What Is IOTA and Is it a Good Investment?
Since the world was introduced to the blockchain by Satoshi Nakamoto in 2008, there have been a number of innovations built on top of the technology. These include the creation of cryptocurrencies with specialized features such as privacy-centric Monero, the development of enterprise-ready blockchain solutions like Ripple, as well as the use of the blockchain to mitigate social challenges such as corruption and fraud within charitable organizations.
Speedy and Secure Alternatives
While the blockchain has a wide range of viable use cases, the technology is not without limitations as is evidenced by the slow pace at which scalable blockchain-based platforms are being developed.
Furthermore, blockchain-based cryptocurrencies have fees attached to their transactions to create an incentive for the miners needed to keep the ledger in good functioning order as part of the consensus mechanism.
That means that most cryptocurrencies are currently unable to adequately function in the context of microtransactions as the fees would be too high.
In an effort to overcome the challenges currently faced by blockchain technology and develop a platform that can scale as well as handle microtransactions easily, IOTA was created. Serguei Popov, a member of IOTA’s development team, explains:
“There are two distinct types of participants in the (blockchain) system, those who issue transactions, and those who approve transactions. The design of this system creates unavoidable discrimination of some participants, which in turn creates conflicts that make all elements spend resources on conflict resolution. The aforementioned issues justify a search for solutions essentially different from blockchain technology, the basis for Bitcoin and many other cryptocurrencies.”
What Is IOTA?
IOTA is a distributed ledger construction that differs from current blockchain standards. The IOTA ledger does not have blocks, a chain, and as a result, no miners are required to keep the ledger functional.
This difference is made possible by the most important innovation behind IOTA which is called the Tangle. Popov explains that “The tangle naturally succeeds the blockchain as its next evolutionary step, and offers features that are required to establish a machine-to-machine micropayment system.”
IOTA was initially created to power the internet-of-things (IoT) market which is how the project got its name.
Dominik Schiener, An IOTA co-founder explained how the project came to be, saying, “One of the major differences of our origin stories vs. other projects is that IOTA came out of real necessity. It was not the drive of creating a fancy new DAG technology that initiated the project, but the apparent problem of transactional settlement for the Internet of Things, and the lack of existing solutions out there today.”
Tangle is a distributed ledger construct that is a type of Directed Acyclic Graph (DAG). The tangle is different from a blockchain as it features neither blocks nor chains. Instead, it simply has transactions.
As is explained in the white paper:
“Instead of the global blockchain, there is a DAG that we call the tangle. The transactions issued by nodes constitute the site set of the tangle graph, which is the ledger for storing transactions. The edge set of the tangle is obtained in the following way: when a new transaction arrives, it must approve two previous transactions.”
What this means is that within the IOTA ledger, the consensus is not separate from the transaction process rather it is an intrinsic part of transactions. The white paper continues with, “This referencing of transactions is seen as an attestation: with your transaction, you attest directly that two transactions, and indirectly that a subsection of the Tangle are valid and conform to the protocol’s rules.”
Because of this structure, there is no need for people to participate in the network as validators of transactions as those participating in transactions handle consensus.
“Instead of a smaller subset of the network being responsible for the overall consensus (miners / stakers), the entire network of active participants (i.e. devices making transactions), are directly involved in the approval of transactions. As such, consensus in IOTA is no longer decoupled from the transaction making process: it’s an intrinsic part of it, and it’s what enables IOTA to scale without any transaction fees.”
While IOTA’s tangle makes it possible for payments to be made entirely without fees, thus creating a platform through which micro, as well as nanopayments, are easily processed, it further lays the foundation for a scalable decentralized ledger solution.
The foundation arrives due to Tangle’s design, which lends itself to greater stability as transaction traffic grows on the ledger. The higher the number of users in the IOTA network, the greater the network’s security.
“IOTA was designed to enable transactional settlement at scale. Since consensus is parallelized, and not done in sequential intervals of batches as in Blockchain, the network is able to grow and scale dynamically with the number of transactions. The more transactions are made, the more secure and the more efficient the Tangle gets.”
In addition, and as part of its initial development plans to support the machine economy, IOTA supports offline transactions.
“The beauty of the Tangle is that you can fluidly branch off and back into the network. This partitioning is key in being adaptive to the rigorous requirements of an asynchronous IoT environment. There is no such thing as always-on connectivity, as such, you need to be able to make transactions and secure data even in an offline environment. IOTA makes it possible for a cluster of devices to branch off and still make transactions in an offline environment; utilizing different communication protocols (ZigBee, Bluetooth LE, etc.) for the P2P communication.”
While IOTA differs fundamentally from blockchain technology, it is important to note that it is still a distributed and decentralized database operating on a peer-to-peer network. Moreover, while the mechanism is different, it still relies on a consensus and validation mechanism.
Even though the platform was initially developed to support the machine economy and to power the internet-of-things, the platform has a wide range of use cases such as data integrity, the supply chain, everything-as-a-service as well as human-to-human payments.
The IOTA Token
As part of the protocol involved in the creation of the genesis block, the total amount of IOTA’s native cryptographic token was created. The total amount of the token units, known as IOTA (MIOTA) is 2,779,530,283,277,761.
In justifying the need for such a large amount of tokens the team explained, “IOTA is specifically designed for machines, so this high supply makes IOTA optimal for tiny nanotransactions while still keeping efficiency in mind.”
It is important to note that the units created during the genesis transaction are the maximum number of tokens because, as a result of this, miners looking to discover new tokens as rewards for helping to achieve consensus will be unable to participate in this manner.
The IOTA development team held an ICO to distribute the tokens. The ICO raised about 1,337 BTC which at the time equaled $584,000. Contrary to popular practice, the team did not reserve a percentage of the token supply for themselves.
However, the community did donate a substantial amount to fund the creation and sustenance of the IOTA foundation. The foundation currently holds about five percent of the token supply.
Because of the large number of IOTA tokens in circulation, IOTA tokens are usually traded, as well as denoted in MIOTA which is equivalent to a million IOTA. The digital currency is currently ranked eleventh regarding its market capitalization which is around the $4.7 billion mark, and MIOTA is presently trading at $1.72.
In comparison to the price the token traded at during the 2015 crowdsale of $0.0001798865 per MIOTA, this represents a substantial growth in value in a few years.
The IOTA Foundation and the IOTA Ecosystem
While the IOTA ledger is decentralized, the developing team created a foundation through which they would be able to carry out the tasks related to keeping the technology in good working order.
The IOTA foundation is a not-for-profit based in Berlin, Germany. It is composed of the core team behind IOTA such as Serguei Popov, the inventor of the tangle, as well as David Sonstebo the founder of IOTA, among others. The foundation funds itself from the tokens it acquired through community donations.
This past month, the foundation announced the creation of the IOTA ecosystem. The ecosystem is a separate organization from the foundation that is supposed to spur on community participation, educate and increase literacy on the tangle and IOTAs use cases as well as provide a way through which members of the community can vote on matters relevant to the project.
Moreover, the foundation has developed a fund it refers to as the Ecosystem Development Fund (EDF). This fund was raised through community donations, separate to the amount allocated for the IOTA foundation.
The funds within the EDF are to be used to fund projects that are created on top of the IOTA ledger. The application process is open to those who sign up to join the ecosystem and have a viable IOTA-based project. This initiative is part of the larger plan to increase IOTA adoption.
Recently, multinational corporation Bosch announced it had invested in IOTA. Through its venture capital fund, Robert Bosch Venture Capital (RBVC), the corporation purchased a significant amount of MIOTA.
This investment is one of the first instances that a multinational has invested in a DLT startup in this manner. This signals a substantial vote of confidence in the IOTA platform and its technology.
In addition, the city of Taipei partnered with the IOTA foundation in an attempt to use the IOTA platform to achieve the city’s goals of smart city status. IOTA’s technology will be used to create IDs which will be called Tangle IDs.
These identification cards are designed to be tamper-proof and will be used by citizens to participate in activities such as voting while also guarding against identity theft.
Moreover, IOTA is also working on a project called Airbox that is designed to provide real-time environmental data to the inhabitants of the city.
Another interesting project is Carriota, a bank powered by the IOTA platform. The project allows full control over one’s’ finances as it is a private, trustless bank without fees or middlemen.
While IOTA has been received positively in some circles, it is not without its fair share of controversy. In the summer of 2017, a group of MIT researchers found a vulnerability in the code employed within the IOTA tangle.
The researchers, headed by Neha Narula, the director of the Digital Currency Initiative at MIT Media Labs, found that a defect in the code where its hash function could be made to produce a collision.
This revelation led to widespread backlash as members of the crypto community expressed fears that IOTA developers were not being transparent. The IOTA team later fixed the vulnerability.
Recently, however, emails between the DCI at MIT and the IOTA team were leaked, bringing the controversy back to life. The IOTA team published a statement reiterating that the vulnerability had been included by design and had never left users open to theft or any malicious activity.
Should You Add IOTA to Your Portfolio?
While IOTA is an innovative and interesting project, it is still in its early stage.
Moreover, it is important to remember that the technology is new and is likely to require more fixes and patches as time goes along. Hence, it is important to consider the risk involved in investing in such a project.
Having said that, if the IOTA team manages to execute on its mission and becomes the go-to digital currency for IoT devices and fee-free microtransactions, its token would skyrocket in value and likely become one of the most valuable cryptocurrencies in the market.