Home Altcoins Cryptocurrency Guide: What is IOTA?

Cryptocurrency Guide: What is IOTA?


IOTA is an acronym for “Internet of Things Application”. The IOTA network could end up being a groundbreaker in the cryptocurrency world as it is one of a handful of new coins that doesn’t depend on blockchain technology, and has several improvements over the blockchain technology that powers most cryptocurrencies and the networks they run on.

As an example, IOTA addresses the following concerns with blockchain technology:
– Ever increasing transaction fees
– Scalability issues
– The need for miners to power the network

IOTA has addressed these concerns by eliminating the blockchain that relies on miners, and has replaced it with something they are calling “The Tangle”, which relies on all participants to verify transactions. In the IOTA Tangle, anyone who submits a transaction to the ledger must verify two previous transactions, thus removing miners from the equation as every single network participant becomes responsible for the proof of work in the network.

While IOTA is calling this The Tangle, this type of verification is already known in cryptography and is called Directed Acyclic Graph or DAG. The random verification of transactions creates a web of connections that builds consensus and verifies transactions are valid. Here’s a Tangle Visualizer to give you an idea of how the IOTA network is meant to grow.

IOTA promises free and fast transactions due to the computing power of the Tangle network growing with each new transaction. This feature will allow for processing of micro-payments, ultimately facilitating a machine-to-machine economy as individual components of entire networks can use IOTA to buy and sell resources needed to run effectively.

IOTA certainly offers great promise, but the technology remains very new, and the Tangle network and IOTA are not without their opponents. Below you can learn more about how IOTA works, why some have criticized the project, and whether it’s worth it to invest in IOTA coins.

IOTA Technical Details

  • Launched: June 11, 2016
  • Total coin supply: 2,779,530,283,277,761 (also quoted as 2,779,530,283 MIOTA, where MIOTA refers to million-IOTA)
  • Algorithm: Proof of Work (PoW) using a version of SHA-3
  • Block time/reward: No blocks, verify two transactions to submit your own transaction

Solving the Machine to Machine Payment Challenge

The Internet of Things has rapidly become ingrained in the world’s economy, both at the consumer and industrial levels. New devices that use a variety of sensors and cameras to monitor conditions in homes, factories, shipments, stores and many other places come online every day. Research firm Gartner forecasts 20 billion IoT devices by 2020 (excluding smartphones, tablets, and computers).

IOTA seeks to be the platform of choice for all of the machine-to-machine transactions that will arise from all these billions of connected devices. The founders of IOTA believe that for the Internet of Things to provide the greatest benefits, all of these networked devices need to be able to allocate and share their resources effectively.

In real-world terms this means that each device will need to purchase what they need when they need it, whether that means bandwidth, data, storage, electricity, or some other resource. And they also need to be able to sell those resources when they don’t need them.

On a small-ish network this could amount to dozens of transactions per second, and a large network could see thousands of transactions occurring each second. With this volume of transactions the blockchain isn’t a suitable solution, at least not with the current scalability issues we’ve seen. Blockchain also fails for IoT due to the cost of transactions. IOTA wants to solve both the scalability and transaction cost challenges with a new technology.

Scalability in IOTA

Because the number of IoT devices continues to grow so rapidly, IOTA’s founders figured they would need a network that encompasses billions of transacting nodes. This meant using a technology that allowed processing power to grow along with the number of nodes in the network. Otherwise everything would grind to a halt as the blockchain becomes overwhelmed with new transactions.

With that in mind they designed The Tangle, a decentralized consensus building network that requires any new transaction to verify two existing transactions on the network. Each verification includes a small proof-of-work that serves to link all the transactions into the existing Tangle.

This means that in The Tangle consensus is reached based on this ever-growing web of verifications, rather than on a linear blockchain. This solves the scalability problem of blockchain as the network processing power grows with each new transaction and verification.

You see, once a transaction is submitted, the device that submitted it becomes a node in the network, contributing its processing power to the network. This eliminates mining as each new device increases the computing power of the network, without the need for block mining. Because of this, all of the IOTA coins were created at the genesis of the network.

IOTA Transaction Fees

Because every node is contributing computing power to the network when submitting a transaction, the cost for each transaction is only as great as the electricity needed to verify the two other transactions. This eliminates the need for transaction fees, and makes the IOTA network far more distributed in comparison to a blockchain network. A blockchain network is only as distributed as the number of miners participating in verifying transactions at any given time. The Tangle is distributed among every node in its network, which will grow into the billions as more devices become nodes.

This lack of fees is key to any IoT network. Some devices will be creating frequent transactions, often for just fractions of a cent. If fees were charged for each of these transactions it would make the micropayment framework unusable. IOTA must be fee-free if it is to be successful as a means of transacting in the machine-to-machine economy.

34% Attacks & The Coordinator

Those who have studied blockchain technology are likely familiar with the concept of a 51% attack. This is a failing that makes the blockchain vulnerable to a group of miners gaining control of the blockchain by having more than 50% of the computing or hashing power. This would allow them to freeze transaction, and more critically to actually reverse transactions, leading to the possibility of them double-spending coins.

IOTA has a similar vulnerability that makes it possible for a bad actor to control the network if they control more than 33% of the computing power on the network. This is known as a 34% attack. Controlling more than 33% of the computing power would be no easy task however. The Tangle is a convoluted web of nodes and transactions, and is not freely discoverable. Anyone initiating a 34% attack would first have to discover the entire network before they could take advantage of 34% control.

As The Tangle grows it becomes increasingly less vulnerable to a 34% attack. In order to avoid this threat in the early days of the network the IOTA foundation is using an actor known as Coordinator to circumvent any potential compromise of the network.

The Coordinator is a necessary step in the early stages of the network to ensure security, but it has also caused some detractors to criticize and oppose IOTA on the grounds that the Coordinator makes the network and the IOTA coin centralized. IOTA has plans to eliminate the Coordinator, but no timeline other than saying it will be removed when the network is strong enough on its own to avoid a 34% attack. In theory this means that the Coordinator itself could begin a 34% attack on the network, but the IOTA Foundation would have no logical reason to do so. Even so, you should keep this in mind if you’re thinking of investing in IOTA.

IOTA Proprietary Technology

IOTA has also been criticized (and praised) for their use of new technology in the development of The Tangle. One such technology is their own hashing function known as Curl, which was used for proof-of-work and key generation on the network. The Curl hash function was highly criticized as it breaks one of the cardinal rules of cryptography – Don’t roll your own crypto. The Curl hash function, being new, had not been tested and vetted sufficiently to prove it would be secure. And indeed an MIT Media Lab group found a serious vulnerability in Curl this past July. IOTA patched the vulnerability, and has since changed to an SHA-3 protocol for proof of work, but the proprietary Curl functions is still used for other applications on the platform.

IOTA has also implemented the use of ternary logic rather than the traditional binary logic. This could lead to great advantages in computing power and efficiencies for the network. Currently IOTA and JINN Labs are working together to develop ternary processors for use in IoT hardware devices.

IOTA Concerns and Critiques

There have been several crypto technology experts that have questioned whether IOTA is viable as a technology and as a platform. They see the implementation of so many new and untested technologies in one platform as not only questionable, but even dangerous. They argue that it is almost impossible that there are no serious flaws or weaknesses in the IOTA implementation. Until the Coordinator is turned off there is no way to know how well IOTA would hold up to attacks, and how it will perform at scale. An overall lack of testing and peer review has been the biggest objection from IOTA critics.

Still, we must remember that many coins have had growing pains. There was Mt Gox for Bitcoin, and the DAO attack for Ethereum, yet both survived and have come back even stronger. There is every chance that IOTA will also have some huge hurdle to pass in the future, but with an active development team it doesn’t have to be something that kills the project and its groundbreaking technology.

In Conclusion

There appears to be great potential in the IOTA technology, and it could change the cryptocurrency landscape in the long term if it works as intended. Certainly it is positioned to become the leader in the Internet of Things as it already holds the #7 position of market cap size among all coins listed on CoinMarketCap.com. And considering the impressive growth being seen in IoT devices, IOTA could become far more valuable than anyone can currently predict. On the other hand, a stumble now could crush IOTA, at least in the next few years, when alt-coins are getting prepared to explode as a group.

Just remember that while there is great potential in IOTA, there is also risk as the technology hasn’t been fully tested and proven. Do your own research before deciding if this is a technology you wish to invest in, and always keep your eye on developments within the IOTA Foundation.



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