Understanding Bitcoin: Cryptography, Engineering and Economics

CHAPTER 14Odds and Ends

This chapter further expands on several topics that have been previously only mentioned briefly.

14.1 OTHER TRANSACTION PROTOCOLS

14.1.1 Micropayment Channels

Some applications require many small transactions to take place, i.e. micropayments. One typical use case for micropayments is paying for an ongoing service, such as network connectivity or content viewing. As Bitcoin transaction fees are reasonably low, micropayments could be performed using multiple transactions of small amounts. This approach, however, has several disadvantages. First, there are fees associated with every transaction (section 9.3). Second, there is a limit to how small a transaction amount can be, the dust limit, created to prevent the bloating of the UTXO (Chapter 6). Third, the receiver is left with many small transactions, which can be costly to spend, as the resulting spending transaction would have a large size.

These disadvantages are overcome by setting up a micropayment channel. A micropayment channel is a communication link between two parties—say a client and a server—to create a stream of transactions that is updated frequently but is not published on the blockchain until the end of the relationship. To set up a micropayment channel these steps are followed (Bitcoin wiki, 2014f):

• The client creates a transaction (Tx1) that sends a large amount to a 2-of-2 multisignature address with the addresses of both the client and the server. The client signs the transaction ...