What is IOTA Cryptocurrency? A Beginner’s Guide to the IoT Crypto Coin

What is IOTA?

IOTA stands for Internet of Things Application, and it’s a new crypto technology that facilitates transactions between devices on the Internet of Things (IoT). IOTA addresses the transaction fees and scalability issues of blockchain technologies by getting rid of the block and chain. Instead, in order to submit a transaction to the IOTA ledger, you must verify two other previous transactions.

This method of verification means there’s no central ledger, and there’s no need for miners to power the network.

As the devices on the network randomly verify each other’s transactions, they build consensus through the web of connections between transactions. In cryptography, this type of verification is known as Directed Acyclic Graph (DAG), but the creators of IOTA call it the Tangle.

Since computing power in the Tangle grows as the network grows, IOTA is promising free, fast transactions. It’s also designed to process micro-payments and payments between machines, facilitating a whole machine-to-machine micro-economy.

While IOTA makes big promises, the technology is still new, and it’s not without its detractors. In this article, we’ll look at how IOTA works, what it might be used for, some of the criticisms it’s facing, and whether you should invest in the token.

Technical Details

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

 

The Challenge: Machine to Machine Payments

The Internet of Things is already a major force in the world economy.

Companies are creating cameras, sensors, and other devices to monitor conditions in factories, shipping lanes, farms, stores, and homes. According to research from Gartner, IoT grew to 8.4 billion devices in 2017, and the outlook for future growth is exponential.

IOTA’s vision is to be the platform for machine-to-machine (M2M) transactions. IOTA’s founders started the company after working in the IoT industry, and they argue that in order for IoT to be most useful, the devices in the network need to share and allocate resources efficiently.

This means the devices need to be able to purchase more electricity, bandwidth, storage, or data when they need it, and sell those resources when they don’t need them.

Even on a small network, this means potentially dozens of transactions per second as devices communicate and use resources. With so many transactions, at such a small, fast scale, IOTA’s founders believe blockchain technology isn’t adequate for IoT applications.

Blockchain networks struggle with scalability (as we’re seeing with Bitcoin’s SegWit2x fork debate), and they often resort to charging fees in order for miners to include your transaction in a block sooner. IOTA aims to solve both scalability and fees with its new network so that billions of IoT devices can use it.

Scalability: IOTA Is Not a Blockchain Technology

Since IOTA plans to have billions of transacting nodes on its network once fully implemented, the founders needed to design a network where the processing power grows as nodes on the network grow. To that end, they designed The Tangle, a consensus-building system where the device submitting a new transaction must first verify two other transactions on the network. For each verification, the verifier performs a small proof of work linking the transactions into the overall Tangle.

The Tangle means that consensus is reached based on a web of verifications. Each transaction is linked to the two transactions it verified, and over time it will be linked to future transactions that verify it. This solves the scalability problem as the network no longer relies on a central blockchain.

Every new device on the network contributes its computing power to the network when it submits a transaction. The Tangle also eliminates block mining, and all the coins on IOTA were created at the genesis of the network.

Transaction Fees: How IOTA is Free to Use

Since you contribute computing power to the network when you submit a transaction, the cost of using the network is only as great as the electricity needed to verify two other transactions on IOTA. The Tangle allows IOTA to operate fee-free, and it means the network is even more distributed than a blockchain network. With blockchain, the network is distributed among the miners on the blockchain. With the Tangle, the network is distributed among every participating node on the network.

The absence of fees is critical to IOTA’s mission of servicing IoT devices. These devices will often be transacting at fractions of a penny with high frequency. Any fees charged on such small transactions would make micropayments unfeasible. In order to serve as the backbone for the M2M economy, IOTA has to be free to use.

34% Attacks & The Coordinator

Those familiar with blockchain technology know that a blockchain is vulnerable if one party has 51% of the computing power on the network. At that point, it’s theoretically possible for a bad actor to create and verify false transactions. Since IOTA uses the Tangle to verify its transactions, it’s theoretically vulnerable if one party controls only 34% (greater than 1/3) of the network’s computing power.

The difficulty of implementing a 34% attack against the IOTA tangle shouldn’t be underestimated. Since the Tangle is a complicated web of nodes and transactions, you’d still have to discover the nest of the network before you could leverage your 34% advantage.

Early in IOTA’s implementation is when it’s most vulnerable to such an attack. Since the early network is small, with fewer nodes, it’s easier for an attacker to accumulate a 34% share of the network. To combat this threat, IOTA is using a “Coordinator” in its early implementation, to ensure the early Tangle isn’t compromised.

While it’s a necessary step for security early on, and IOTA plans to eliminate the Coordinator once the network is strong enough, it does mean that the platform and currency are currently centralized, and you have to trust the IOTA Foundation if you decide to invest.

Proprietary Technologies

The IOTA team has received praise and criticism for its use of new technologies in developing the platform. Originally, IOTA used its own hash function known as Curl for all proof of work and key generation. While the proof of work hashing has since changed to a more traditional SHA-3 protocol, IOTA still uses the proprietary Curl hashing function for other applications on the platform.

IOTA also implements trinary logic, instead of binary. Using processors with three states could mean advantages in efficiency and overall computing power. IOTA is working closely with JINN Labs on hardware for IoT devices that are capable of computing in trinary.

Concerns, Weaknesses, & Critiques

A number of crypto technology experts have questioned IOTA’s viability as a platform. Implementing so many new technologies at once, it’s difficult to believe that there are no weaknesses or flaws in IOTA’s implementation. The technology behind IOTA simply hasn’t been tested enough to know how it will work at scale, and how it will hold up to attacks. This overall lack of testing and peer review is the biggest concern for IOTA’s detractors.

Earlier this year, MIT and Boston University made waves when they published a scathing paper outlining critical security flaws in the Curl hashing function. The idea that you can “roll your own crypto” is strongly looked down upon in the community and among experts. Good cryptography takes years to develop, test, and review. The SHA-3 hashing algorithm took nine years to complete, and experts have shown concern that IOTA’s developers chose to try to write their own cryptography instead of using established standards. These concerns have led to a fairly unstable price for the IOTA token.

It’s easy to forget, however, that every new technology goes through technical hurdles and growing pains. Bitcoin had the Mt. Gox scandal, and Ethereum weathered the DAO hack. While the technology and implementation behind IOTA will certainly change, potential investors should consider the overall architecture of the IOTA cryptocurrency and the history of the development team when considering whether to invest.

Conclusions

The IOTA cryptocurrency uses technology that has a lot of potential.

If successful, the Tangle could be a viable competitor to blockchain technology for transactions, and the internet of things market for microtransactions will only continue to grow. Since IOTA is cutting edge, however, its technology hasn’t been thoroughly tested. In the end, your decision to buy IOTA should be based on thorough research about the technology and its founders. IOTA’s tangle could be the next big advance in cryptography, but investing in an untested technology is inherently risky, so do your research.

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Bennett Garner

Bennett Garner is a technology writer with experience in cryptocurrency, blockchain, cloud computing, and cybersecurity.