This is really a private payment network that happens to be denominated in Bitcoins. You have a balance denominated in Bitcoins on a server at "21.co". "Before you can execute an off-chain transaction in the 21 system, you need a bitcoin balance at 21.co." It's a centralized micropayment system. So only people with 21.co accounts can play. Hey, it worked for PayPal.
You can initiate a "flush" transaction which asks "21.co" to sell you real Bitcoins in exchange for their book-entry Bitcoins. Sellers would presumably do this at least once a day, avoiding keeping a substantial balance on "21.co". Given the track record of "hosted Bitcoin wallets", which tend to be "take the money and run" operations (anyone knowing the whereabouts of Cryptsy's "Big Vern", please contact the Silver Law Firm) that's a good feature.
There's no real reason this needs Bitcoins at all. This scheme would work if it was denominated in dollars. There's a startup opportunity here. Reuse the micropayment system, forget about the Bitcoins. You'd deposit money into your micropayment account with a credit card, and your computer can then spend against that balance. Merchants could "flush" their balance via an ACH transfer to their bank.
When they actually do it that way, the "channel" relationship is between buyer and seller, without going through "21.co". That's fine. But that only works if you do enough transactions with one buyer to justify a blockchain transaction. You have to tie up some predetermined amount of BTC for a day or so, and you get back change for what isn't used. That's a pain.
The more common case is what they call "Off-Chain Transactions (BitTransfers)". "21.co" acts as a clearing agent for microtransactions, and so you have funds tied up against "21.co", not with the seller. This involve some degree of trust in "21.co", in that they can potentially steal your balance. (In keeping with Bitcoin scam tradition, they'd probably claim they were "hacked".)
Their terms of service demand confidential arbitration (!), so you're gagged if they screw you.[1]
They use Bitcoin due to its granularity (1 Satoshi = 0.0000040352 USD) and because users can mine a small trickle of new money easily with the hardware they have designed. But mainly because it's much easier than bootstrapping users onto a new payments network from scratch.
Yes, you could design a new micropayments system denominated in dollars with electronic wallets that would piggyback off card and bank payment networks, but you would add latency in flushing (admittedly negligible) amounts to your bank, and if your service became large enough, credit card providers would probably disallow you from using their infrastructure to deposit billions of tiny amounts into micropayment wallets, which would generate a lot of overhead and fees for a relatively small transaction volume.
Seems to me that the reason this micropayment startup doesn't exist is because it wouldn't solve any pressing problem at the moment.
This is what I designed, however I am not going to do a startup with it[1]. Feel free to do it yourself, email me and I'll get you up to speed on the implementation.
As for 21, they raised 100mil because one of the founders used to work at a vc firm. Now they are making mining chips that are far slower than state of the art, and reimplementing Bitcoin library code from 4 years ago.
You can initiate a "flush" transaction which asks "21.co" to sell you real Bitcoins in exchange for their book-entry Bitcoins. Sellers would presumably do this at least once a day, avoiding keeping a substantial balance on "21.co". Given the track record of "hosted Bitcoin wallets", which tend to be "take the money and run" operations (anyone knowing the whereabouts of Cryptsy's "Big Vern", please contact the Silver Law Firm) that's a good feature.
There's no real reason this needs Bitcoins at all. This scheme would work if it was denominated in dollars. There's a startup opportunity here. Reuse the micropayment system, forget about the Bitcoins. You'd deposit money into your micropayment account with a credit card, and your computer can then spend against that balance. Merchants could "flush" their balance via an ACH transfer to their bank.