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What is IOTA? | IOTA Supporting an IoT Machine-to-Machine Economy

from AChainOfBlocks 5 years ago 0 0 1389

By 2025, it is estimated that the number of connected devices in use will exceed 75 billion. The amount of data that we upload and download using these devices is massive, and growing exponentially. IOTA’s vision is to enable all connected devices through verification of truth and transactional settlements. These transactions will incentivize devices to make available their properties and data in real time. This gives birth to entirely new general purpose applications and value chains. We all know, our data is only as valuable as it is valid. Distributed Ledger is the perfect technology for ensuring truth and validity across a network.

What is IOTA?

This article aims to address the question, What is IOTA? We will take a deep dive into how IOTA’s technology is different than blockchain, and what advantages come along with it. Anytime, I look at a new decentralized platform, the first question is always, What problem does it solve? With regard to IOTA, this quote from their white paper, gets us moving in the right direction to answering that question.

The rise and success of Bitcoin during the last six years proved that blockchain technology has real-world value. However, this technology also has a number of drawbacks that prevent it from being used as a generic platform for cryptocurrencies across the globe. One notable drawback is the concept of a transaction fee for transactions of any value. The importance of micropayments will increase in the rapidly developing IoT industry, and paying a fee that is larger than the amount of value being transferred is not logical.

History Behind IOTA

In 2015, IOTA was founded by David Sonstebo, Sergey Ivancheglo, Dominik Schiener, and Dr. Serguei Popov. IOTA has a native coin MIOTA but also uses other different units to measure value (more about this later). IOTA has a fixed supply of 2,779,530,283,277,761 coins. On the IOTA platform, a focus has been placed on transaction speed along with the elimination of fees. This makes IOTA a prime technology to be used in conjunction with the Internet of Things (IoT). There is no mining with IOTA, and there will never be additional coins created, this also eliminates involuntary inflation.

3 Things to Know About this 3rd Generation Crypto

IOTA, like Cardano, is a 3rd Generation cryptocurrency. It implements a distributed ledger that introduces the concept of Directed Acyclic Graphs instead of traditional Blockchain. I’ll dive deeper into exactly what that all means, but first I want to explain 3 important things to know about IOTA.

What does it mean for a system to be Scalable? It is the capability of a system, network, or process to handle an increasing amount of work. In simple terms, this means the IOTA network can handle a growing volume of work without slowing down or stopping the network. In fact, the way the network is built, the more people that use IOTA the faster it gets. This method is contradictory to many other cryptos, where the network slows down as more transactions as added (more on this to come).

With most traditional blockchain technologies, users of the system and validators of the system are competing against one another. The User wants a good customer experience. This experience includes a cheap or free transaction that is fast and secure. The Validator is looking for the highest possible reward as compensation for the use of their computing power to mine or validate transactions. This situation creates conflict for traditional methods like Proof of Work and Proof of Stake. Without sufficient fees, miners have no incentive to operate costly mining equipment. And without mining, blockchain does not work. At a high level, on the IOTA network, every new transaction serves as the validation of 2 previous transactions. We will get deeper into how this works later in the article.

The IoT is the interconnection for all connected devices. The number of connected devices can only be estimated at any given time, however, we do know the number is growing very rapidly. IOTA technology is preparing for what will be known as a Machine-to-Machine Economy. An economy where connected smart devices will communicate with each other, settle payment, and trade data in a completely autonomous way. IOTA is positioning itself as the basic infrastructure, for IoT data and value exchange, where transactions can occur instantly and securely in a decentralized environment.

Now that we understand 3 important concepts about IOTA, it’s also important to know that IOTA is not another Blockchain technology. IOTA uses a technology called Tangle which is based on a mathematical concept called Directed Acyclic Graphs (or DAG). DAG is essentially a storage system that allows individual items to link to one another. Directed means that all links between 2 items always have a set and specified direction. Acyclic means that it is impossible to create loops inside the structure.

Tangle Terminology

In order to understand how a Tangle works, it is important to understand some basics terms. In the diagram below of a simple Tangle, each square represents a transaction and is also called a Site. Each Site contains the transaction details: Sender, Receiver, Amount, etc. Each confirmed site will also have connections to at least 2 other Sites, these connections are called Edges. Edges are what validate the transactions.

In the above diagram, we see a majority of the sites have at least 2 edges pointing to them. These Sites are transactions that have been confirmed by the network. Any site that does not have 2 Edges pointing to it is an unconfirmed transaction.

As we take a look at the larger Tangle below. Near the end of the Tangle (circled in Red) we have Sites that do not have 2 or more incoming

Edges. These sites are new transactions that are waiting to be confirmed, we call these Sites ‘Tips of the Tangle’

New Transactions

Now that we have some of the basic terminologies down, let’s examine how we can add a new transaction to the Tangle. New Transactions attach to at least one of the tips of the Tangle, an algorithm selects 2 tips at random. There is a validation process that occurs to make sure the transactions being validated are not conflicting with previous transactions (this prevents double-spending). If one of the selected tips is not a valid transaction it is ignored and discarded and a new tip is selected at random. If everything checks out how it should, the new transaction is attached to the 2 tips it validated. By doing this, a new transaction is added to the Tangle and 2 pending transactions are confirmed. Additionally, the new transaction becomes a new tip of Tangle waiting to be verified in the exact same manner.

This technique is what makes IOTA incredibly scalable. The fact that every new transaction verifies 2 previous transactions means that IOTA actually gets faster as it is used more. This is the exact opposite of many current blockchain platforms.

Like Speed, Love Trust

We all want a network that runs fast, and runs faster as more transactions are sent to it, but how can we know we can trust it? With traditional blockchain transactions, it is common practice to use the number of confirmations to know whether or not a block should be trusted. IOTA has a similar but improved technique, each Site is assigned an Initial or Own Weight. This number signifies how much “Work” has been done to verify this transaction. The higher the weight signifies more work has been done to prove this transaction. The Own Weight can be 1, 3, 6, 9, etc. (3^n). The specifics on how this weight is calculated will be discussed in future articles. Each Site also has a Cumulative Weight, this is the sum of its own weight plus the sum of the weight of all transactions that have approved this transaction.

This might sound confusing, but really it is quite simple. The Diagram below assumes that each site has an initial weight of 1. The bigger number in the center of the square is the cumulative weight for the Site which is the sum of all Sites that link to it. The older transactions generally have the higher cumulative weight, which makes sense because they have been validated many times over.

Untangling the Tangle

A New Transaction will go through 3 Steps. The First step is signing the transaction with the Private Key of the device, this is done automatically by the device. The IOTA Tangle uses the Winternitz Signature, this is a hash based cryptography which is used instead of Elliptic Curve Cryptography (ECC). The Winternitz hash-based signatures produce much faster processing times, this is a key reason Tangle is a leader in transaction speed per second.

The Second step is the Tip Selection, your transaction uses a selected algorithm to confirm 2 random previous transactions. This does take a little bit of computing power, the device initiating the transaction reconciles the new transaction against other transactions until a specific authenticity score is reached.

The Third step is for the transaction to enter the Tangle and become a new Tip. Once a transaction confirms 2 previous transactions it will enter the Tangle as a Tip and wait to be confirmed by future transactions.

Tangle vs Blockchain

Now that we have an understanding of how the Tangle works, let’s compare it with traditional blockchain. The Tangle solves 2 core issues of traditional blockchain technology, Scalability, and Mining.

IOTA provides a network where transactions per second increase with each new transaction, solving one of the core scalability issues. In theory, there is no limit to the number of transactions per second DAG can handle.

Transaction speed is only one part of the scalability. Another large, and sometimes forgotten factor of scalability is data storage. With blockchain, you need a full copy of the entire chain before you can begin adding new transactions. At the time of this article, the Bitcoin blockchain is approaching 200 GB of storage and growing exponentially. Storing 200 GB of data is not something that all devices can do, especially when talking about IoT devices.

The Tangle of IOTA is much lighter weight than a traditional blockchain. Creating and verifying transactions can be done by only having or accessing a small part of the Tangle, you don’t need to store the entire thing. This can be done by achieving a high enough cumulative score when adding a new transaction and verifying 2 additional. Transactions don’t need to verify my transaction against every transaction on the network, verifying against some of the older transactions will provide enough authenticity to validate.

No Miners = No Fees

With Proof of Work and Proof of Stake, there is mining/validating of transactions. Miners will only spend their resources mining if there is a greater reimbursement than the cost spent to mine. Since IOTA has no mining, there are obviously no mining fees, this makes IOTA completely free to use.

Is It Actually Useful?

In order to address this, we really need to have an understanding of the purpose of IOTA. The purpose of IOTA is to maintain, facilitate, and provide an incentive in a machine-to-machine economy. The transfer of value and information using a protocol that allows for scalable, near instant, and secure transactions.

IOTA is built to keep up with ever-changing technology and the progression of the Internet of Things. The need to provide an underlying system infrastructure to support the IoT will soon surface and IOTA will be there to fill the gap.

Time will tell if it gains the mass adoption to give it a real chance to be a useful tool in our everyday life.

Details of the IOTA Supply

Understanding the supply of IOTA can get a little confusing, therefore I will break it down simply with the chart below.

1 IOTA is the smallest unit of this cryptocurrency, the only unit less than 1 IOTA is 0. This is different than bitcoin, which has the smallest value of 1 Satoshi, or 0.0000001 Bitcoin.

This is how the different unit of measures work with IOTA:

IOTA = 2,779,530,283,277,761 ( 2.7 Quadrillion)

KIOTA = 2,779,530,283,277 (2.7 Trillion)

MIOTA = 2,779,530,283 (2.7 Billion )

GIOTA = 2,779,530 (2.7 Million )

TIOTA = 2779 (27 Hundred)

1 KIOTA = 1000 IOTAS

1 MIOTA = 1000 KIOTAS OR 1 Million IOTAS

1 GIOTA = 1000 MIOTAS OR 1 Billion IOTAS

1 TIOTA = 1000 GIOTAS OR 1 Trillion IOTAS

For everyday purposes at the time of writing this article MIOTA is the most common unit for IOTA. If you look up pricing for IOTA, you will generally see the price of 1 MIOTA.

ICO Details

IOTA’s ICO raised $434,000 USD. The ICO started on November 24th, 2015, and continued until December 20th, 2015. By present-day ICO standards, $434K looks like a small amount. During 2015, this was an impressive ICO total.

At the time of this article, IOTA is the number 12 Cryptocurrency, with a market cap of $1.6 Billion Dollars.

Conclusion

As I have hinted in many previous articles, I feel as though the next few years are not about what currency will win out. Currency is just the first use case for this new technology. The coming years will tell us which distributed ledger protocol will gain mass adoption. IOTA has some great features and benefits over traditional blockchain technology, due to this, I feel that this will definitely be a protocol that flourishes over the next few years.

I think the technology makes a lot of sense and solves some core issue of previous blockchain technologies. As a result, you will see this technology start to gain mass adoption along with an increase in the use of IoT devices.

At the time of writing this article, MIOTA is trading at .58 cents USD. Bitcoin dominance is up to 53.4%.

I hope you have found this deep dive into IOTA useful and informative. Please feel free to comment below with any questions or suggestions for future articles.