Introduction to IOTA
In the past, people needed to go to stores, call toll-free numbers or send faxes to buy things. Then, it became possible to order things online, through TVs and by talking to smart devices such as Amazon Echo.
When Amazon introduced the first version of Amazon Echo in 2014, many people thought that Echo was very weird. They just couldn’t imagine that someone would buy a device with a microphone always on, listening to voices next to it and waiting for commands.
The rapid growth of the popularity of Amazon Echo and Amazon Alexa, an electronic artificial intelligence-based personal assistant from Amazon, showed that these people were wrong. In 2017, Jeff Bezos, the CEO of Amazon, reported that his company has sold over twenty million devices with Alexa functionality.
Over the years, Amazon has been improving both the technology and the design of its smart home products and today there are hundreds of applications and Alexa-compatible smart products available on the market, including baby monitors, lamps that turn on, off and dim the lights, speakers that increase and decrease volume and change music stations, refrigerators that order food for you, and more. Using Alexa, it is possible to order a taxi, buy items from Amazon, listen to the music, and more.
Because of the growing popularity of Amazon Echo, Amazon Alexa, and other smart devices, the competition has joined the race. Google introduced Google Home smart speaker to the marketplace and, just like Amazon, started adding new features to the device and products to the line of the smart devices. Apple has created HomePod. Samsung has been working on smart refrigerators and Family Hub technology for smart homes.
The vision of IOTA founders
Looking at all the available technology and functionality, it is not hard to imagine a future in which various devices would be communicating with each other directly. For example, a fridge could be ordering food on its own. A smart assistant could be ordering a taxi at a certain time of day according to notes in a calendar. Your car could be paying someone to bring products to it and place them in the trunk while you are at work so that you can drive home without stopping by a store and so on.
This is where cryptocurrency called IOTA comes into play. The vision of the creators of IOTA was that IOTA would become a currency for transactions between machines. David Sonstebo, Sergey Popov, Sergey Invancheglo and Dominik Schiener started working on IOTA in 2015.
They introduced a beta-version of the network to the market in 2015 and started trading IOTA currency in 2016. The company has attracted several high-profile investors. As of early 2018, IOTA worked with Deutsche Telecom, Fujitsu, and Microsoft. In Japan, the company had been a part of blockchain accelerator together with Sony, Honda, and Toyota.
When creating IOTA, its founders said that they believed in blockchain projects and applications for special purposes. The goal of Iota is to enable transactions between machines that would allow machines to not only buy products and services, which is something many machines can already do today, but also pay other machines for performing various tasks and using the computational power and storage capacity of other electronic devices.
To date, major blockchain projects such as Bitcoin and Ethereum have proven the viability of blockchain technology but they did not prove to be suitable for a huge amount of micro transactions happening simultaneously.
There are two reasons why Bitcoin is not a good choice for transactions between machines. The first reason is the way fees work on the Bitcoin network. To understand why Bitcoin network has fees, you need to understand the idea behind the structure of Bitcoin.
21 Million Bitcoins
Bitcoin network can only have 21 million bitcoins in existence. Satoshi Nakamoto has designed the network this way to avoid the issues of inflation and currency manipulations. Nakamoto launched Bitcoin in 2009, a year after the peak of the world financial crisis. During the crisis, many countries were looking to make their products and services more competitive. Sometimes, they were accomplishing this goal by what is known as quantitative easing.
In simple terms, quantitative easing is printing more money. When a government prints more money, the money in circulation loses a part of its value, which means that for some time products and services become cheaper.
For example, let’s say that you trade three pens with your friend on a regular basis. You and your friend created pen currency and there are three pen dollars in circulation. This means that each pen is worth one pen dollar. Then, your friend decides to print more pen dollars and instead of three pen dollars, there are now six pen dollars in circulation.
However, the increased amount of money didn’t do anything to the number of pens. There are still three pens available, which means that the price of a pen would become fifty cents instead of one dollar. Because the price of a pen went down, the same one dollar as before can now buy two pens instead of one.
This is exactly what happens when governments engage in quantitative easing. They print more money and it becomes possible to buy more products and services with that money. Suddenly, products and services created in country A become cheaper than they are in country B. People and organizations start buying in country A instead of country B. This is one of the ways how governments can make products and services of their countries competitive.
The problem with quantitative easing is that it can be very dangerous to an economy and it can’t continue going on for a long time. If a pen is worth one dollar today, fifty cents tomorrow and twenty-five cents the day after tomorrow, sooner or later it would become unprofitable for pen manufacturers to keep making the pens. Pen manufacturers would go out of business. When this happens to a lot of different businesses, the economy collapses.
The possibility of an economy collapsing is what Satoshi Nakamoto wanted to avoid when he created Bitcoin. This is the reason why the number of Bitcoins is capped at 21 million. Nobody could add more bitcoins into circulation.
Adding Bitcoins to circulation on the Bitcoin Network
Miners on the Bitcoin network compile transactions into the blocks of the Bitcoin blockchain. Bitcoin software created by Nakamoto aims to create a block of the blockchain every 10 minutes.
As of the writing of this article, Bitcoin blockchain had a little over 500,000 blocks. You can see the number of blocks and all the details about the blocks in real time by visiting https://blockchain.info/
Bitcoin network gives rewards for creating blocks of Bitcoin blockchain. The rewards serve as an incentive to miners for processing the transactions on the network. The reward per block for the first 210,000 blocks of the blockchain was 50 Bitcoins. Then, it split in half and turned into 25 Bitcoins for the next 210,000 blocks. Currently, the reward for mining a block is 12.5 bitcoins.
When the network creates another 210,000 blocks, the reward will become 6.25 bitcoins. This is estimated to happen in June of 2020. You can see the estimated time left for the reward splitting in half again at http://www.bitcoinblockhalf.com/
For the Bitcoin network to keep operating, it would still need to have miners compiling transactions on the network into blockchain blocks. Why would miners keep doing the work once the Bitcoin network creates 21 million Bitcoins? Nakamoto’s answer was that they will keep working because they will be paid by the fees from the transactions that occur on the Bitcoin network.
When you send funds in Bitcoins, you can include a fee with your transaction. If you do, 100% of the fee would go to the miner who includes your transaction in the block that the miner creates.
On the Bitcoin network, fees are not mandatory. Users sending funds do not have to include fees with their transactions. At the same time, miners also do not have to include a transaction in a block and can choose what transactions they include in the blocks they mine.
Up until mid-2017, the system worked fine. Some users included fees with their transactions, some didn’t. Miners would still include the transactions in their blocks because they needed to create blocks to get rewards from the network.
However, when the popularity of Bitcoin increased significantly in 2017, the number of transactions on the network has also increased significantly. For example, on May 13, 2016, the Bitcoin network processed 211,280 transactions. Just a year later, on June 10, 2017, this number almost doubled compared to the previous year. The number was 369,098.
(You can see the number of daily transactions on the Bitcoin network here: https://blockchain.info/charts/n-transactions. You can see a graph with the total number of transactions on the network here: https://blockchain.info/charts/ntransactions-total).
Because of such increase, the miners could choose which transactions to include first and which transactions could wait. Since miners get 100% of the transaction fees, they were processing transactions with the highest fees first. This means that if you wanted your transaction to be processed quickly, you need to include a fee.
Because of this, in 2017 the average fee on the Bitcoin blockchain skyrocketed. It went from USD$0.314 on 2016/12/31 to USD$19.198 on 2017/11/12 (you can see a graph with average daily
Bitcoin transaction fee here: https://bitinfocharts.com/comparison/bitcointransactionfees.html).
Obviously, such a variation in fee prices wouldn’t work if the goal was to use blockchain for transactions between machines without having to ask humans for confirmations every single time. Imagine your car paying a fee of 30 cents to download a song and play it to you while you are driving to work on one day and a fee of $20 for the same operation on a different day. This is one of the issues that IOTA currency solves.
The second reason why Bitcoin is not a good fit for transactions between machines is scalability of the Bitcoin network. The network aims to create a block of the Bitcoin blockchain every 10 minutes. The size of the block is limited to 1 megabyte. In practical term, it means that the network can only process so many transactions. This number varies from 3 to 7 transactions per second. This number is simply not big enough if the Internet of Things was to start using a decentralized network for payments.
Just as an example, the financial network of VISA processes hundreds of millions of transactions daily. During the 2013 holiday season, it was able to handle peak volume of 47,000 transactions per second.
How Bitcoin blockchain technology processes transactions
The biggest difference between IOTA and Bitcoin is that on the Bitcoin network miners compile transactions into blocks sequentially, one by one. This is what limits the capacity of the network and leads to high fees when the number of transactions on the network is high.
When many users send funds to each other at the same time, blockchain networks such as Bitcoin and Ethereum can get congested and confirmation of transactions will take a long time.
Bitcoin Cash is a cryptocurrency that tried to solve this problem by increasing the size of the block of the blockchain. Bitcoin’s block size is 1 megabyte and Bitcoin Cash has blocks that are 8 megabytes in size each. While this did increase the capacity and speed of the Bitcoin Cash network, just one user of the network, blockchain game SatoshiDice, accounted for about 5% of block space of Bitcoin Cash in the end of 2017.
SatoshiDice has been in business since 2012 but stopped being available in the United States in 2013 because of legal issues. This is why you may not be familiar with the game if you live in the US.
SatoshiDice is a betting game. The difference between SatoshiDice and regular online betting games is that to play using SatoshiDice, users do not need to install any software on their computers or visit any websites. They can simply send a transaction on the Bitcoin Cash network to one of the addresses that don’t change.
Each address represents a certain outcome in a bet. When a user sends funds to the address, the user bets on the outcome. Each outcome has its own probability and payout. Once the game determinesthe winner, it sends a winning payout to the winner and a small amount to the losing players.
The fact that the game already takes up about 5% of block space on Bitcoin Cash network, means that the space increase has only been a very short-term solution. Another twenty or so games could take all the block space on the network and the network would need to start looking for another solution again.
Instead of a blockchain, IOTA uses Tangle, which is a directed acyclic graph (DAG) protocol. On Tangle, cycles of the graph do not have a specific direction.
Versus bitcoin’s blockchain structure:
In practical terms, this means that the IOTA network could process an indefinite number of transactions at the same time.
Users on the IOTA network can send and receive funds with no fees. The network accomplishes this in a very simple way: to send funds on the network, a user needs to confirm two other transactions.
On a regular blockchain network, the more users want to send funds, the more congested the network becomes. On the IOTA network, the more users want to send funds, the more transactions they can confirm and the more scalable the IOTA network becomes. Because of this, as the IOTA network grows and becomes bigger it is also becoming faster and more secure.
On the Bitcoin network, users that participate in transactions and miners that compile transactions into Bitcoin blockchain are separate entities. On the Bitcoin network, you can be either a miner or a user. This is where fee and scalability issues come from. On the IOTA network, they are the same entity, which is what solves the problem.
The currency of the IOTA network is Iota. Iota is the smallest letter in Greek alphabet, which is why the creators of IOTA network decided to call the smallest available amount of currency on the network “iota,” similarly how the smallest amount of usable currency on the Bitcoin network is called Satoshi (A Satoshi is one hundred millionth of Bitcoin, 0.00000001 BTC).
Larger units of Iota currency on the IOTA network have names that are identical to names of larger units of digital information. For example, just like there are bytes, kilobytes, megabytes and so on, there are Iota, KiloIota, MegaIota, etc. The difference between Iota names and digital information names is that Iota currency does not have a binary prefix.
Having a binary prefix means that there are 1,024 bytes in 1 Kilobyte, but 1 KiloIota is simply equal to 1,000 Iotas. One MegaIota is 1,000,000i, 1 GigaIota is 1,000,000,000i and so on.
Because miners and users on the IOTA network are one entity and users need to confirm transaction to be able to initiate a transaction, there is no mining of coins on IOTA network. The founders of the network have created all the coins before the network went live. The number of Iota coins on the IOTA network is 2,779,530,283,277,761. This number is not going to change. It can’t go up or down.