The Rise of Digital Cash

By Misha Guttentag and JP Schnapper-Casteras

What if spending money in the real world was as inconvenient and invasive as spending money online? Imagine a customer at the register of a local corner store:

Customer: I’d like to buy this $1 water.

Merchant: OK, I just need you to type your name, home address, email, and credit card number, all of which I’ll add, without your consent, to your customer profile, where we track every one of your purchases. We’ll tell our partners what you purchased here today (for a fee, of course), send you ads to sell you more things . . .

Customer: Huh?

Merchant: . . . Oh, and we attached a GPS tracker to your coat so we can see what stores you visit next.

Dystopic, huh? Fortunately, in the real world, unlike on the Internet, you have the option of cash, a timeless technology which allows fast, discreet exchange of money for goods and services. Of course “cashless” solutions like credit/debit cards are convenient, too: you can pay by thumbprint/swipe/tap, always make perfect change, and never have to figure out what to do with pennies. But in a digital age, we should have the best of both: the ease and privacy of cash with the convenience of digital payments.1

As Wired Magazine’s Zeynep Tufecki lamented this year: “I want to easily support artists and writers [online] without having to set up an account, create a password, fork over my credit card details, and commit to an ­ongoing­ relationship that involves receiving a new piece of spammish email at least once a week.” When we make payments online, she says, “it sucks.”

So how can we make it suck less? Can it be true that small digital payments are impossible or incompatible with the Internet? No way.2 So why aren’t cash transactions under $5, which are abundantly common in the brick-and-mortar world, available via our computers and phones?

One big answer for the lack of digital cash is that the traditional banking system isn’t designed for them. The legacy payment rails, like ACH, are designed for infrequent, large-value, high-fee transfers between big banks (who own these rails, and charge high fees to use them). Similarly, credit cards charge a high base fee for each transaction, plus ~3% of the cost — which makes accepting small-dollar credit purchases unduly expensive.

But a big technological leap happened in the last year: the emergence and growth of a new, open payment technology called the Lightning Network, an alternative rails for fast (faster than credit cards), low-cost, secure digital cash transactions. It’s still early days, but there’s no question the network works. Here’s an example of Lightning in action, buying a recipe for $0.01: 

We’ve been working on integrating and experimenting with Lightning for a while now, and we couldn’t be more excited about where digital cash is headed. We see three reasons it’s going to be huge: 

One reason is timing: a variety of consumer preferences and market trends are converging in ways that are favorable for digital cash. There is a growing body of evidence that users are increasingly worried about their privacy, fatigued by subscription-only paywalls and targeted advertising, and willing to pay for content and choose products based on how they handle their data. Cash use remains especially popular for individuals under 25. Studies confirmed that we search differently when we know we’re being watched — and it is only logical to assume we buy differently too.3 Businesses are looking for new ways to sell products, expand their user bases, and monetize existing content with alternatives to advertisements. Content creators are clamoring for a way to be compensated directly by fans, as evidenced by the rise of newsletter- and membership-based services like Patreon, Substack, and Medium. In the words of Medium CEO (and Twitter co-founder) Ev Williams, “it’s clear that the broken system is ad-driven media on the internet. It simply doesn’t serve people.”

The second reason is technology. The Internet succeeded because it was open: anyone could launch a website, app, or browser. Similarly, Lightning is designed so anyone can readily send or receive digital cash.4 The legacy banking system is closed — only banks get to send money to and from each other, or only allow transfers within the same network, like on PayPal or Venmo.5 Until recently, there was simply no alternative. But with Lightning, we have a network that is open to everyone. Lightning also makes payments programmable, so as developers dive in, integrating Lightning is leading to all sorts of applications that are just getting started: clearing paywalls as easy as scanning a code, online pay-to-play arcades, you can even instantly feed chickens. The fact that consumers are already getting used to paying by smartphone makes for an easy and exciting transition to digital cash. Here’s Lightning in action, buying a beverage:

Above: Buying a beverage with Lightning (h/t BitMEX); Below: Feeding chickens with Lightning on PolloFeed

The third reason is opportunity: studies have shown that cash payments under $5 accounted for over $1 trillion in consumer spending in the United States alone. If Lightning providers can bring some of those transactions into the digital realm, the revenue opportunity is enormous, and that’s just for handling payments. Much like the early Internet, there is an incredible amount of business that can be built on top of an open network where anyone can participate. We’re not the only ones who think so: legendary computer scientist and former Stanford President John Hennessy, and prominent venture capitalists Mary Meeker and Marc Andreesen have spoken passionately about the massive potential for small payments online, and Twitter co-founder Jack Dorsey invested directly in supporting Lightning development.

To be sure, there is plenty of work ahead. Lightning Network transactions almost all take place using bitcoin, which for now puts it out of most users’ comfort zones.6 And the meteoric success of “free” services such as Facebook, Gmail, and Google Search does suggest that many users are accustomed to paying with their privacy; writers and artists publish plenty of content online for free. At the same time, consumers and creators haven’t really had the option of digital cash before, so we’re in new territory: many of those behaviors could change. 

In short, it’s an exciting time for digital cash. If we build and invest deliberately, we can find ourselves on the cusp of a cash comeback that has the potential to revitalize business models and create new ones, support quality content, and protect privacy. Imagine the possibilities for an economy full of seamless, speedy, private, digital cash transactions. We’ll be able to pay, get what we came for, and move on. With Lightning, that’s just getting started.


  1. With digital payments so convenient, the solution for pro-cash consumer advocates cannot be to just convince everyone to use paper money, as Ralph Nader and others have argued. No, the solution is to demand the best of both worlds: the speed and convenience of digital money, with the privacy and security of cash.
  2. Two dot-com era essays that dominate this type of discourse, Clay Shirky’s “The Case Against Micropayments” and Nick Szabo’s “Micropayments and Mental Transaction Costs,” have been wildly overread: crucially, neither author argues that under $5 payments (the type of payment we typically make with cash in the real world) would be unworkable online. Szabo, for example, was writing at a time when ISPs like AOL were deciding whether to bill per-minute (like phone companies) or per-month (like subscriptions). He argued that consumers would prefer subscriptions, since there was a high “mental transaction cost” to spending a small amount (“micropayment”) for each minute of Internet service; his focus is on services with micropayments of “a few cents or even fractions of a cent.” Shirky also assailed small payments for their mental transaction costs. Still, he defined micropayments as fees that are “functionally zero” — i.e., not sub-$5 transactions. He later clarified this further, explaining that his critique of micropayments was about proposals “billing for amounts as small as a thousandth of a cent; this was what made such payments ‘micro.’” To Shirky, these micropayment services couldn’t compete with “free.” By contrast, he distanced his critique from proposals that “imagine pricing digital content in the range of a dime to a dollar. These aren’t micro-anything, they are just ordinary but small payments.”
  3. For example, Google has access to 70% of all credit/debit transactions in the United States.
  4. As Satoshi Nakamoto wrote in 2009: “A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990’s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”
  5. It may seem like you can send money to anyone, but that’s only if you and the other person are in the same network, like when you both have Venmo accounts. You can’t, for example, send money from your Venmo to another person’s CashApp wallet. With different Lightning wallets, you can.
  6. At least until the UI/UX is simplified. In our estimation, the first generation of widely-adopted Lightning products will abstract away bitcoin, so users will be able to “pay $1” even if the backend transaction takes place using BTC.