"Granular Exchanges"

One common feature of many commercial transactions is that they are deferred exchanges. For instance, A gives $ to B today in exchange for a promise that, in the future, B will give A some valuable good.

This is a source of risk. The time between the exchange of promises and the performance of those promises introduces uncertainty. Even though A has paid B, B might take the money and run and never provide whatever good they promised to A.

From a very high level, this is one reason we need legal contracts: they make promises enforceable. I can trust a promise will be acted on in the future if I believe I can enforce that promise. Deferred exchanges become less risky.

New technologies like state channels (or payment channels) will allow us to “compress” the time-lag between payment and provision of some good or service. This would reduce risk and uncertainty, and mean we might rely less on expensive solutions used manage that risk (like legal contracts) in some cases.

For instance, there are many services that we pay for in big chunks (e.g. Monthly) but use or receive constantly or in small increments (internet, electricity, netflix). Sometimes these must be paid up-front, while others are billed each month after we have already used the service.

This creates risk on both sides. Utilities spend large sums trying to collect debts from users who consumed electricity or internet but never paid for it. Users may pay for a service, but then never receive it. If the amount we've lost isn’t large enough, we might simply eat the cost because it’s too expensive to pursue the claim.

What if we reduced the time-lag between payment for and receipt of this service? For every minute of internet connectivity you have or consume, your account automatically makes tiny streaming payments. The total cost could be identical to what you pay monthly, but it’s no longer a deferred exchange, and both parties can rely less on promises. If a user stops paying, the internet turns off. If the internet goes down, the user stops paying. We’ve made the exchange more granular - you are paying in tiny pieces, rather than in big lump sums.

This isn’t a particularly new idea - it's often discussed as a component of various projects/dapps in the blockchain space, as well as generally in discussions of payment/state channels. But I thought it deserved its own post and an attempt at giving it a name that put it in a useful context. So: granular exchanges.

Also, obviously this only works for some types of exchange. Money payments can always be granular, but some goods are not provided in incremental amounts. This would not make sense for purchase of a car. In other cases, there might be other reasons why paying in monthly lump sums is valuable even if we could turn it into a granular exchange. For instance, it’s probably worse for society if a person who suddenly lost their job has their electricity turned off in the middle of the month. In the current form, the monthly billing system provides that person some “slack” or credit they can use to figure out how they are going to continue paying for an essential service next month.

© 2017