Freedom Project – Application 3 of 26
Probabilistic payments are similar to how Bitcoin mining rewards are distributed. In mining, transactions are settled every 10 minutes in winner take all fashion, instead of settling every hash. In the long run miners are compensated equally on a per hash basis. The same concept can be applied to micropayments. Alice wants to pay Bob 0.001 Big Macs. Alice cannot pay Bob as the network transaction fee is 0.002 Big Macs. Alice and Bob instead agree upon a game of chance. Alice will pay Bob one Big Mac, if Bob can correctly guess Alice’s chosen number from 1-1000. 999/1000 times the transaction does not occur, however, 1/1000 times Bob receives 1 Big Mac. The expected value ends up equaling 0.001 Big Macs for the payment. This structure comes with the tradeoff of volatility, however, Alice and Bob benefit from increased privacy in that most transactions settle off chain.
A rudimentary protocol is described and linked here r/https://en.bitcoin.it/wiki/Nanopayments
For micro transactions, volatility will not be a concern, for larger transactions an additional layer can be built on top of probabilistic payments. Like miners, Alice and Bob can join pools to hedge volatility. Alice or Bob can optionally open a payment channel with a third party and broadcast all their probabilistic payments to the pool. In this event Alice could pay the exact amount to the third party in their payment channel, and Bob could receive the exact amount from his respective third party in his payment channel. This comes with the tradeoff of reduced privacy to the related pool operators and the need to pre-fund payment channels. There are three advantages to this system:
Alice and Bob are still compatible if one uses payment channels and the other does not.
All pool nodes are indirectly connected through the laws of statistics. This eliminates both the routing problem and network effect problems as seen in Lightning Network.
Pools can easily operate at any scale, limiting centralization.