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IOTA: A Misunderstood Cryptocurrency?

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IOTA: A Misunderstood Cryptocurrency?

IOTA is one of the fastest growing cryptocurrencies with an enthusiastic community of fans. However, it is also one of the most severely criticized cryptocoins. Here we investigate what makes IOTA so controversial – and what value can be found in its approach to scale cryptocurrency.

Disputes and Criticism: IOTA Defending Itself

For a crypto writer, IOTA is currently one of the hardest topics to cover. Not only because it’s extremely complex, and you actually need a lot of prior knowledge about blockchain and scalability to write properly about it. But also, because the ensuing discussions quickly becomes poisonous.

On the one hand, the wider crypto scene has a hard time taking IOTA seriously; on the other hand, the same community often reacts to genuine criticism a bit too aggressively.

The following brief Twitter dialogue between Litecoin founder Charlie Lee and IOTA developer David Sønstebø may well illustrate this point:

Why does Lee tend to be patronizing, and why does Sønstebø respond so angrily and reproachful to a critical question? What is IOTA in itself that makes many in the crypto scene skeptical, but at the same time also attracts fans who often react with fanatic anger to criticism?

We find almost the same pattern in a brief dispute between IOTA’s Dominik Schiener and core developer Peter Todd.

Why do IOTA discussions quickly escalate into such heated debates? The answers to this question are complex. However, the author hopes that they help to familiarize readers a little further about the new cryptocurrency and to more precisely explain some of its properties.

Design Decisions

Why IOTA baffles many in the crypto scene is easy to explain: IOTA makes a promise that most consider irretrievable, and makes design decisions that may seem odd, even outlandish to outsiders.

The promise, in a slightly exaggerated way, goes like this: The Internet of Things (IoT) will soon consist of 20, or 30, or 80 billion devices, all of which are online. IOTA will be the backbone of this economy of these machines — the platform that allows things to receive and transfer money and data. Because IOTA can — in theory —scale “almost infinitely,” thanks to its “Tangle” network structure. In any case, it claims to scale significantly better than blockchain-based cryptocurrencies.

Anyone who takes even a superficial look at the scalability of Bitcoin and Ethereum knows that this promise of high scalability is bold.

IOTA’s technical core, the Tangle, eliminates blocks — and thus the latency that arises when the blocks are distributed across the network. Blocks are always clumps of data. At the same time, IOTA creates so-called “snapshots” through “Milestones,” whereby the nodes can throw away all transactions that took place before the snapshots. This saves hard disk space and makes starting a new node easier.

Other factors in scaling are apparently not improved. Bandwidth, CPU, and memory remain limiting factors. Here are the same, if not more restrictive, limitations also found in blockchains.

Accordingly, many distrust the IOTA promise. It has — maybe — solved two problems. But parts of the community sometimes act as if IOTA is the complete answer to scalability.

Several design decisions at IOTA aggravate this mistrust: First, IOTA uses a post-quantum cryptography algorithm. That’s fine, but this innovation increases the size of transactions by nearly ten times. What needs 160 bytes for Bitcoin, now needs 1.6 kilobytes for IOTA. If you want to scale, that seems highly counterproductive.

On the other hand, IOTA has neither a mining reward nor transaction fees. The system does not provide a reward for “honest” network nodes. And that is one of the key innovations of Bitcoin.

Finally, IOTA uses a ternary rather than a binary system. The developers are convinced that this is necessary and correct, but many doubt it because the present day software infrastructure relies on binary systems. You do not necessarily make life easier with a ternary system.

To sum it up, IOTA wants to impose an insane number of transactions on the full nodes, increasing the size of transactions tenfold — but deprives the nodes of their rewards.

But, honestly? How should this work? The answer could be enlightening.

Industrial Nodes

Why would someone operate an IOTA node? The demands on the CPU and the Internet connection are, sooner or later, enormous. For what reasons should someone invest in the infrastructure needed for the backbone of the machine economy?

If you ask such questions in the IOTA community, you will get, at least on occasion, insightful suggestions. The nodes are, it is said, voluntarily operated by large companies. The incentive is not a block reward or fee income, but the ability to send and receive many free microtransactions.

If you follow this perspective, it suddenly makes some sense. IOTA’s assumption is that there will be a need for machines to pay each other with microtransactions for data and services. That it is profitable for large companies — Bosch, VW, Telekom — to invest in a large node in order to participate in this machine economy.

If corporations want such a system, IOTA might be a good choice, and it’s perhaps the best that exists today. Technology companies do not want to risk being involved in an arms race of mining farms with Chinese miners. They also do not want to earn money by creating new blocks or through network fees. The corporations do not want to become a bank — but simply send free microtransactions. And that is what IOTA offers and makes it different from other cryptocurrencies.

Seen this way, another design decision suddenly makes more sense: Bandwidth and CPU are very limiting factors in a network of hobby nodes. But if you assume industrial nodes, bandwidth and CPU are no problem up to a very high scale. The first limiting factors will be the block latency — the time it takes for one block to reach all other miners — and the synchronization of new nodes. So the tangle and the snapshots become important assets in scaling.

Not Very Impressive Performance

How does IOTA work in practice? Again, members of the wider crypto community are stunned. The gap between promise and reality is large.

It starts with the fact that IOTA is not completely decentralized. The tangle works by always confirming two previous transactions before confirming a new transaction. The network, the developers promise, will work better the higher the load. Under a low load — much lik now — the Tangle by itself cannot provide effective protection against double spends. Plus, there is a so-called 34 percent attack.

This is where the “Coo” comes in, the central coordinator run by the IOTA Foundation. It writes so-called “milestone” records and in IOTA wallets only those transactions are considered confirmed that are referenced by the Coo. A member of the IOTA community, exaggerates slightly, by describing this as follows: “The Coo makes IOTA a simple blockchain.”

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Although the Coo was promised to be shut down in the future,  IOTA still drives with central support wheels. The Tangle needs a centralized blockchain of milestones to work reliably. And even with this help, the performance of the system has been rather sub-average as of late.

I have been watching IOTA now and then since about mid-September. Since then, there have been several incidents in which IOTA was temporarily down or almost down. Just in late December, the Coo was temporarily canceled. In the meantime, IOTA has been extremely slow, there are dozens of reports of transactions not arriving, and of exchanges/wallets where credit is missing or not displayed, exchanges/wallets that do not connect, full nodes that can not sync the tangle, and more. Some members of the IOTA community have disclosed to me that they are “inwardly scoffing at criticism” and are anything but satisfied with the developers.

I myself recently tried IOTA’s light exchanges/wallets and had no problems with transactions, transfers with amounts well below one cent went through without a hitch, which is impressive But maybe I was lucky too, and I was told which Full Node to connect to.

A node operator has told me that a public IOTA full node also eats massive amounts of resources, and the client performs rather poorly.

“Every computer game and chat program is more economical.”

Other node operators say that a normal node does not need a lot of resources. It’s hard to say exactly what is going on, as IOTA’s information policy is rather sub-optimal, critical questions like the FUD are being chatted away, and the thing itself is rather opaque to non-insiders.

Some in the IOTA community say that the client is poorly implemented, others indicate that there are spam attacks, and still more say that the relation between light and full nodes has gotten out of hand. According to various sources, IOTA currently processes about 0.1 to 1 real transactions per second. If the Tangle struggles with this low volume — how can it ever become the backbone of the Internet of Things?

Beta, Very Beta

IOTA is, the developers emphasize again and again, an experimental technology. Both they and the community firmly believe that the tangle scales better than a blockchain. But they also realize that everything is still very beta.

The developers are very honest and transparent about it. One finds the hint in many places. Often, unfortunately, with the remark, “just like Bitcoin and Ethereum.”

Yes, Bitcoin experienced its only major bug so far in 2010 (when a bug allowed a miner to mine billions of bitcoins), and Ethereum also ran with centralized support wheels in the frontier phase (about the first year). But neither Bitcoin nor Ethereum are as “beta” as IOTA at the moment. And no other cryptocurrency does so much differently as IOTA. The Tangle, the snapshots, the quantum-proof signatures, the tertiary instead of the binary system — IOTA quasi-reinvents cryptocurrencies and leaves no stone unturned.

Bitcoin and Ethereum were fortunate enough to survive their childhood illnesses at relatively low prices. Neither currency was worth anything like IOTA in the early, sensitive phases, which is currently putting well over $ 10 billion into the market cap and has already been worth more than $ 15 billion. These sums are different, and one may justifiably ask if the performance of IOTA has recently met this market value.

But can you really blame developers for what the markets do? Clearly, the high price of IOTA is a blessing for the community. But when it comes to leading IOTA through tricky waters, it may very well be a curse.

Solutions

Bitcoin and Ethereum are, of course, also beta. But IOTA is much more nascent. Currently, the system cannot do what it promises to do.

But solutions are already planned for every problem. The coordinator will be abolished, a new client will improve performance, Flash Channels will bring transactions and data off chain, the Nelson protocol will eliminate spam waves.

Some of these things are already in alpha mode and being tested live on the network, others are planned for the future. The pace of new innovations presented by the IOTA developers is high. In late 2017, the new client was released, and according to community reports, IOTA since then runs like clockwork.

You could catch up on each new innovation for a long time and write an article. Of particular interest to the author is the topic of spam attacks. The following section will highlight a particular aspect of IOTA, which may be the key to understanding the charm of this system.

Spam

For cryptocurrencies, spam is a kind of DoS — an overload attack. One sends meaningless transactions endlessly  in order to increase the load on the nodes in a decentralized network. All cryptocurrencies combat spam through a limit (such as blocksize) and/or base fees.

IOTA does not. There is neither a limit nor a fee. But still, transactions are not free. You have to pay with your CPU time. Two actions are required to send a transaction in IOTA: First, you have to confirm two previous transactions, second, you need to make a “work proof” by solving a cryptographic puzzle. At the core, it does exactly the same thing as the bitcoin miners. You could say that IOTA completely decentralized mining.

Spamming the Tangle costs CPU resources. And plenty of it. To send a single transaction, a typical computer takes about 10 seconds, an old laptop sometimes several minutes. If there is a spam attack, the nodes can arbitrarily increase the difficulty of the required work proof.

Because with a Tangle, unlike a Blockchain, it does not matter who has confirmed a transaction. Transactions are often confirmed by many subsequent transactions, and when the Tangle runs hot, one can increase the difficulty of protecting its node from too many other transactions.

It’s complicated, abstract and very different than blockchains. But if you think about it, the Tangle should be able to fend off spam attacks with no fees. The victims of this solution are the small devices that are supposed to use IOTA to send or sell data. They should not really have the resources to do the work proof. The solution would be either a special chip — developed by the IOTA Foundation — that is added to the devices, or a design that the devices forward their transactions to a master mode, which will then provide the work evidence and feed the transactions into the network.

The more exciting question here is: Why are there spam waves, though? Reportedly, IOTA is currently groaning under continuing spam attacks that are fueling the nodes’ hunger for resources and making the whole network much slower. If you have confirmed a transaction in ten minutes, you are currently delighted. Yet,how can that be, despite the required proof of work?

The answer lie in the myriad invalid transactions. Someone gives a false proof of work and floods the Tangle. All nodes transfer these transactions, and someone making a new transaction has to validate and discard the bad work evidence. In this way you can spam IOTA endlessly for close to zero costs.

With the Nelson Protocol, the IOTA developers want to ward off the spam waves. The second layer innovation is designed to allow nodes to blacklist other nodes when posting false work evidence. Or something like it, and more. More on this subject after the author has further investigated the protocol.

Summary

There is still a lot to say about IOTA. The author has been leaked statistics from the node load, things about snapshots, milestones, and so on, explaining what the differences between ternary and binary logic are, and about the mathematics that will make Tangle safe beyond a certain threshold of transaction numbers.

In the end, many questions remain open, perhaps more than are answered. The author still has doubts whether IOTA can meet the self-imposed claims, and continue to think that various questionable design decisions have already been made. I also think that both the IOTA developers and the community often use a very unprofessional tone when someone is critical of the project, and they are too unreflective about their own promises.

Nevertheless, IOTA — and this is perhaps the author’s own conclusion  — is a fascinating technology. The concept of bringing PoW from the miners to the transactions has a charm. To write it off completely because it is still in an experimental stage, as J. Ratcliff probably does, is not fair. There is a very vibrant community, delighted with the technology of Tangles.

We can rest assured that the IOTA story will continue deep into the crypto future.

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