IOTA: The Currency of Skynet

In the upcoming weeks, I plan to write a short summary of the things I am most excited about in the current crypto space. These articles will be split to answer two questions:

• Vision: What they want to achieve in the long run? How much potential they have?
• Concerns: What risks does their project have? Why might they are not be able to realize their vision?

Also, in the end, I present a short summary of the main points and some useful links.

Recently IOTA had to endure a strong wave of FUD (Fear, Uncertainty, and Doubt), mainly because of their beef with MIT Media Lab, but they have a vision, they have the money, and most importantly they are gathering the team to deliver.

Vision

The Tangle

Although IOTA indeed has a distributed ledger and its own currency, it’s not based on blockchain. Instead, they created a new type of storage for transactions what they call the Tangle. It enables a feeless transaction system, without miners.

The ‘ultimate platform’, Ethereum has been smashed by the CryptoKitties. Sending a Bitcoin transaction costs you 40 bucks. As rumors say, Bitcoin mining consumes more electricity than Ireland. Now it’s a widely accepted view in the crypto community that the Proof-of-Work consensus which requires miners and incentives (comes from Satoshi Nakamoto, inventor of Bitcoin) is outdated. Eventually, these blockchain systems will switch to the Proof-of-Stake protocol, which makes transactions cheaper and faster.

Source

It’s clear to see that the Proof-of-Stake protocol will take over in 2018, but the IOTA team has gone one step further. They threw the blockchain into the trash, instead they store the transactions in a directed acyclic graph what they call the Tangle. Skipping the details here, this practically means that in order to send your tokens, you have to verify two previous transactions. Like with Bitcoin, this is equivalent to solving cryptographic puzzles, but computationally these are way more efficient. Also with this structure, as the Tangle gets bigger it will be faster. This is the exact opposite how the blockchain-based solutions behave.

The Tangle (Source)

Machine Economy

Futurist speakers have been parroting for a long time about the Internet of Things and how it will be integrated into our everyday life. As now you can buy a fridge with built-in Wi-Fi in any store, and even the lamps are becoming smart, this is not the future anymore. Still waiting for smart condoms though.

The IOTA Foundation is pushing very aggressively to be the platform of the soon-to-come machine economy. Smart charging your electronic car, powering your smart home, tracking down that suspicious Chinese food from your grocery… They want to be the currency of Skynet.

Recently, in a Reddit AMA, they revealed that financial organizations are also interested in using the Tangle. Given that how the price of XRP, the currency of the Ripple company skyrocketed from some announcements of financial pilots, this could be huge on its own.

Data Marketplace

What can be monetized, will be monetized. The Data Marketplace is the game changer concept here. Imagine that there is a promising health-care startup. They want to sell a service which provides you with suggestions to keep that nasty blood pressure in place. Needless to say, based on machine learning algorithms. But how do they start, if they do not have the data to train their algorithms? They could go to the IOTA marketplace, and buy this data from people, who earn their living by giving out their health measurements. Today’s development is powered by data. Why would you give it away for free, when you could make some money out of it?

I think this is huge, but it’s more important that huge companies think this too. The marketplace is now ready for testing. With the feedback of companies like Bosch, Deutsche Telekom, Fujitsu, and Microsoft, they will release case studies and Proof of Concept applications connected to the Data Market.

Participants of IOTA Marketplace (Source)

Concerns

The IOTA project is very young, ambitious and full of great concepts, but they haven’t delivered much yet. The Tangle is functional, but it is still centralized, the wallet is a pain in the ass and the team hasn’t got used to being in the limelight.

The address reuse

Lots of people lost their money because they misused the system. The way IOTA is designed, your address changes anytime when you make an outgoing transaction. Without technical details, this means that if you send x IOTAs to an address that already had an outgoing transaction, those x IOTAs are vulnerable to brute-force attacks. When the IOTA foundation realized this issue, they had to face a difficult decision:

• Do nothing and watch as IOTA users get their money stolen
• Freeze the exposed addresses by moving their content from the exposed addresses to themselves, and later give it back to the users.

They eventually chose the second option.

IOTA address usage explained (Source)

Though I think they chose wisely, if people can mess up something so easily, it is a clear sign of a serious flaw. The developers promised to solve this issue very soon, also the new wallet should come out in a few days. Until then, I wouldn’t recommend using the IOTA wallet.

IOTA is Centralized

It is, for now. A 34% attack can happen, when an attacker possesses 34% of the total processing power, allowing her to create malicious transactions. IOTA relies on a Coordinator until it gets big enough to reduce the chance of a 34% attack practically to zero. Here is how a developer explained the role of the Coordinator:

Every minute the Coordinator makes a normal transaction with its signature on it, and we call these Milestones. […] When you want to know if a transaction is verified, you find the newest Milestone and you see if it indirectly verifies your transaction (i.e it verifies your transaction, or if verifies a transaction that verifies your transaction, or if it verifies a transaction that verifies a transaction that verifies your transaction, etc). The reason that the Milestones exist is because if you just picked any random transaction, there’s the possibility that the node you’re connected to is malicious and is trying to trick you into verifying its transactions.

The Coordinator is not open source, so we can’t be sure how it exactly does this.

MIT Media Lab

A dirty piece this is. MIT Media Lab claimed they found cryptographic vulnerabilities in IOTA. They also argued with another MIT spin-off company, MIT Technology Review when they praised IOTA. That was the point when IOTA Foundation had enough and released a 4-part response to address the concerns of MIT Media Lab. Hard to follow, that’s for sure.

In short, MIT Media Lab found a “practical” vulnerability in the Curl-P hashing function. From what I understand is that IOTA intentionally put this vulnerability into the function as a copy-protection mechanism. This ‘flaw’ is then handled by the Coordinator, which is not open source, so the Media Lab did not have the knowledge to measure the effect of this flaw. Despite the fact that Sergey, creator of the Curl-P, privately explained this to them several times, they stuck to their original claims in future articles.

Copy protection

All in all, the debate between IOTA and the MIT Media Lab was originally based around a copy protection mechanism. Personally, I think the developers know what they are doing, but I have to agree with Vitalik Buterin, founder of Etherum in one thing (full comment here):

I would make a personal appeal to IOTA to not fear copycats. Ethereum did not. You have the opportunity to create a strong brand around specializing in DAG blockchain tech, especially if you can welcome existing researchers in such algorithms. If you have this, then copycats will only be a shadow of what you can accomplish.

Controversial personalities

Founders of IOTA do not hold back on social media when somebody needs to be roasted. It’s not hard to find such catfights, but my favorite is the clash of David Sønstebø & Sergey Ivancheglo against Ethereum developer Nick Johnson. You might have figured out by now that there is no love lost between Ethereum and IOTA.

Dominik Scheiner is widely known for swearing at conferences. I actually don’t give a damn if they are arrogant or not, as long as they want to move the world forward, but for some people, this is a red flag.

TL;DR

IOTA might be the most ambitious crypto project of all, which is a huge claim given that even the shittiest shitcoin wants to disrupt a whole industry.

Currently, there are lots of valid technical concerns, but let’s not forget that even relatively(!) mature platforms like Ethereum has its difficulties. I think they have realized they wanted too much too soon: they took Vitalik’s advise and recently hired mathematical experts from numerous fields to answer open questions.

Most people forget that this is still a project in a very early phase; nobody claimed that IOTA is production ready yet. Being the pioneers of using DAG as the distributed ledger, it is expected that they will face major problems, just like Ethereum has enough on its plate with their scalability issue. Questions can be answered, difficulties can be solved.

What they promise is huge, and if they only manage to deliver the half of it, IOTA will be here to stay. This is a decisive year for IOTA.