The IoT Token with No Transaction Fees
IOTA is currently ranked 7th largest cryptocurrency by Market Cap at $11B (twice as much as all ICOs at launch as of now), making IOTA one of the most exciting platforms of 2018. This article will explain what makes IOTA so special, and describe its market, value proposition, and the details of their token.
2018 will be the most important year yet for Cryptocurrencies. A lot of the newest platforms are trying to solve the greatest problems with the Blockchain technology, and IOTA is one of them. Their ICO occurred in November of 2015. IOTA’s team decided to create their own Cryptocurrency technology instead of using or patching the Blockchain.
IOTA is a cryptocurrency that has no transaction fees and requires no miners in order to process transactions. It does, however, require some computational power to submit a transaction, making it perfect for machines to use as a currency and distributed communication protocol for the Internet of Things “IoT”.
The main purpose of IOTA is to solve some of the major problems with Blockchain technology, the main one being that the bigger the Blockchain (such as Bitcoin), the slower, more expensive, and also more restricting it is to actually transfer funds.
Another issue with the Blockchain is size, as more and more Blocks are added, the longer the Blockchain gets, and therefore the less amount of computers are able to mine it. Right now BTC is over 150GB long, and so is ETH. If this size increased tenfold, very few computers would be able to mine it at all. Making them relatively centralized (the top 2 Bitcoin mining pools own about 56% of hashing power).
Blockchain vs IOTA
One of the main differentiators of this technology versus the Blockchain is what IOTA calls “The Tangle”. It’s a new method of storing transactions through a mechanism called Directed Acyclic Graph or “DAG”.
As a Blockchain network grows, the amount of transactions per second does not. Which leads to congestion. The other issue is that the more miners (computers) are on the network, the more expensive it is to cover the transaction fees associated to the electricity bill of those miners.
This means that if 10 or a million people transact BTC or ETH, the network will be able to process only a specific amount of transactions per Block. This is a natural limitation because BTC fundamental property is that the difficulty to solve a block has to remain stable at 10 minutes per Block (1 hour on the original BTC white paper). If you add more computers to the system, the algorithm makes the problem harder to enable the complete computational power to solve it in 10 minutes. The reason for this is that if the block can be solved too quickly, it is vulnerable to attacks and hacks, if it is solved too slowly then very few transactions are authorized minute or hour.
As more computers mine BTC, it becomes increasingly expensive to transfer funds, since computers need to be rewarded more than their electricity bill. Each BTC transaction currently consumes over 250kWh, and as much as 32TWh for the whole network, enough to power the households of over of 5 million people every day.
Bitcoin solved this through transaction fees. Due to the amount of computer power that Bitcoin is consuming, the transaction fees have grown considerably. The current average transaction fee for Bitcoin is $25 USD. So if you were planning on sending $50 USD in BTC to a friend, your friend will likely receive less than half of this amount of BTC on their end. These fees act as an incentive to keep the network growing, and miners honest.
IOTA — In Theory
In IOTA every user is both submitting and verifying transactions. So every user contributes both to verification, and security. Transactions are verified multiple times by different users, as it keeps getting approvals, the degree of confidence for that transaction increases.
Another interesting aspect of the Tangle is that, instead of being deterministic like the Blockchain (X amount of transactions per second) it is instead probabilistic. This means that some transactions may be confirmed faster than others, since the network picks two random transactions to be verified. Instead of Bitcoin, which always takes ~10 minutes (plus congestion).
IOTA — In Practice
No Cryptocurrency delivers perfectly in what it promises. IOTA is not different. In order for IOTA to work as a decentralized cryptocurrency it still has to solve a lot of challenges and technical difficulties that still are yet to be demonstrated will work.
IOTA currently faces criticisms in:
- Conflict Resolution Vulnerabilities
- Malicious Attackers (Majority attack)
- The Coordinator
- Parasitic Chains
- Cryptography Best Practices
- Ternary Processor concerns
Note: We elaborated on all of these issues on the “Technical Details” section of this article after the conclusion.
All of the tokens for IOTA were generated at the same time through a “genesis” address. These tokens were originally given to a founder address. No tokens will be generated in the future, and no reward will be given through mining (details for this on our The Tangle section above). In a sense, all IOTA tokens have already generated (all 2.779 x 10¹⁵ of them). Many exchanges trade IOTA, which is as of January 2nd, 2018 is valued at about $4 USD per token.
This is a 10 fold increase in price in the last 4 months.
IOTA is not designed to come equipped with a Turing complete programming language, like ETH and therefore does not have smart contracts, nor will it be likely that other startups create ICOs based completely off their platform.
The idea is that due to the fact that IOTA is ”transaction-free” (explained below), machines can use their computing power + connection to the internet to be able to use IOTA as a decentralized communication system. On top of that machines could use that as a currency to transfer funds for goods or services that they are distributing, such as sensor data, control, or management of machines. Thus IOTA is specialized for low-power cpus that are primarily used to run IoT hardware.
From the perspective of a node, a transaction looks like the following:
- Node chooses 2 other transactions that it will verify (every node approves 2 transactions)
- The node verifies both transactions after demonstrating there are no conflicts
- Nodes have to solve a cryptographic problem, similar to BTC in order to verify transactions (Finding some nonce to get the right hash)
Essentially the transaction “fee” is verifying other transactions, thus the system guarantees everyone has an incentive to verify, since its needed to transfer. The system also makes sure there’s always computers verifying transactions, since each node has to verify twice as many transactions as its requesting. So there’s always twice as many verifications as there are transactions.
IOTA Raised $434,000 USD during their ICO which started on November 24th 2015 until December 20th 2015. Despite $434K USD looking like a small amount by today’s standards, this was an impressive achievement.
By late 2015 ICOs were still relatively new and people were not as confident about them as they are today. That said their current cap, as of January 2nd 2018 is over $11B USD. Almost doubling over the last 4 months, so the currency is definitely doing well. It is also the 7th largest Cryptocurrency by Market Cap, which is calculated by multiplying the number of tokens by the value of each token. This shows the total amount of money that has been spent in USD buying the currency.
Use of Funds
Their white paper (v1.3) does not mention Use of Funds. This is mostly due to the fact that in 2015 this was a much less common practice, but in exchange we get 28 pages of a much more technical white paper.
However, we can assume, from the relatively small amount of money raised (~$420K USD) that the funds allocated from the platform went directly into the formation and development of the IOTA Foundation and IOTA cryptocurrency.
As previously mentioned, the total amount of IOTA tokens is always stable. This means that the owners were able to choose how many tokens would be sold and how many they would be able to keep.
The owners of IOTA are thought to own roughly 50% of all the available tokens. This is a controversial topic, since this means they roughly own about $5 Billion USD. Which is an incredibly high amount of pay for any one group of people on a new and relatively unproven technology.
The IOTA has been officially traded by different exchanges for over a year (depending on the exchange, some started trading it much more recently). Since its inception the price and excitement for the currency have both grown exponentially. There’s also been over one hundred million transactions on the network already. The volume is expected to continue growing exponentially.
That said, there are a lot of challenges as mentioned in the section about deploying IOTA in practice. How they transition away from the coordinator and the ways of mitigating the probabilistic attacks that require the coordinator in the first place are all still pending technical and social issues before IOTA can begin to think of successful deployment. Furthermore, IOTA’s success is closely tied to the IoT industry’s adoption of it, and that is not an insignificant business challenge on its own.
IOTA is designed and maintained by the IOTA foundation. Its founders are David Sønstebø, and mathematician Serguei Popov. David a Norwegian national who has experience in IoT through a processor manufacturing company he started in 2014. Dr. Popov is a mathematician at Moscow University. The rest of the team from IOTA has a wide range of skills in Software and Investment. The pictures found on the foundation’s website have a lot of consistency issues (resolution, color, type of picture, etc.) which makes it look much less legitimate, specially for a foundation worth over $6B USD.
The team at the IOTA Foundation also has a series of veterans that have worked in building projects on top of cryptocurrencies since 2011, they also have a Harvard professor, some Mathematicians, and an increasing series of high profile professors vouching for the network. This project has a very robust team.
How to Buy IOTA
Not all exchanges trade IOTA, and many only taken BTC or ETH in exchange of it, so you may have to use multiple exchanges in order to get some. The following are the only exchanges that take IOTA:
IOTA’s price is around $4 USD per token at the moment. Different jurisdictions may have different requirements about where and how to purchase the token. Coinbase does not currently support the purchase of IOTA, also if you are in Canada, it may take a couple of extra steps, here’s a good article on that.
How to hold IOTA
Detailed instructions to hold IOTA on a cold wallet can be found on their Github.
Holding IOTA for cold storage requires the user to download NodeJS, the Electron Framework, and Web Package Manager, Bower.
IOTA is an incredibly ambitious and interesting project. If it’s successful, it would be one of the first cryptocurrencies to not only lower the price of Bitcoin, but maybe to render it useless. Due to a large amount of question marks, in technical feasibility, vulnerabilities, and the lack of an open-source coordinator, and that’s a big IF.
The IoT aspect of IOTA is also quite interesting. Giving machines the ability to trade information, services, and goods for income is an interesting proposition using a transaction-free network.
We also have some reservations about the ternary processor system of IOTA. Why not choose a system based on binary? Could this be due to the fact that their CEO,David Sønstebø, HAS experience developing this type of processors, and therefore some bias may exist? We are not sure.
This is still one of the most interesting cryptocurrencies of today, with an almost limitless potential. We wish IOTA token and their team best of luck as they continue to dominate the increasingly-competitive cryptocurrency market.
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Being a newer cryptocurrency not based on the Blockchain protocol brings its own host of problems for IOTA, many of them being unique to DAG-based verification protocols and some completely unique to IOTA’s implementation of their white paper. We shall first talk about the DAG-based protocol verification and how we can encounter many problems with it, and then talk about IOTA specifically.
DAG and conflict resolution of transactions
The main attacks in a tangle based system are undoubtedly those based on the tip selection, and addressing how new nodes are approved if there is a conflict. The white paper addresses three of these DAG based attacks however they lack in detail in many areas, we will provide a layman’s explanation of these areas which may lose some technical accuracy but will make the main ideas behind attacks and why certain IOTA features are more vulnerable easier to understand.
- Malicious Subtangle generation: Unfortunately here IOTA falls to the same mitigation issues as a 51% attack on a simple Blockchain. If an attacker is successful in deploying a reasonable percentage of computing power to generate a subtangle (for Tange this is 40%), then the entire IOTA network will approve the dishonest transaction
- Parasitic Chain attacks: IOTA tries to mitigate this attack by using something called an “MCMC” tip selection algorithm.However, it is possible for IOTA to still allow dishonest transactions to be verified (with a very low probability). If IOTA does become large enough a non-insignificant number of transactions that are essentially cheating people out of their money will be approved! This is something one definitely does not want in a financial ledger
- Splitting attacks and IOTA’s coordinator: The final DAG based attack is one in which a malicious actor partitions the tangle into two sub-tangles. This happens by injecting many malicious transactions that are unapproved by the tips and then carefully balancing the two subtangles to eventually approve one of their malicious transactions. Therefore allowing the attacker to double spend their funds. This too is susceptible to the earlier probability argument, and IOTA has no way to guarantee that such transactions are actually legitimate / illegitimate with 100% certainty.
Finally in order to prevent all these attacks being used effectively when the network is smaller (and 51% type attacks are much easier to deploy), IOTA has something called a coordinator that essentially issues trusted transactions without having the same bounds of trust as other random node’s trusted transactions. It is run by the IOTA foundation
Problems with a coordinator, bad best-practices and “centralizing” trust
Unfortunately the use of a coordinator places a lot of trust in the IOTA foundation with their essentially “guaranteed” coordinator transactions, and acts as a way to centralize trust in the network. While this is purely a social problem, there are some more serious technical problems with IOTA’s specific implementation of the coordinator and white paper in general which we explain now.
Never roll your own crypto
Some of us at Best of ICOs have worked in the security industry, specifically in cryptography. We learned that one of the most important principles in cryptographic security is to never write and deploy your own cryptographic hashing functions, before they have been reviewed for their security and accuracy by an objective third party.
Unfortunately IOTA chose to do so and their hashing function called curl, was found to have serious vulnerabilities (vulnerable to differential cryptanalysis, an attack executable by even an amatuer cryptoanalyst) which could allow a more advanced version of the splitting attack to be deployed very easily. While the IOTA team claims the coordinator could have mitigated this, the general cryptographic community’s consensus is that it could still have caused major damage. Even the introduction of the coordinator comes with its own problems.
The coordinator is closed source
Since currently transactions issued through the coordinator are guaranteed verified and unless a transaction can extend those from the coordinator they are not guaranteed to be verified, this provides a very large attack vector on the entire IOTA network: compromising the coordinator’s private key. Since the coordinator is closed source there is no way to verify how secure its private keys are, and furthermore the above violation of never roll your own crypto leads the staff at best of icos to believe that best practices aren’t very important to the IOTA developers, leading to serious concerns about a bad actor getting a hold of the private keys and being able to take over the entire network without ever having to amass large computing power.
Network Hashing power and a focused attacker
Finally, a premise of IOTA is that the devices in the IoT industry should be able to generate enough hashing power to deter any attackers when the network gets large enough. However this is very dangerous thinking since the sporadic transactions on an IoT network with devices having low GHz clock speeds with optimizations for battery life would not be able to outpace a committed constant attacker with specialized attack hardware. It is safe to say that a well-financed committed attacker could easily acquire those resources to outpace the computation power of the entire IoT industry’s devices in 2018 and believing otherwise is wishful thinking.
For some mathematical simplification reasons, the creators of IOTA developed the software in a way that is optimized for ternary processors. Instead of the usual 0s and 1s. These processors have 3 inputs: 0,1,-1. This has confused many, as the amount of those processors available in the wild is miniscule compared to binary processors.
Over a hundred million transactions have already been finished through the IOTA network. Making it clear that the cryptocurrency is starting to claim quite a respectable volume. If everything goes as planned, as the network increases, so will its speed. So there shouldn’t be a backlog issue as we keep seeing their transactions rising. IOTA’s Github includes a series of instructions on how to use and deploy IOTA for IoT.
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