Past currency

Micropayments are back. Despite at least half a dozen failed attempts to persuade internet users to pay for low value information and services one penny at a time, a new firm is ready to make a fresh attempt, this time using statistics.

First, here is some history. In 1994, a Dutch firm called Digicash, run by mad professor crypto-genius David Chaum, reached an early solution to the problem of making small payments online.

It boasted the geeky merit of being mathematically provable: a powerful equation embodied in a simple software product.

Chaum's system was extraordinarily elegant. It featured persuasive benefits, such as anonymity for users, bullet-proof security for merchants, and no lower limit on transaction value. It could be used to make payments of only a few pence, or entrusted with a multi-million pound deal.

To make this possible, Digicash relied on its own, newly minted digital currency: cyberbucks. I joined the product's trial, and was sent 100 cyberbucks from the 1m originally made available. It was exciting, and I seem to remember buying a shirt using the cyberbucks.

Plenty of people, particularly libertarians and encryption fanatics (known as cypherpunks), were impressed by Digicash's apparent potential to short-circuit the global financial system by replacing big, centrally-issued currencies with untraceable private ones.

Sadly, they were the only people who got excited about Digicash. Cyberbucks never caught on, and the company ultimately went bust, despite having a core business in smart cards for governments and banks.

The problem was that merchants hated the anonymity part, governments hated the alternative currency part, banks hated the competition, and internet users could not be persuaded that they even needed micropayments at all.

Meanwhile, giants such as Visa and Mastercard began to pay attention, launching their own products and services for the web. The rest is history.

However, cyberbucks enjoyed an interesting afterlife amongst the cypherpunks. Using the trial cyberbucks still in circulation, they started a market, just like real foreign exchange traders.

Its trading floor was the simplest thing imaginable: an email mailing list. Bids were submitted to the list, and anyone with cyberbucks could agree to meet a bid. As in any market, the artificial scarcity of the currency (no-one would ever mint any more) pushed prices above face value.

I can recall sending $20 (?14) to a Hungarian programmer in exchange for 10 cyberbucks, which were transmitted magically to my electronic wallet a few days later.

Of course, it was only a game: pretty soon, everyone lost interest. Digicash failed because it was designed and executed in a vacuum. It was eminently clever, perfectly put together, and utterly redundant.

I was reminded of Chaum and Digicash when I read about a new micropayments scheme by another encryption guru, Ron Rivest.

Rivest is the R in the ubiquitous RSA encryption algorithm (you may never have heard of it, but you're certain to have used it).

His plan is called Peppercoin and, at first glance, it like just another boring micropayments system. On closer inspection, however, there is an elegant algorithm humming away under the bonnet.

Peppercoin aims to tap the supposedly awesome potential for very small online transactions by finally making them economical for merchants. The main problem with such transactions is that fees imposed by banks and credit card companies will eat up the whole profit if the deal is too small.

The scheme gets around this by simply failing to pay out on most transactions. As a merchant, payment from Peppercoin might actually be received for only one in 100 completed transactions.

However, here is the clever bit: Peppercoin uses a statistical method to choose when to pay a merchant, and how much to pay. If 100 customers have each spent 10 pence at your website, it will discard 99 of those transactions, but then pay out a larger sum in one go.

Therefore, the money paid by those customers will always arrive even if, day to day, you may find yourself down (or even up) on the sum owed. Everything is in the statistics.

The idea is finely-tuned, but so misjudged that it makes me want to weep. Yet again, a group of brilliant techies have got together and found the perfect supply solution to a demand problem that does not exist.

Again, a clever idea has been allowed into a hostile and crowded marketplace with only its intellectual credentials to protect it. Techies, and the companies they build, often cannot believe that intellect is not enough, and that a stylish product can fail because nobody wants it.

Unfortunately, like those preceding it, Peppercoin has utterly ignored the fact that, in terms of demand, no-one is really listening.