IOTA is the token used on the IOTA distributed ledger. The IOTA distributed ledger (protocol) is the first open source distributed ledger built to eventually serve and enable the Internet of Things, including peer-to-peer, peer-to-machine, and machine-to-machine interactions. IOTA’s distributed ledger is not a pure blockchain, but a comparable technology called the Tangle. The Tangle is a form of directed acyclic graph that helps solve the paradox inherent to blockchains—increasing centralization, transaction times, and fees as validation rewards grow. The Tangle does not group transactions into a chain of blocks; it is a flow of individual transactions tangled together. IOTA’s Tangle purports to hold many more advantages, efficiencies, and use cases compared to traditional blockchains.
The nonprofit IOTA Foundation was founded on November 3, 2017 by Dominik Schiener and David Sønstebø. The IOTA Foundation aims to research and secure IOTA’s foundational protocol layer, develop software for the community, promote IOTA’s technology through education, and standardize and govern the adoption of the Internet of Things. Three separate boards--Governing, Supervisory, and Advisory--govern the IOTA Foundation. The IOTA Foundation is funded through donations and grants form governments, companies, and private individuals.
The IOTA founders launched a crowdsale in 2015 to help fund initial development. They raised more than $500,000 in Bitcoin and did not reserve or allocate a treasury fund to any founders or developers. The token supply was distributed to the crowdsale buyers. The IOTA Foundation currently has 52 team members and 12 advisors, most of whom boast strong backgrounds in computer science. Recently, the IOTA Foundation has been hiring new employees.
The purpose of the IOTA token is to facilitate transfers of funds and data over the IOTA distributed ledger. Users can currently use the IOTA token for transactional settlement and data integrity. IOTA is especially useful because its transactions are feeless and fast, enabling frictionless microtransactions Some potential future use cases include real-time streaming payment services, data history tracking, computational resource sharing, open-source oracles, smart contracts, and more. IOTA also aims to scale and be decentralized much better than traditional blockchains.
Although IOTA does not have a miner incentive to run a full node due to its feature of lacking mining and fees, it does offer some incentives for operation and usage of full nodes with all transactions.
Some incentives for running a full node include warm glow, personal investment, and utility. Warm glow as an incentive occurs when someone wants to help further the IOTA ecosystem out of a sense of altruism. Personal investment as an incentive occurs when someone holds a large amount of IOTA tokens and wants to support the IOTA distributed ledger so that their investment will increase in value. Finally, utility as an incentive occurs when someone has great demand for cheap currency-like transactions. For example, someone wanting to bypass Western Union’s high fees can send remittances with IOTA for free. In the future, machines can communicate and transfer funds among themselves without fees by using IOTA tokens. Unlike traditional blockchains, where the miner’s monetary incentive anchors the ledger, IOTA’s utility helps create its own incentives because people and machines have a massive monetary incentive to use a feeless, fast distributed ledger. Essentially, the main incentive for someone to validate other transactions is the ability to create and use transactions themselves.
CONSENSUS ALGORITHM & SCALABILITY
IOTA currently uses a coordinator as its consensus algorithm because it does not yet have enough proof-of-work to repel potential dedicated attackers. The coordinator is a special centralized node that cannot confiscate users’ funds or perform attacks without the rest of the network’s knowledge. The coordinator creates a milestone transaction every two minutes that itself approves sent transactions in order to confirm them. The IOTA Foundation plans to eventually remove the coordinator, in a move called coordicide, and fully transition the IOTA ledger into a consensus mechanism of random walk Markov chain Monte Carlo and proof-of-work. A tiny amount of proof-of-work is required to send transactions, which helps protect from spam. Since each new incoming transaction must approve 2 tips, the random walk Markov chain Monte Carlo is the method used to select and validate new transactions.
IOTA purports to be infinitely scalable, as it does not use a blockchain and run into blockchain’s scalability problem. In theory, IOTA’s Tangle grows stronger with each new transaction, so as new transactions are created and spent, the distributed ledger’s ability to process transactions increases. Because IOTA transactions must directly and indirectly approve other transactions, the number of transactions that can be processed in a time period increases with the number of confirmed transactions. IOTA’s scalability is limited by current bandwidth technology and hardware.
The IOTA coordinator can process up to 1,500 transactions per second currently. IOTA purports to allow processing of unlimited transactions per second in the future, after the coordinator is removed and economic clustering.
Technically, IOTA transaction fees cost around $0.0000000388916 per proof-of-work. Effectively, the transaction fee is free.
A bad actor can spam the IOTA network with countless transactions, as transaction fees are effectively free. However, because transactions require proof-of-work, spamming billions of transactions might well cost the attacker a non-negligible amount of money. Nodes can also perform a local snapshot to clear spam data. In addition, the spam transactions would actually cause the Tangle to grow bigger and more resilient against spam attacks.
There is a negligible chance of a 51% attack on IOTA because the Tangle does not have miners and thus, hashing power is not the only resource needed to perform an attack on the network.
IOTA is an open source project, which means that anyone can audit its code. It has several public repositories on GitHub for everyone to see. The IOTA Foundation is a private company, but they offer transparency through regular blog posts and news updates. IOTA also has a sizable social media presence with 50,000 Facebook followers, 112,000 Reddit subscribers, and 117,000 Twitter followers.
IOTA currently has few competitors who also offer a directed acyclic graph besides Nanocurrency. In the crypto space, IOTA mostly positions itself against first and second-generation blockchains like Bitcoin, Ethereum, etc. A “Chinese IOTA” named IoT Chain has a tiny market capitalization of $8 million and the major headwinds of Chinese regulations and the lack of first-mover advantage. It is arguable that IOTA has intense centralized competition from tech giants like Google, IBM, and Amazon, who are also researching the Internet of Things. IOTA currently boasts the 12th largest cryptocurrency market capitalization of over $916 million, far larger than Nanocurrency’s.
The current market size of the Internet of Things is small at $235 billion. However, analysts project it will more than double by 2021 to $520 billion. The value add of IOTA in the Internet of Things is cheap and seamless machine-to-machine communication.
ADOPTION FRICTION & EASE OF USE
IOTA has an immense first-mover advantage as the first and most well-known directed acyclic graph network. It has also successfully forged numerous research partnerships with industry giants including Bosch, Volkswagen, Fujitsu, Microsoft, Accenture, and more.
Only users need to use IOTA to see efficiency. Users can be individuals, firms, universities, nonprofits, or machines.
IOTA has a stellar reputation thanks to its transparent communication, active social media presence, passionate community, and quality partnerships. Because it is focusing on how to impact and capture market share in a nascent industry, IOTA has lots of room to grow as the Internet of Things grows over time.
It is relatively easy for an enterprise to set up and run an IOTA node or use IOTA in transactions. Anyone can download and install wallet software, buy IOTA on an exchange like Binance, and spend the IOTA cheaply and quickly.
Current Status and Roadmap
The IOTA Foundation does not offer a concrete roadmap timeline, but it is currently researching numerous topics to improve the IOTA distributed ledger, including coordicide, spam prevention and detection, automatic peer discovery, economic incentives, attack analysis, and more. On engineering, the IOTA Foundation is finishing its Trinity wallet software and the Hub that simplifies exchange integration of IOTA tokens. It is also working on Qubic, a project that aims to enable oracles, smart contracts, and outsourced computing on the Tangle. The IOTA roadmap is available on the website and blog at https://www.iota.org/research/roadmap and https://blog.iota.org/whats-next-current-iota-r-d-projects-eeb8cc03adb5. IOTA’s current biggest challenge is safely removing the coordinator while maintaining consensus and scalability.