpetuity, except when they translate the payments into cash. All fees could be collected at banks. If Rivest guarantees the fees will never exceed a certain amount (such as the current fees on Visa cards), there should be no reason for the patent to get in the way.
I've been wondering why e-cash patent holders don't do this.
Nice idea but... (Score:4, Insightful)
Re:Nice idea but... (Score:5, Interesting)
Same old, same old?
Solving the wrong problem (Score:3, Insightful)
The failure is summed in one word, MOMENTUM. Micropayment companies can't get any because they usually sign up one or two bigger names (those sites have to have *really* compelling content for anyone to sign up), people go elsewhere when they see their favorite little diversion now requires payment, and the micropayment start-up runs out of money before they get momentum. In addition to that, people prefer subscriptions to micropayments.
I do think there is a way to solve the problem, but Peppercoin doesn't seem to be it.
Re:Nice idea but... (Score:3, Insightful)
The customer thinks they're using their credit card in the normal way: just most of the time, the micro-transaction is discarded, sometimes it becomes a macro-transaction and is pushed through. It should average out.
The killer to this idea is that (if I read the non-technical article correctly) is that the consumer has a 9 in 10 chance of paying 0*x, but DOES have a 1 in 10 chance of 10*x. It seems to me that people may object to this gamble unless you have a pretty thorough user education program. (This bit was unclear in the Boston Globe article, but if you're going to throw transactions out, you need to make that up from somewhere.)
Also (under same may-have-missed-the-point caveat) , it seems that when the ink turns red, the incentive is there to skew the probabilities a bit. Brings a whole 'nuther meaning to "preferred partner".
But I can almost guarantee that I've missed something:
Rivest is a Bright Fellow, and will have come up with these problems and solved them. Anecdotally, when developing RSA, one guy would come up with a system that he thought worked, and the other two would devote their energies to breaking it. Repeat until success. This indicates that Rivest has adopted the competing-evolution model of invention.
Re:Nice idea but... (Score:3, Insightful)
"Most people's number skills are so poor that they probably won't understanding or trust it."
First, this is not intended as a flame.
But what people accept these days (Microsoft code and our current president come to mind) dwarfs this idea spectacularly. 999 of 1,000 people won't even bother trying to learn how it works much less chafe at its complexity.
And I'm sure that the Peppercoin people aren't going to make you take a test before you use their service. Smiling faces on a brochure go a long way.
Cool ! (Score:3, Funny)
Why randomize? (Score:5, Interesting)
Re:Why randomize? (Score:2)
that's exactly my question too (Score:5, Insightful)
At the same time, the above is assuming that EVERYTHING is 50 cents. Now, imaging there are things costing different amounts of money, and calculating if papercoin is ripping you off that 0.3% becomes difficult if not impossible.
Now, of course, I can't quite figure out how does papercoin charges the consumer. That's really weird because THEY can't be hit with the 25c charge everytime either or they will go under; so they will either have to
1) act like a bank / paypal and have you keep a balance.
2) wait until your "sum" is large enough and charge it all at once.
both have serious problem.
Of course - this entire thing is really a credit card system problem, that can really only be solved by the credit card companies - but they seem to have no incentive to do so, so... we might be stuck here for a while.
Re:that's exactly my question too (Score:2)
Re:Why randomize? (Score:3, Insightful)
If the vendor can know the value of your token, then he can refuse to take ones with no value.
What do you do when the vendor says "I'm sorry sir, but there seems to be a problem with your token, are you sure it's not a forged one?". Do you give him a different one?
Also, how are we supposed to know that the ratio of tokens with values is exactly 1/20. It's in peppercoin's favour if only 1/25 have a value. Surely we (or merchants) have to trust them, yet they're financially involved. Why should we trust them to not rip us off?
$0.50 for every token would mean no possibility to rip anyone off.
Introducing a third party that someone has to trust means that there are now _6_ trust relations rather than _2_. That's _worse_ than the status quo, IMHO.
Won't catch on. I bet you $10 on that (or maybe $0, you'll find out later).
YAW.
Re:Why randomize? (Score:5, Informative)
I suspect that on the customer's end they will solve the micropayment problem by forcing the customer to deposit a minimum amount (say $10) into his Peppercoin account, rather than charging every nickel and dime he spends separately. The customers will not mind if they expect to be able to spend these Peppercoins on many goods and services. Thst is where the chicken&egg problem comes in: if there are only a few sites accepting these coins initially, no one will want to depost the minimum $10 to activate his account.
Re:Why randomize? (Score:2, Informative)
Re:Why randomize? (Score:2)
That way, they only lose money on the credit-card overhead if a user makes just a few micropayments per month. This is probably a kind of loss-leader behavior to jumpstart the industry. Hopefully, once things get rolling along, no customer will have an incentive to spend $10/month.
(And if that happens, they might decide to push back the billing for another 30 days, to keep costs low.)
Re:You know, this might work (Score:2)
The merchant still does need to do more detailed bookkeeping in order to keep an eye on the random number generator, so that he can complain loudly in case it's biased to obviously in Peppercoin's favor. Not doing any local accounting would be highly foolish!
Re:Why randomize? (Score:2, Insightful)
Don't start it unless you want it. (Score:2, Insightful)
Once the means to collect it was in place.. see what happened?
Re:Don't start it unless you want it. (Score:2)
I'm sure they must have been payed for by now.
Trust Peppercoin? (Score:4, Interesting)
Sounds, from reading that short article, like the merchants must trust Peppercoin? Why should they?
Re:Trust Peppercoin? (Score:3, Insightful)
Re:Trust Peppercoin? (Score:2, Insightful)
Re:Trust Peppercoin? (Score:3, Insightful)
They don't necessarily want to trust so many people. They just have to trust (some) people, or nobody will buy stuff from them.
Re:Trust Peppercoin? (Score:3, Insightful)
Re:Trust Peppercoin? (Score:2)
True, but if Visa and Mastercard cheat the merchant, it's fairly obvious, and easy to sue.
However, Peppercoin has the power to cheat in a very subtle and unprovable way.
Due to the randomization, no merchant gets his due exactly. Some get more, some get less. Initially, the ones that get less are likely to complain, especially if they get much less. Peppercoin takes note about which of the merchants that got less didn't complain... The next month, those that didn't complain get treated to a slightly lower ratio than the one promised. As it is essentially a random process, it is very hard to prove that any deviation from average is intentional. Especially if you are careful not to overdo it. And as Peppercoin specifically choses those merchants that didn't complain, the probability is quite high that these didn't even notice.
Full text of article (Score:2, Informative)
Solving the problem of micropayments
By Hiawatha Bray, Globe Staff, 2/17/2003
IT professor Ron Rivest has come up with a new way to throw away money on the Internet. With luck, it'll make him a fortune. Rivest is one of the three people who devised the encryption system that allows us to transmit our credit-card information safely over the Internet. The company that grew out of this work, Bedford-based RSA Security Inc., is one of the leaders in the field. He's a fellow of the American Academy of Arts and Sciences and the Association of Computing Machinery. Put it this way: Rivest knows what he's doing. So what's all this about throwing away money?
Actually, it's a fascinating proposal for solving one of the toughest -- and smallest -- problems of Internet commerce. It's easy to buy a $20 CD online, or a $100 hard drive or a $20,000 car. But how do you buy something online when it only costs a buck or two?
This is what's called a micropayment, and it turns out to be remarkably difficult to do. Entrepreneurs have been banging their heads against this problem for the past half-decade or more, and with good reason. There are lots of desirable digital products that might sell like popcorn if there were a practical way to pay for them. Music, for instance. Some subscription services will let you download tunes at 50 cents apiece, but you have to pay a subscription fee as well. We're still waiting for a service that lets anybody drop by at any time, and purchase a single song.
This is because it costs so much to process a single financial transaction. Most Internet shopping happens with a credit card. The merchant selling the goods must pay a transaction fee to the credit card issuer. This usually amounts to a few percent of the sale price, plus a flat fee of 25 cents or so.
But this flat fee is the same no matter the size of the purchase. When the merchant is selling Tom Clancy novels at $30 apiece, the fee doesn't matter. If it's an MP3 of the latest single from Sheryl Crow, that fee will eat up all the seller's profits, maybe even put him in the red.
''You can't do small payments with credit cards,'' said Rivest. ''From the merchant's point of view, you probably can't do under $5 and make a profit.''
What's needed is a method that slashes the cost of the transaction. Enter Rivest, his colleague and fellow computer scientist Silvio Micali, and their new company, Peppercoin Inc., which plans to solve the problem with doses of encryption and statistics.
The service will be free to consumers, who sign up with Peppercoin and provide a credit card number. Now the user can go to any Peppercoin retailer and purchase a single, very cheap item -- an MP3 song priced at 50 cents, for instance. By clicking on a link, the music gets downloaded to the customer's computer. The merchant gets a Peppercoin -- a sort of electronic token that's got the customer's digital signature embedded in it.
What's the token worth to the merchant? It depends. Peppercoin uses an algorithm that assigns a value to the token. Actually it assigns one of two values. Either the token is worth some preset amount -- say, $10 -- or it's worth nothing at all. When the token is worthless, the merchant throws it away. When it's not, the merchant collects $10 from Peppercoin, even if the customer only spent 50 cents.
It seems utterly nutty until you apply this method to millions of 50-cent transactions every month. Maybe 5 percent of these transactions will be sent to Peppercoin, which processes them through the credit card system. The rest are thrown away. This keeps transaction costs way low. And the transactions that are processed have a value of $10 apiece, which brings in cash to make up for the 95 percent that were thrown away. Spread over millions of purchases, it all averages out.
But even if Rivest's math is correct, the success of Peppercoin is far from assured. The dot-com graveyard has a special section for companies like Digicash and Cybercent that failed to solve the micropayment puzzle.
''A payment system is a real chicken-and-egg problem,'' said Rivest. Consumers won't embrace the system unless lots of merchants accept it; merchants won't sign onto the system unless the customers are there. Peppercoin hopes to break the cycle by signing up some major media companies in time for its debut later this year.
Letting consumers buy hit music recordings for a buck or less, without charging $10 a month in subscription fees, could be just the thing to ignite the micropayment market. And if more consumers sign up for Peppercoin, more vendors will start offering products -- magazine articles, digital games, even those annoying cellphone ringtones. Many of these goodies will be items that are presently given away, because there's no efficient way to charge for them.
With Peppercoin, companies will be able to make us pay. And at the microprices made possible by his software, Rivest figures millions of us will be happy to let him throw our money away.
Hiawatha Bray can be reached at bray@globe.com.
This story ran on page C4 of the Boston Globe on 2/17/2003.
© Copyright 2003 Globe Newspaper Company
Not to be the cynic? (Score:3, Insightful)
But I thought part of the problem was using PayPal is that PayPal is an external service that is not as recognized as Visa, Mastercard, or American Express (plus some others).
And this service does not seem to solve that problem for me. I thought when I started reading the article that it was going to somehow have some magic receipe for using my ALREADY accepted credit card....
Re:Not to be the cynic? (Score:2)
Re:Not to be the cynic? (Score:3, Informative)
There doesn't seem to be one... [paypalsucks.com]
Trust is not only a matter of security (Score:2, Interesting)
So what makes Ron Rivest thinks he might be able to solve this where other failed?
A key success factor of this business is trust. But unfortunaly for non-geeks, trust is hardly based on transaction security, but merely on the wealth of the company.
Microsoft tokens won't have the same trust factor as Linux tokens (for example), and customers won't buy tokens that could well be worth less than nothing, if the market decides that way.
Would you really invest a penny (because that's what is's all about : invest money) in peppercoin?
What about the bill? (Score:2, Funny)
But what we REALLY need are micro bills
Eh? (Score:3, Insightful)
What is the point of a retailer collecting these PepperCoins, then sending them in, with 5% of them being worth $10.00, and 95% of them being worthless? If you're going to have a clearing-house, why the hell wouldn't you just have the retailers collect the PepperCoins and send them in for a guaranteed 50c each, but just not do it until you've collected at least 20 of them?? It'd have the same "avoiding credit card fees" effect, but without the stupid randomness which, even if it does balance out perfectly over lots of transactions, will completely turn off the vast majority of retailers.
Er... (Score:3, Interesting)
Re:Er... (Score:2)
Supplier checks if (a) a valid payment to it and (b)if and only if "a winnew", has not been used before. If so, delivers goods. If not a winner, forget transaction apart from incrmenting "expected gross" to keep Peppercoin honest. If valid, send to peppercoin for payment and note number to prevernt cheats.
Russian roulette anyone (Score:2, Interesting)
For the Merchant
"....That's right Mr. Merchant we will allow these anonymous customers to log on to your system you give them your products, and they can pay with our tokens that are worthless 95% of the time, but you'll be ok in the long run. Um no we are not like those other dot.com companies that are not around for the long run..."
As well as that what is the advantage to the customer?
I can see how the law of averages works (or works more quickly) for the Merchant, but picture the situation that I buy one item per month for 6 or 7 months @ 50 cents a go, but due to randomness I am included in the 95% of those tokens that are thrown away. Then on the 8th month I get hit by a 10 dollar charge for something that should cost 50 cents, and even assuming I remember I have had 7 freebies, I am still out of pocket. This means I have to keeping buying, and hope that I can get 10 dollars worth of stuff, and then get out before I get hit again for another $10. This then leads to abuse/gambling, how much stuff can I get without getting charged and then get out or quit?
Or am I missing something?
obfuscation (Score:5, Insightful)
and it's based on 'patent pending technology' that is somehow acceptable by slashdotters (see here [peppercoin.com] for more info)
this sounds like a lot of marketing hype. why not just have a company that processes micropayments in mass -- if i buy 10 songs for $1.00 each from 10 record labels during 3 months i should be charged $10 as soon as it is profitable to charge me, possibly at the end of the three months, possibly after my tab is at $5.00. i think this is basically what happens with peppercoin but in a more complex, mathematically obtuse way.
finally, what's up with all the hot women on the peppercoin page? it's like i'm supposed to be able to buy them with peppercoins.
Re:the women (Score:2)
but this marketing tactic, though hardly uncommon, unsettles me in this instance. this is supposed to be a financial institution and they fill 1/3 of the screen with hip, attractive models (some are actually disgustingly skinny).
whatever, i'm sticking with my first assumption that this slashdot submission is entirely a marketing ploy and i hope everyone involved with this company gets diarrhea and their car tiers go flat on the way to pickup medicine.
Re:obfuscation (Score:2)
Yes it is, at least to me. Not all patents are bad; I am fine with the technological details (the encryption algorithm, process for randomness, etc) being patented. Ie. if you want to do a similar thing using different algorithms, you'd be allowed to.
It would be another matter if they'd patent the idea of Micropayments.
Re:obfuscation (Score:2)
<FLAME>yeah, you probably use windows too</FLAME>
but seriously, i don't agree with the current implementation of patents. they were intended to give a small inventor time to get a product to market but now they are just used to create a legal monopoly. i'd be more down with patents if they brought the finincial size of the applicant into question and set the length of the patent according to the amount of time expected for getting the product to market.
but i think what you are 'fine with' is the place for copyright which i have less of a problem with. copyrighting an algorithm is better. without seeing this patent (i checked uspto.gov, couldn't find it) i can't say how ridiculous it is. if it's like 'we patent micropayments based on amassing charges then charging credit cards en mass' i'm going to be pissed.
and my sig is only slightly tounge in cheek -- i don't believe in god.
You can't copyright an algorithm (nt) (Score:2)
Re:You can't copyright an algorithm (nt) (Score:3, Insightful)
hot women (Score:3, Funny)
what's up with all the hot women on the peppercoin page? it's like i'm supposed to be able to buy them with peppercoins.
you mean like this one? [peppercoin.com]
or a little buddha-devil maybe? [peppercoin.com]
i get the feeling both merchants and consumers are going to root around in the hype for a while and then just turn their backs on this. [peppercoin.com]
slashdotters will hate them anyway because they obviously use windows in the office. [peppercoin.com]
It's Your Telco, stupid. (Score:2, Interesting)
Nice solution, Ron.
Can I throw away some 5%-10% less invoices?
And by the way, Your Telco has a micropayment solution since ages. Your Mobile Operator also.
It's called phone bill.
Don't know were I read it several years ago:
"The (Business) Model of a (3G) Operator is the Business Model of a bank"
chess
So I must trust their randomness generator? (Score:2)
Ok, a business plan joke:
0. Become Rivest.
1. Change the winning probability from x to x-0.0001%
2. Transfer the 0.0001% of revenue to a private account
3. Profit!!!
Re:So I must trust their randomness generator? (Score:2)
That's only a problem if you are a retailer. If so, you should (in theory) be selling enough that the fluctuations are small. And it really makes no sense to commit fraud by taking a (say) 1.0001% transaction charge instead of the agreed 1%.
Re:So I must trust their randomness generator? (Score:2, Interesting)
- Alice sends the encrypted result of a coin toss
- Bob sends the answer they're hoping for encrypted
- Alice sends Bob the key that was used to encrypt the toss result. Bob sends the key that was used to encrypt his bet.
(note: both messages are send with some kind of pre-agreed nonce)
Neither party can cheat... theoretically.
My understanding... (Score:4, Insightful)
Okay.. from the merchant's side.. he does not wanna mess with trying to account for a 5 cent sale.. so lets calculate the a 0.005 probability ( thats 5 cents out of 10 dollars ) and assign that probability to a ten dollar token, that the token is any good. So, in effect, the merchant is gambling he is going to get paid - in this case, for the sum of 5 cents, he accepts a 0.005 probability he gets $10. Basically, its just like gambling, where PepperCoin is the "house". But over millions of transactions, statistics would approximate the same return to the merchant as if he tallied all the micropayments.. but the merchant does not have to worry with millions of tiny payments, he works with thousands of larger consistent payments. And is willing to accept the accounting simplicity as tradeoff against any probability error, as well as the overhead of the "house cut". This technique allows the processing of billions of payments without keeping detailed records on each... the only thing going through is the statistical averages of who gets paid what.
Well anyway, thats my *understanding* of how this thing works...
One neat thing is that it appears any identifying information to the purchaser would be lost in the "noise". comments invited.
Re:My understanding... (Score:2)
This sounds pretty risky to Peppercoin. What if a large number of customers sign up and then only spend 5 or 10 cents in a month? Then Peppercoin will have to pay huge amounts more in credit card fees than they take in.
I think they'll have to do it by setting up prepaid accounts for customers, or by allowing customers to participate in the payment gambling scheme.
Duncan Murdoch
Re:My understanding... (Score:5, Funny)
[root@computer root]# ping 4533 7648 6632 7812 exp 12/04
5 cents from 4533.7648.6632.7812 (exp 12/04): icmp seq=1 ttl=51 balance=78.13
5 cents from 4533.7648.6632.7812 (exp 12/04): icmp seq=2 ttl=51 balance=78.18
5 cents from 4533.7648.6632.7812 (exp 12/04): icmp seq=3 ttl=51 balance=78.23
5 cents from 4533.7648.6632.7812 (exp 12/04): icmp seq=4 ttl=51 balance=78.28
^c
Re:My understanding... (Score:2)
Re:My understanding... (Score:2)
The biggest problem is of merchants who don't have enough content to have a chance for any one consumer to spend enough for the transaction to be worthwhile. Suppose me & 2 friends play a song and sell it as MP3 for $0.35. If it's a nice tune, we might get a few thousand people willing to pay per month. But if each only spends $1, we can't aggregate enough to profitably collect from their credit cards. But, since those consumers are probably also purchasing many other small data items online, Peppercoin.com can wait and aggregate them into reasonable chunks.
A related benefit is that Peppercoin (or some other, centralized micropayments service) will reduce the sign-up overhead for accessing paid-content. Today paid content is very rare- not just because you've got to be billed a lot (to cover ccard fees), but also because the time it takes for a potential user to sign up for the first use of the service.
By the time a customer has input credit card and billing info, created & memorized a password, and decided if the merchant is trustworthy or not, he's probably lost interest in whatever drew him there, or is ready to search for a free alternative (even if it's not quite as good).
If a user could follow a random link from a weblog and see a promise of amusing content for $0.25, there's a fair chance he'll pay it, as long as only 2-3 mouse clicks are needed.
(Yes, this does open the door to some scams- mislabelling my junk files as something valuable or entertaining. But there are technological approaches to make them less likely- distributed reputation servers and similar)
some information missing from the article ... (Score:5, Insightful)
Re:some information missing from the article ... (Score:2, Insightful)
it's boolean: pay / not pay (Score:2)
credit cards pose a secutiry risk (both for in-country and foreigners), independent of how good encryption is, there is always the human factor on the other side. The moment you give the card number, independent of the buy being $ 0.50 or $ 500, you are at risk. The micro-ness of the values only bring more risk of security look-overs.
If that's not enough, international credit cards are not easily available to everyone, especially young, income-less students, who are a considerable part of the "people who use the net" and are likely to be the main targets of such "content producers".
International bill sending poses more issues than any merchant is willing to face.
The only way for this to work is if a multi-national company sets up a station on every target country (US, Canada, all over Europe, probably South America and some places in Asia too, for most businesses) for selling net credit. Of course this company will be a monopoly, which isn't good; Moreover, politicians would come up with lovely absurd taxes on such services (allowing citizens to mess freely with the external debt is a bad idea, anyway), and the micro-payments would no longer be micro.
It may work for small segments and businesses, which is enough to get this yet-another-dot-com in the blue, but micro-payments aren't taking over the "content industry".
Re:it's boolean: pay / not pay (Score:2)
No. You don't need to give your credit card number in a micropayment system. There are perfectly good (in one sense) micropayment systems in use today - premium rate phone lines. If I really wanted to I could use a contract-free prepayed phone, and not give *anyone* my card details.
Small sample statistics problem? (Score:4, Informative)
What about the retailer that doesn't do a heavy volume of business through PepperCoin?
For example, if it's a 50/50 probability that a given coin is worth High or Low and you flip that coin 100,000 times, then within a minimal error, the coin will be 50,000 High/50,000 Low. But what about a retailer that only does 1000 or 500 or *less* per month.
Then, add on the fact that the PepperCoins being discussed aren't necessarily 50/50 but sound more like 5/95 or 1/99. If you closely examine any 500 of those 100,000 tosses earlier, you can probably find quite a few runs of 500 lows or more in a row. Suddenly, there are whole months that a retailer is going without payment to wait for that one time when they get compensated waaaay down the line. It seems a feast-or-famine proposal for the smaller retailer.
Re:Small sample statistics problem? (Score:2)
I'm too tired to work the math out right now, but I doubt it's probable for a reasonably small account to off of the correct value by more than $100.
--
Benjamin Coates
Re:Small sample statistics problem? (Score:2, Informative)
Then they should probably re-think their business strategy.. we are talking micropayments here. Less than 500 micropayments a month isn't exactly big business..
you can probably find quite a few runs of 500 or more in a row.
Err.. no. Not really. 2 raised to the power of 500. That's pretty darn unlikely. Actually 1 in 3.2734*10^150 unlikely.
The phenomenon isn't as bad as you think (Score:2, Informative)
Your expected income is in fact $10000 while your standard deviation is 10(20000*.05*.95)^(1/2)=$308 or so. So while the variation is painful, it actually turns out you'll be in the $9000-$11000 range 99% of the time.
Similarly, if you scale down by a factor of 10, so you have 2,000 coins. Your expected income is $1000 while the S.D. is 10(2000*.05*.95)^(1/2)=about $100 or so. The 95% range here would be from $800-$1200, which is more painful but still managable.
The odds of a run of 500 lows in a row is about 7.27*10^-12, safely ignorable
Re:The phenomenon isn't as bad as you think (Score:2)
You're assuming the tokens are valued independently of each other. If the vendor saves up the tokens, there's no reason Peppercoin couldn't choose to aggregate them, and reduce the variability even further.
The innovation of Peppercoin is that it doesn't *require* aggregation in order to reduce the transaction fees.
Re:Small sample statistics problem? (Score:2)
The problem in some parts of the country... (Score:2)
No, peppercoin.
That's what I said, peppercorn.
Sounds like pepperoni to me. (Score:3, Informative)
Only a certain number of customers will reach this break-even in a given time-period.
The value of a "winning" Peppercoin to a merchant would be this break-even amount, minus the credit card company fees and Peppercoin fees.
The odds of a merchant getting a valid Peppercoin would be based upon the number of break-even transactions made in say, a month.
If 10,000 total transactions were made in the first month, and only 100 people spent more than the break-even amount, say $12.50, the odds of a given coin being worth $10 would be 1/100.
It's a novel system, as previous efforts to deliver microcash required customers to buy tokens in advance. This system places the risk upon the merchants, who are being asked to gamble that people will use Peppercoins on a regular basis.
As a system like this matures, it could actually work, maybe.
Technical people are terrible at marketing. (Score:2)
Technically knowledgeable people are usually terrible at marketing. The Peppercoin web site is one of those "Click here to get the plug-in" web sites. (Last time there was a big security vulnerability in Flash, I uninstalled it from Mozilla.)
A play on words like "Peppercoin" is rarely successful marketing. People want to be able to trust a company. They don't want a small joke.
Critical point of friction (Score:2)
That is the death knell. Any system that interfaces to credit cards or bank accounts but which doesnt have some utterly compelling extra feature is going to fail, especially when there are services like PayPal already dominating the market.
Any point of friction, like having to sign up for a bank account to spend money will instantly limit the uptake. Merchants will become disenchanted with the lack of customers, and stop converting their content to peppercorn files.
If opening an account is not a three field form, then forget it. This is the true problem of micropayments; how to give away the user accounts to create a huge spending population.
Bad business plan (Score:2)
These guys are doomed simply because it doesn't really cost Visa/MasterCard/etc that much to process a transaction. They charge it because they can get away with it.
As soon as any scheme like this becomes even remotely successful, the credit card companies will change their pricing models and steal the market.
Telcos could do better (Score:2)
But Telecom companies already charge tiny amounts for services, they have the structure in place to do so... I get charged a minimum of UKP0.05 for every phone call I make.
So all we need is for the seller to charge the telco handling your Internet Connection (dial-up, cable modem, ADSL whatever).
So for example, I log online with BT and surf to mp3.com. I ask for a $0.25 MP3 file and mp3.com checks my IP, spots I'm at BT and asks for the cash FROM THEM, NOT ME. (Insert foolproof authentication here, of course).
When I get my next monthly bill, I have an additional $0.25 charge on it, hopefully with some information regarding what it's for. I pay my bill as usual (relatively large numbers so it's easy).
Assuming BT and mp3.com trust each other, they can agree to settle the bill for all BT's customers when it hits $10, $100 or $10,000 if they like. Or BT can pre-purchase 'tokens' from mp3.com and use them up as and when their customers buy stuff.
Sounds exactly like PayPal, doesn't it? Except I trust my telco not to rip me off, I don't (usually) need to pre-charge my account, and the economies of scale mean it's easier to kick off - there are a huge number of customers for the average ISP, so they can all start trying this out without stuffing $10 in a Papercoin or PayPal account, which might be usable in all of 3 online shops.
Now let the flaming begin
Two algorithms... (Score:5, Interesting)
For the user, sign up for a PepperCoin account, providing your credit card number, and when you want to make a purchase:
The token is a digitally signed token with the merchants "name," the consumer's "name," the amount of the transaction, and a value of either $0 or $10 (to the merchant.) Your PepperCoin account is charged $0.50.
The merchant, upon receiving a token, sends you the product, and if the token is worth $10, keeps it for later.
At the end of the [day / week / month / quarter] send all the $10 tokens to PepperCoin. PepperCoin sends back the money for the total value of the tokens. What you'll find is that (money received) / (total number of tokens collected) is $0.50. The merchant will be charged a fee for the service, so you might see something like $0.45 per purchase (10% fee.)
Back to the consumer ... over time you'll accumulate $10 or more in purchases at which point your credit card will be charged. If, let's say, 6 months elapse, and you still haven't accumulated $10, you'll be charged your current balance.
See ... PepperCoin makes about 10% of all the purchases minus the cost of credit card transactions to the consumers (about 5%), the merchant gets $0.45 instead of $0.20 on a $0.50 purchase, and the consumer is charged dollar-for-dollar what they spent.
Re:Two algorithms... (Score:2)
Let's say you were handing transactions like a credit card company does and charging a flat 5% per transaction. What you'd find is that you make all your money on the large number of middle transactions ($10-$100, say) and also on the small number of large ones (over $1,000.) Given that your network has a finite amount of space, you'd favor the transactions that make the most money. However, instead of denying transactions below $10 because they don't make money, you just charge a flat fee of $0.25 on every transaction which makes it worth your while--no transaction ever nets less than 5% of $5. You're happy because it's just like you're getting no transactions under $5 and the merchant is happy because they can charge $4.90 if they wanted.
However, from a merchant standpoint you really get screwed when things get down to $0.25--the transaction fee is 100%. What if you could sell stuff right down to a fraction of a penny and still only pay a 10% fee?
PepperCoin is just like a credit card company, in a way, in that they don't want their network plugged with a million $0.001 transactions, but instead of making an effective minimum charge, merchants buy in bulk. However, they can't be a credit card company because the Internet-based transaction of passing a PepperCoin token around is much orders of magnitude cheaper than the telephone-based system used by credit cards today--why would you want a PepperCoin credit card if you _couldn't_ use it in brick-and-mortar stores? In other words, the existing credit card infrastructure wouldn't support this kind of system because the data transfer costs are too high.
Re:Two algorithms... (Score:2)
The number of coins that someone (Peppercoin) has to remember to stop the same coint fraudlently being submitted twice. With your scheme, every coin, no matter how small (and I see 50c as large for micropayments) has to be recorded. With Peppercoin, only paying tokens, by definition worth at least $10, need to be remembered.
The problem is not micro-payment... (Score:5, Interesting)
The "market" for credit cards is skewed because the transaction charge is applied to the merchant rather than the purchaser. If the charge did come direct from the purchaser, the purchaser would choose a credit card that offered the lowest charge. As it is, the merchant has no choice (other than saying "I don't accept Amex), so competitive pressures don't apply.
Peppercoin-type operations will further mask the skewed market - we will all end up worse off; except of course for the Visas and MasterCards of this world.
Rob.
Re:The problem is not micro-payment... (Score:2)
Scenario A: Peppercoin.com becomes moderately successful, and has a few clones/competitors spring up. Then Visa and Mastercard buy them all out, and start offering micropayments as part of their normal services.
Scenario B: Peppercoin.com is successful, and begins accepting bank checks (instead of ccard payments) to reconcile your monthly bill. Eventually some customers start using Peppercoin for even large transactions, and don't bother with credit-cards anymore. Visa and Mastercard are forced to adapt.
Misconceptions? (Score:4, Interesting)
My guess is this system was likely not designed for use by run-of-the-mill merchants with transaction volume below the millions (and conceivably billions). Like many have pointed out, your typical store merchant would laugh at the prospect of roulette-based revenue.
This system was designed to solve the problem of handling billing and payment collection for A LOT of transactions per unit time. Think NASDAQ. Think VisaNet. Think McDonald's-years. Think pay per wireless packet, a concept routinely floated by Rivest's MIT colleagues including Dr. David Clark [chiefexecutive.net].
Coupled with a computationally efficient token verification scheme, I could see how this system could turn standard billing practice/procedures on its head, provided the big corporations have enough smart people in their stables to say, "Rivest is right." For instance, if my statistics memory serves, this system should effectively enable stepless billing (without increments or round-off issues) - in other words, finest-grain discrete-time pro-rating for services provided, tunable per application to some arbitrary epsilon.
I think music downloads are a red herring. It's entirely possible that PepperCoin will never see the light of day as a consumer payment service. But I'm very curious to see what the world's largest accounts receivable departments have to say about it.
Hey, we could do multi-threading this way too! (Score:2)
Also, the article fails to explain why the payments are done randomly. And how the 'random' token is chosen. Without some rational and more precise information, this idea is nutty.
Patent pending (Score:2)
There is already a working micropayments system (Score:3, Informative)
An un-insightful comment (Score:2)
I'd say the probability is about 95% that this idea is going nowhere, and 5% that it's worth $10.
Micropayments are done every day... (Score:2)
How about a PIN-protected mechanism similar to a debit-card which allows you to use your phone number to make a purchase? Thats what a 1-900 number is, in essence, anyway.
I know, I know, security concerns. But if a phone company supports this scheme, it doesn't have to be your real phone number, or even a valid phone number. It could be some random number that's associated with your phone number in the phone company's database. The cellphone companies ought to go crazy with this -- it opens up a LOT of options for internet-enables cellphones, esp. when you add bluetooth to the mix.
Okay, the PIN idea sucks for the internet. But hey, there's gotta be a solution there, too. I know of a few, but there's no room in the margin...
Marketing problem (Score:2)
Why stop with randomizing individual transactions? (Score:3, Funny)
Why not just randomize *all* payments for a particular supplier? Either they get paid by Peppercoin that month, or not. Better yet, Peppercoin can randomize their entire set of payments. Either: "Hooray! Peppercoin paid all its bills this year!" or "Sorry. We went bankrupt."
Until I see otherwise, I expect the latter.
You may be a loser! (Score:2)
Every time you "buy" something, you take a chance on paying some pre-set minimal fee (looks like [US]$10.00). If all you buy is $0.50 items, your chance will be 5% each time you buy. In the long run, it should even out...
BUT...
Realistically, Rivest is making a very conceited assumption; that everyone will be using his micropayment service. The more services, the harder it is to hit that "long run" point where everything evens out. And guess what?
Banking systems ALWAYS err to the benefit of the bank. (Surprise!) They will never allow themselves to come up short. The most likely implementation will bill you the very first time you use it and then give you the random chance.
So, how many Rivest-ish micropayment services would you give your credit card info to? (Did he think he was the only one who could do it?) ...and how much opportunity do you think
this provides for credit fraud, since you never really
know whether you should have been charged
or not.
HOW 'BOUT A SERVICE THAT JUST ADDS UP MICROPAYMENTS AND BILLS YOU WHEN THEY HIT A LIMIT LIKE $10.00? Does anyone remember "NetCash"? They could even ask you to pay the first $10 in advance once they were popular enough. PayPal is already in a good position to implement this... but they don't.
Chances are they've looked into it and figured it wasn't going to be profitable.
-Rick
Banks charging per transaction needs to END (Score:5, Insightful)
These are database transactions. They happen almost instantly and they consume resources at a tiny fraction of the cost we're being charged. It's electricity being sent over a wire; the marginal cost is so close to zero you need calculus to describe it. This is why micropayments don't work yet, and elaborate schemes like this randomization are even necessary at all. PayPal and similar systems have eliminated these costs, but "real" banks refuse to, because they make an assload of money off of charging for the movement of electrons.
These retards are solving the wrong problem (Score:3, Insightful)
I'm not gonna waste your time with my words since Clay already wrote about it in The Case Against Micropayments [openp2p.com]
The main problem is that users hate micropayments:
"Why does it matter that users hate micropayments? Because users are the ones with the money, and micropayments do not take user preferences into account.
In particular, users want predictable and simple pricing. Micropayments, meanwhile, waste the users' mental effort in order to conserve cheap resources, by creating many tiny, unpredictable transactions. Micropayments thus create in the mind of the user both anxiety and confusion, characteristics that users have not heretofore been known to actively seek out."
Go ahead and read the article. It explains the problem in better detail and it clearly shows why the problem is conceptual and not technical. Then you can happily get on with your life, without Peppercoin and without micropayments. Cheers.
A related approach (for donations only) (Score:3, Informative)
Monte Carlo pledge fulfillment [buskpay.com] for the Buskpay microdonation system [buskpay.com].
Re:Can someone explain this a bit better? (Score:3, Interesting)
So we have *drum roll* another internet currency! Hoorah, the old ones did so well. Noone has the funds to get to critical mass now - you need a LOT of vendors to accept the currency for consumers to be interested. Not that VISA/MC would just sit there if you tried to get to this level.
See beenz.com (oh, it isn't there?) for history of such schemes.
Re:Can someone explain this a bit better? (Score:2)
Re:Can someone explain this a bit better? (Score:4, Insightful)
Peppercoin will not pay the merchants 100% of the money that they took from customers.
It will pay out 100% minus the fee for the real transaction costs minus a win margin for them.
The benefit is, that if e.g. only 5% of the transactions will result in a credit card fee, this scheme gives a 95% cost reduction in real transfer fees - a big big improvement.
Ok, the merchant needs many transactions to get reasonable statistical error margins. But like with insurances on could imagine different peppercoin fees for different risk levels.
The scheme is elegant, but it makes peppercoin a mix of a bank and a lottery, areas typically keen defended by state monopolies. So guess it will be more a legal/political issue than a technical/economic one.
Regards,
Marc
Re:Can someone explain this a bit better? (Score:2)
As far as I understand there are two types of credit card transactions involved:
The scheme makes only sense, when many transactions are condensed to one transaction.
The rest is done by probability. The client buys 20 times, but only one winning coin will be distributed. So we have 20 transactions and 2 credit card billings (one at the client, one at the merchant). That reduces billing cost 10 to 1, thus a saving of 90%. Not bad.
Regards,
Marc
Re:Can someone explain this a bit better? (Score:2)
That gives for 20 transactions a total of 1 credit card blling over at the merchant plus between 1 (client does 20 transactions in one month, client is billed monthly) and 20 transactons (client does one transaction per month, is billed monthly).
So it would depend on the billing intervall and how many transactions a client does per month.
Regards,
Marc
Re:Can someone explain this a bit better? (Score:2)
Digital tokens can be seamlessly copied. So the company that is going to deliver cash (Peppercoing) must keep track of every valid token it has issued (withing a time window that has to be months at least), so that the same token cannot be issued twice.
If tokens are worth $0.01 each, you have a *huge* heap of tokens which has to be tracked. But bu this scheme, worthless tokens can be dumped. Every valid token is worth at least $10. If Peppercoin is taking (say) 1%, they have %0.10 to pay for the cost of storing and revalidating the token. If volume grows because people used it for really micro payments, other schemes crumple under the strain: Peppercoin doesn't. They get a straight $0.10 per transaction.
Obviously, there must be some micropayment below which even they can't be bothered - the cost of issueing a token is probly more than $0.00001. But it lowers the per-transaction break-even point by an order of magnitude or so.
To answer a point further up - yes, the purchaser needs an account with Peppercoin. But people are probably happier with that: pay in fixed amount, thus limiting losses, and monitor it in real time on the web. Pay a $0.50 peppercoin , see your account drop by $0.50. No waiting for the bill to come in, never risking more than you paid in - Joe Sixpack is happy.
Re:I must be stupid (Score:3, Insightful)
Lottery (Score:3, Interesting)
No, the customer get's charged.
But the term lottery is very good in this context. Let's look at the scheme from that point:
If a state organizes a lottery (at least here in Germany) it is obliged to pay out at least 50% of the money that came in from selling the lottery tickets. This payment occurs in the same random fashion like the pepper coins.
In reverse, a customer of a lottery can roughly except to win back about 50% percent of what he shells out (it depends on the time frame and how all the win money is distributed among different winning ranks).
The same holds for the merchants participating in that peppercoin scheme. Statistics is on their side. The more transactions, the smaller the error margins.
I would call the scheme a reverse lottery.
The critical point is of course the tuning of the propabilities in the win/loss one time pads that Rivest's company is likely to distribute to the client software. He can make money by having to low win probabilities.
As a participating merchant I would perhaps insist on a contractual margin - if I have N zillion transactions there should be guarantieed error margin. If my pepper coins are below that margin, I should get compensated by Rivests company, if I'm above I should pay back.
The general idea, to use statistics to neglect expensive detail, seems very good to me.
Regards,
Marc
Re:Huh? (Score:3, Insightful)
Then basically Pepercoin, I assume, keeps a tally of how many items a given site sells. On every N-th transaction, they hand over $N to the retailer. This way the retailer only effectively needs to pay the $.25 (+ Pepercoin's markup of course) per 20 transactions of whatever.
So, to sum up, this seems basically like Paypal but reworded. You still can't use your credit card to make micropayments and you still need to have an account with Pepercoin, and for the retailer to accept Pepercoin, before you can make a transaction.
Unless I'm missing something this seems pretty useless. I thought the major factor with services with Paypal etc. was that users don't want to have to sign up with a 3rd party - it's just too much hassel.
Re:Huh? (Score:2, Insightful)
"I thought the major factor with services with Paypal etc. was that users don't want to have to sign up with a 3rd party - it's just too much hassel." You are already dealing with a 3rd party.. the Credit Card company; only you don't notice 95% of the times.
If Peppercoin succeeds in making themselves perceived as "transparent" to users, they could be succesful. Anyway, I guess that if micropayments becomes a rich business, Credit Cards companies will take the business in their hands.
Re:This article misses out something ... (Score:2, Interesting)
From what I can tell, what Peppercoin does is batch the transactions so that the total of all of them goes into *their* merchant account. I couldn't find out any info on how often they would distribute the funds to member merchants, but I'm sure the frequency of payments (triggered by number of total transactions or dollar amount) would be tied to merchant membership fees.
Just my $0.02US
Re:EEtimes has a slightly better clarification (Score:3, Funny)
Is that in peppercoins, or real payment?
Re:The beauty of this method (Score:2)
I can't see that it is more efficient than the way some internet charging works (i.e keep storing up the amounts until its worth incurring a transaction charge to pay out.)
Duh (Score:2)
Customer creates and account and puts in a minimum amount via credit card. The card is charged. Just like paypal.
The only difference is how the money is paid to the merchant; random digital peppercorns.
Don't ask me why this would be desirable.