IOTA

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IOTA Percentage Increase Compared to the Average (Bit20 ETF) Starting in 2017

IOTA differentiates itself in many ways from other cryptocurrencies, but its primary distinguishing features include: (i) instead of using a blockchain to record transactions, IOTA utilizes a Tangle (described in more detail below). This alternative data structure allows users to transact with zero fees. Instead, when executing a transaction a user is required to confirm two previous transactions on the Tangle; (ii) IOTA is intended for machine-to-machine transactions such as the transfer of IOTA from machine A in exchange for data or memory storage capabilities from machine B; (iii) while blockchains are more secure than traditional computing systems, they are vulnerable to an attack from a quantum computer. IOTA, on the other hand, uses Winternitz signatures when signing transactions which are quantum resistant. On a related note, IOTA also has very fast transaction times compared to other cryptocurrencies. Each transaction performs its own proof-of-work as it is executed and a subsequent transaction then validates the previous transaction and one other unconfirmed transaction which can be performed very quickly.

Pros: First cryptocurrency intended for the Internet of Things; feeless transactions which enable micropayments; fast confirmation times (~a few seconds); quantum resistant; utilizes a Tangle rather than a blockchain which is less memory intensive and designed to scale

Cons: Unproven and untested – still in the beta phase, IOTA is currently working on a smart contract platform, but it has not been released for testing; uses a coordinator to confirm transactions meaning that at this time it is not decentralized (IOTA does plan to shut down the coordinator when the network reaches higher transactions volumes); the platform is not user friendly and wallets are difficult for the average person to use; the Internet of Things is still in its infancy and IOTA is years away from being integrated consistently in a machine-to-machine economy

Analysis

To perform an objective analysis, each cryptocurrency is rated based on the following factors: (1) validation method; (2) leadership; (3) community participation in development; (4) transaction volume and market capitalization; (5) industry participation; (6) security; (7) usability; (8) technical features; (9) growth; (10) legal risks; and (11) estimated time of arrival.

Validation Method

As described above, IOTA departs significantly from other cryptocurrencies and does not use a blockchain to record transactions. Instead, the coins are recorded in a Tangle which is a form of directed acyclic graph (DAG) that requires users to confirm two previous transactions (called “tips”) to issue a new transaction.[1] The user checks to make sure the two transactions do not conflict with each other and then attaches the transaction to the Tangle by having it reference the two previous transactions.[2] The user must also perform a proof-of-work (POW) for the new transaction to prevent attackers from spamming the network. As a transaction receives additional approvals from subsequent transactions, it is accepted at a higher level of confidence each time. The transactions are weighted and the weights increase with each subsequent transaction that directly or indirectly references the transaction, so the earliest transactions have the highest weights. Once a transaction achieves a certain weight, it is confirmed with a very high confidence level and does not risk being removed from the Tangle. Importantly, transactions are confirmed faster as more transactions are added to the Tangle.[3] This is the opposite of a blockchain where the network has issues with scalability. By contrast, the Tangle actually performs better as the transaction volume increases. However, because the Tangle is currently in its infancy and the transaction volume is relatively low at the moment, IOTA uses a central coordinator to help confirm transactions which is essentially training wheels for the protocol.[4] As currently implemented, the IOTA foundation is in control of the transactions on the network, and thus, they are not decentralized. IOTA does plan to remove the coordinator shortly but it’s unknown when that will be.

Leadership/Community Participation

The IOTA Foundation is led by David Sonstebo (a serial entrepreneur), Dr. Serguei Popov (the author of the whitepaper, a mathematician, and professor), Sergey Ivancheglo (former lead developer of Nxt coin), and Dominik Schiener.[5] Between the four of them, this team has extensive experience in the field of cryptocurrency. However, the development team has received a great deal of criticism for creating their own cryptographic hash function (which has since been removed),[6] exaggerating the extent of their partnership with Microsoft,[7] and handling criticism poorly.[8]

Transaction Volume and Market Capitalization

IOTA has cracked the top 10 in market cap but recently ranks closer to 15 at ~3.3B.[9] With a daily transaction volume of less than $30 million, IOTA has a much lower volume than the other coins in the top 10. As IOTA still requires a significant amount of development and testing (deploying a smart contract platform, removing the coordinator), transaction volume is likely to increase as the protocol progresses.

Industry Participation

In December, Robert Bosch teamed up with IOTA and one of Bosch’s partners joined IOTA as part of their advisory board.[10] More recently, IOTA partnered with the International Transportation Innovation Center (ITIC), where ITIC plans to use IOTA in a “smart city” environment.[11] Volkswagon also announced a partnership with IOTA to use the coin in smart cars for exchanging data and ordering good and services. While a few large companies have invested in IOTA, the cryptocurrency still has a long way to go to being utilized extensively in a machine-to-machine economy. Additionally, these partnerships are in their very early stages and the protocol has not yet been implemented in any Bosch, Volkswagon, or ITIC products.

Security

Unlike almost all other cryptocurrencies, IOTA is quantum resistant meaning that it isn’t vulnerable to an attack from a quantum computer.[12] While this isn’t an issue right now, a fully functioning quantum computer could compromise the security of Bitcoin, Ethereum, and many other decentralized ledgers.

Usability

Although IOTA can be used for daily transactions due to its ability to process micropayments quickly and at no cost, it plans to corner the market on M2M transactions. While the smart contracts platform has not been developed, the founders envision IOTA being used in a machine-to-machine economy, where devices exchange data, energy, and other resources.[13]

Technical Features

The main feature of IOTA that distinguishes it from the rest is its use of the Tangle instead of a blockchain to record transactions. Users rather than miners perform a POW and then confirm two previous transactions referred to as “tips.” Many in the cryptocurrency community have questioned who is going to validate transactions on the Tangle without receiving fees or a block reward. The IOTA foundation responds to this by suggesting that large companies who want to send and receive free micropayments will be incentivized without any additional reward or fee.[14] IOTA is also quantum resistant by using Winternitz signatures to sign transactions. Furthermore, the cryptocurrency plans on deploying a smart contracts platform to allow for the automated exchange of data between devices, but this is still in development.

Growth/Legal Risks

IOTA has plenty of potential for growth as development proceeds further. Nonetheless, the success of IOTA is strongly tied to the growth of the Internet of Things and the need for a machine-to-machine economy. If the Internet of Things does not grow as expected or companies do not want their devices to exchange data IOTA may lose its purpose. On the other hand, this seems unlikely as the IoT is projected to grow significantly in the next few years.[15]

Estimated Time of Arrival

Although IOTA is readily available on many exchanges, a significant amount of development is still necessary before this coin becomes viable. Currently, the training wheels have not come off for the Tangle, the light wallet is not user friendly, the smart contracts platform is still in development, and IOTA’s partnerships with device manufacturers are in their early stages prior to implementation in consumer products.

ETA: 2022 

Conclusion

IOTA departs significantly from other cryptocurrencies making it exciting and unique with vast potential. Still, there is still a lot of work to do to build the platform. At this time, IOTA is an experimental technology with creative solutions to common problems found in cryptocurrency. Nevertheless, its unique solutions allow IOTA to stand out from the rest and if the development team can follow through on its promises, IOTA can be one of the strongest cryptocurrencies in the future.

[1] https://iota.org/IOTA_Whitepaper.pdf

[2] http://untangled.world/iota-consensus/

[3] https://steemit.com/iota/@iuliuspro/iota-tangle-seems-to-be-the-next-crypto-evolution-the-bad

[4] https://medium.com/@norbert.gehrke/iota-the-misunderstood-coin-c6c94678ec99

[5] http://untangled.world/iota-founders/

[6] https://www.forbes.com/sites/jeffkauflin/2018/01/03/iota-rose-464-in-2017-but-buyer-beware-experts-have-major-security-concerns/#411e247d5faa

[7] https://cryptovest.com/news/iotas-partnership-with-microsoft-is-exaggerated/

[8] https://medium.com/@norbert.gehrke/iota-the-misunderstood-coin-c6c94678ec99

[9] https://coinmarketcap.com/currencies/iota/

[10] http://www.businessinsider.com/robert-bosch-bets-on-iota-2017-12

[11] https://www.prnewswire.com/news-releases/iota-partners-with-itic-to-build-a-global-alliance-of-smart-mobility-testbeds-300580423.html

[12] https://iota.org/IOTA_Whitepaper.pdf

[13] http://untangled.world/cryptocurrency-without-blockchain-built-outperform-bitcoin/

[14] https://medium.com/@norbert.gehrke/iota-the-misunderstood-coin-c6c94678ec99

[15] https://www.forbes.com/sites/louiscolumbus/2017/12/10/2017-roundup-of-internet-of-things-forecasts/#3975f5761480