IOTA is a the native currency on a network designed for the Internet-of-Things. The IOTA team aims to solve the scaling problems of current generation blockchains by implementing what they call the “tangle” or Directed Acyclic Graph (DAG). With IOTA there are no dedicated miners involved or needed in the process of verifying network transactions unlike Bitcoin or the vast majority of other blockchains. In the place of miners, with each transaction that is made on the IOTA network, the original creator of the transaction must verify two other transactions on the network. In a way, the miners and users are one in the same. Each transaction requires a small amount of Proof of Work to be done on their part in order to participate on the network. There are no fees in the traditional sense when a transaction takes place, only a small amount of the senders processing power in return for a secured network.
The Transaction Process
Each new transaction creates a new block in the tangle. For this new block to become part of the network, the creator has to verify two network selected blocks. This lack of a traditional transaction fee allows for much smaller transactions to be economically viable in the form of nanopayments or micropayments. The IOTA team is aiming to be the main facilitator of these increasingly small payments and enable for internet-connected devices to conduct transactions with each other (The Internet-of-Things, IOT).
In the transaction process when the two unverified blocks are chosen, it is done so by a specific MCMC-based algorithm. When all users on the IOTA network follow this, the tangle of blocks will continue in the same direction which is much more secure over time. Each Proof-of-Work computation further protects the network as the tree grows in the same direction. However, the network is only secured as long as a single bad entity doesn’t amass 33% of the hashpower.
Sergey Ivancheglo, a co-founder of IOTA, has talked about the problem in depth about a scenario where an attacker controls over ⅓ of the network’s processing power, allowing them to create fraudulent transactions.
A Coordinator is currently being leveraged by the network to protect against this type of attack. With the IOTA foundation in complete control of the Coordinator node, it means that the network itself doesn’t have enough inherit censorship resistance. The Coordinator node creates its own transaction every minute and verifies two others in the process. Users on the network can check for the Coordinator’s unique signature on a block indirectly through the tangle to ensure the validity of a selected transaction. At the current size of the network, bad actors could submit false transactions and there is no way to know otherwise, yet with the ability to look for a Coordinator signature indirectly, a transaction can be deemed valid.
As the network scales, there are plans to reduce the role of the Coordinator nodes. The network will theoretically be able to protect itself proportionally to the user generated transaction volume.
A Directed Acyclic Graph (DAG) structured network creates potential solutions for the problems plaguing the decentralized space. Promising scalability, speed and zero fee transactions, allowing for new concepts such as distributed computing, data, storage, bandwidth and energy can change the way resources are managed in the economy. The Internet-of-Things isn’t shrinking and for it to truly become as large as estimates currently put it at, there needs to be a network capable of handling that amount of transactions.
When it comes to comparing IOTA’s structure over what we understand as the blockchain, there are trade-offs to be made. One is not necessarily more advanced than the other and one will not make the other obsolete. Different applications are suited for each network with the Tangle being largely untested technology. IOTA is a combination of a lot of new technology and mathematical solutions never before implemented together. Regardless of the problems and concerns about the network, it is truly a step in a new direction in the decentralized exchange of value and only time will tell if the IOTA can grow past the software vulnerabilities and centralised coordinator solution.