Financial Cryptography

We present the “Peppercoin” method for processing micropayments efficiently. With this method, a fraction of the micropayments received are determined, via a procedure known as “cryptographic selection,” to qualify for upgrade to a macropayment. The merchant deposits the upgraded micropayments as macropayments, and merely logs locally the non-qualifying micropayments. In this manner, the merchant transforms a large collection of small micropayments into a smaller collection of macropayments, of the same total expected value. The merchant pays much less for processing the resulting macropayments, since there are fewer of them. Consumers are billed for exactly the amount they spend, based on auxiliary information recorded in each micropayment. The method is highly secure, and compatible with existing payment mechanisms such as credit cards.