Bitcoin has problems, this company thinks it can solve them

Blockchain is booming in both scope and hype. The technology, known as a distributed ledger, powers bitcoin, the world’s biggest cryptocurrency, and is quickly expanding into diverse industries, from entertainment to NGOs. Success breeds competition, however, and a company called IOTA is just one of several that claims to have created the “next-generation blockchain.” 

Berlin-based IOTA was founded in 2015 to provide secure payments and communications between machines on the Internet of Things (IoT).

IOTA doesn’t run on blockchain at all but a new ledger called the “tangle,” which is growing fast in popularity. While blockchain runs on a single chain of “blocks,” the tangle operates across multiple structures, designed to overcome many of blockchain’s challenges, such as scalability. At this stage, whether it’s the better distributed ledger is hard to determine.

The Internet of Things

Simply put, the IoT is the idea that smart devices can connect over the internet, can talk to us, and to each other. A common example is that your “smart fridge” will be able to text you to say that you’ve run out of milk. Gartner, an American research company, predicted last year that 20.4 billion devices will be connected to the internet by 2020. 

The crux of IOTA is to catalyze a machine-to-machine economy where devices can transact with one another. In order to do that, however, they need currencies to transact with. IOTA has its own cryptocurrency called MIOTA, which, at the time of writing, is the 11th largest cryptocurrency with a market capitalization of around $7 billion (Coin Market Cap).

How does the ‘tangle’ work?

“If we discuss semantics, IOTA is not really a blockchain,” Dominik Schiener, co-founder of IOTA, told WikiTribune“At its core, it’s a distributed ledger that further improves upon the blockchain architecture by no longer using a blockchain, and instead using the tangle to achieve consensus and secure transactions.

“It is still based on the same principles though: it’s a decentralized, peer-to-peer network, with an append-only database that makes data immutable through consensus among the network participants,” said Schiener. 

The tangle – based on a mathematical concept – is a structure made of nodes (where data is stored) and edges (connections between the nodes). Unlike blockchain, it has no blocks that need to be mined, but instead verifies a transaction by validating a minimum of two previous transactions. 

A visual comparison between Tangle and Blockchain, via Steemit.

Comparison to blockchain

Blockchain still faces technical challenges that block it from reaching mass adoption, which IOTA says it can overcome:

Scalability: Blockchain is limited in its ability to scale. The more people use it the slower it gets, as each block is capped at a certain size. Blockchain’s scaling issue is why bitcoin “forked” – a change to the protocol to create two separate versions – on August 1, 2017. A dissatisfied faction of the bitcoin community then created bitcoin cash (Ars Technica) because of conflict over increasing bitcoin’s block size from 1mb to a higher value. IOTA, however, can in theory “infinitely scale” with the tangle, because the more people use it, the more it grows.

Fees: New bitcoins get added to the blockchain through a process called “mining,” which involves solving cryptographic puzzles. Fees are high because miners need to be rewarded for their effort and also because of high demand. The tangle, however, doesn’t involve mining, which means no miners and no transaction fees.

As a result, all of IOTA’s coins (MIOTA) already exist. Mining is also a way to verify transactions, but the tangle verifies two random transactions in the network before it can itself be validated. In that sense, every user in the network is a miner.

Micro-transactions: Because bitcoin is notorious for high fees, micro-transactions are difficult because you can end up paying fees higher than the transaction itself. Since IOTA gets rid of fees altogether, micro (less than US$1) and even nano-transactions (less than US one cent) become possible. The increase in smart devices could mean a huge increase in micro-transactions, which IOTA aims to facilitate through the tangle.

But IOTA may not be secure

IOTA’s implementation of the tangle has garnered skepticism from the tech community (Medium) for two main reasons. First, it designed its own protocol, defying the golden rule of cryptography: don’t roll your own. The second is that it uses a trinary system, which makes little sense when all modern hardware is binary.

Vitalik Buterin, co-founder of Ethereum, said on Reddit that he “strongly disagrees with many of IOTA’s technical decisions” and that he finds “some of their behavior deeply egregious to the point where it goes beyond mere negligence.”

When asked why IOTA made these potentially jeopardizing choices, co-founder Schiener said that “when it comes to the IoT, energy and computation efficiency are everything, and trinary-encoding achieves exactly that, which is why we’re betting on its future in IoT.

“Because we are at the cutting edge of technology, we decided to develop a new trinary hash function [its custom protocol] – which was Curl-P,” he said. “While the circumstances around the responsible disclosure and hash collision have been debated, the main reason why we went down the path of developing our own hash function is largely due to practical problems.”

A cryptographic hash function is mainly used to verify the authenticity of a piece of data, and most have gone through years of proper testing and peer reviews. IOTA’s custom design hasn’t, and MIT Media Lab criticized it in 2017 after discovering “serious weakness” in its design, which IOTA has recently responded to in a comprehensive series of articles.

Last week, IOTA users reported a loss of around $4 million from their wallets because of seeds (basically a backup pin to recover wallets) generated from unofficial sites and fraudulent accounts. IOTA itself has no official website to generate a seed, a decision that prompted some experts to say that the crisis was of its own “devising.”

nic on Twitter

There are no bad users, only bad UX. Forcing individuals to manually generate an 81-char seed consisting of a-z + 9 is fairly arduous, to say the least.

Best not to crypto your own way

IOTA is controversial in the crypto-community.

Some of its design decisions have made it one of the most harshly criticized projects, which, to its credit, it has always defended through public discussions with users.

Many of these critiques stem from the concern that IOTA is pushing above its weight with the hope of servicing the IoT, which remains in the conceptual phase.

In comparison to blockchain, which has had some time to develop, IOTA is still in an experimental, beta mode. It’s also developing amid public mania surrounding cryptocurrencies, government crackdowns, and widespread hype that is putting pressure on the crypto-space as a whole.

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