Crypto Currencies – a short look at IOTA

Again the promise: This will not become a Crypto Currency blog. On the other hand I really find the topic fascinating and maybe one or the other reader finds it interesting too.

After looking at rather non-exciting ICOs like Naga Coin and Whysker, I decided to have a quick look at IOTA.

Why IOTA ?

First of all, IOTA is also based in Germany and I want to know what is going on in my home country. Secondly, I was surprised that Robert Bosch AG, the very conservative privately hold German auto supplier invested in IOTA coins a few weeks ago. Although Bosch did some stupid things in the past (like buying Ersol and Aleo Solar), it is nevertheless an interesting move.

Thirdly, IOTA is not a “cheap Ethereum based shitcoin” but something differently. Their fancy website claims that they are the “next generation blockchain”.

What’s different with IOTA ?

The biggest issues with the currently most popular Crypto Currencies, especially Bitcoin and to a lesser extend Ethereum are the following:

  • As every participant (node) needs to calculate the consistency of the full blockchain (which becomes longer with every block generated) more and more calculation power is required to maintain the integrity of the network. On top of that, especially Bitcoin’s architecture makes it very difficult to scale (only 1 block every 10 minutes etc.)
  • “Traditional” Crypto currencies differentiate between participants who transact and those who verify (Miners). In order to motivate Miners to verify transactions, they get fees, both via direct fees and newly generated Bitcoins. According to Blockchain.info, the current “fully loaded” cost for a single Bitcoin transaction has become a whopping 123 USD PER TRANSACTION !!! This was for instance one of the major reasons that Valve/Steam discontinued to accept Bitcoins a few weeks ago.

According to their Whitepaper, IOTA tries to solve this issues with those 2 main features.

  1. Instead of a full Blockchain which gets mirrored on each node, IOTA consists of a so-called “tangle” which is a Blockchain that consists of many different sub parts but which are connected. Nevertheless, the intelligent algorithms behind IOTA ensure (according to the Whitepaper) that “double spending” is prevented. This allows among other features that transactions can be created and confirmed in parallel and not sequentially as in Bitcoin or Ethereum.
  2. There is no separation between people who transact and Miners. Everyone who wants to do a transaction needs to verify two other transactions via the respective algorithms. This eliminates the requirement to charge transaction fees. It also allows in theory to scale quickly and efficiently as there is always twice as much capacity to confirm transactions than transactions generated.

As the calculations to verify transactions are relatively easy to perform, Quantum computing doesn’t seem to be such a great threat to IOTA according to the Whitepaper. Just to be clear: I only read the summary parts of the Whitepaper, I cannot verify the math and logic behind it.

IOTA has also fixed the total amount of coins that are issued, however this is a pretty large number:

Fixed Money Supply

All of the IOTA that will ever exist were created in the genesis block. The amount will never increase or decrease. The total money supply of 2,779,530,283,277,761 is optimized for ternary computation and notation ease of use utilizing SI units. ((3^33-1)/2) = 2.779 x 10^15

The current price is ~3,50 USD per 1 million IOTA (MIOTA) which translates into a market cap of around 9,7 bn USD.

History of IOTA

This is from the support website:

Brief History

David Sønstebø, Sergey Ivancheglo, Dominik Schiener, and Dr. Serguei Popov founded IOTA in 2015. Serguei Popov, a Ph.D. in mathematics, laid out the math required for the Tangle which was then written into code by the programming prodigies Sergey Ivancheglo and Dominik Schiener. The project is led by David Sønstebø, an expert in business and technology. This group has been extensively involved in the cryptocurrency space for many years, all with impressive resumes and notable past successes.

IOTA hosted a crowdsale in December of 2015 at which time the entire money supply was distributed to crowdsale participants. The event raised 1,337 bitcoin for project development. There was no premine, instamine, or otherwise. In order to incentivize the co-founders and growing team of developers, the IOTA community united to donate a significant amount of resources to establish the IOTA Foundation. The IOTA Foundation is a “gemeinnützige Stiftung” (i.e. non-profit Foundation) located in Germany. In addition to its original funding, The Foundation is eligible to receive support from government grants and corporate contributions (similar to the Linux Foundation).

There is also an interersting interview (in German) with one of the founders, a 21-year-old German-speaking Italian who seems to be already a Blockchain veteran.

So much for theory but what about real world use cases ?

If Iota works as laid out in the Whitepaper, it really looks like an interesting medium for all kind of micro payments which so far were very expensive under the old currency system and which have become expensive again in Bitcoin and Ethereum.

Three problems remain in my opinion:

  • The question remains if “the tangle”really works in practice. Looking at their explorer, the network currently seems to process 1 transaction per second. So it will be interesting to see how things change if this number gets a lot bigger
  • Use cases: As far as I could see there were little or no use cases for IOTA. The only use case I could find was a micro payment service called Satoshi Pay which uses IOTA instead of Bitcoin. However in the mean time, Satoshi Pay seems to have moved on to Stellar.org. (fun fact: Satoshi Pay itself charges a 10% fee on any micropayment, har har har ….).
  • Finally IOTA has the same problem as all Crypto currencies: A very volatile price. Even with micro payments it is not very convenient if the exchange rate against “FIAT” goes up and down +-20% on a daily basis

 

Summary & Learnings

First things first: Should you now rush out and buy IOTAs ? Of course not. A 10 bn USD market cap for a “Token” with unclear legal status and a not yet proven technology in my opinion is far too much, even for a “punt”.

The more important point in my opinion is the following: Crypto currencies are undergoing rapid development and evolution. Before looking at IOTA, I would have thought that Ethereum is the most advanced Crypto Currency. But at least on paper, IOTA seems to be much more advanced than both Bitcoin and Ethereum at least with regard to its payment function.

Bitcoin in contrast seems to be unable to really develop further as many people have vested interests in the status quo. Every advance seems to end in a new fork like Bitcoin Cash.

However even IOTA is clearly not the end of development. I think it is reasonable to assume that there will be even better Crypto currency platforms in the future and it seems that the development is accelerating these days. I personally don’t think that this is a “the first one takes it all” kind of technology. The current price of Bitcoin seems to indicate this but in my opinion is not justified by actual use cases apart from money laundering and speculation. And Bitcoin unfortunately doesn’t scale very well.

One thing in my opinion is also clear: All those cheap knock offs like Naga Coin or Whysker have zero chance of returning any value to its “investors”. There is absolutely no added value in creating another Ethereum based coin in order to create another market place of soemthing.

IOTA looks much more promising but agian, something better could come along tomorrow. Nevertheless I think it is worthwile to follow this developement as sooner or later something REALLY interesting could come out of this “evolutionary zoo” of crypto currencies, Blockchain, Tangles etc.

 

 

 

 

 

11 comments

  • Crypto is all early stage biotech to me. Such a hype over something that is still a few years down the road and ‘might’ turn BTC into the myspace of social media. All hype, nothing of substance and all the signs of early dotcom-boom of the late 90s.

    Please note that everyone are using the word ‘might’. Everything is built on hot air and high hopes.

  • Miners spend about 0.0001% of their resources on verification (making blocks). It is computationally cheap. It scales OK to many times the current network’s volumes with no protocol changes other than tweaking a few constants.

    The resource expenditure is all in running the decentralisation lottery thing, which has become a complete farce since you now have a handful of big miners/syndicates, most of whom have outed themselves. Basically there is a fatal bug in the bitcoin protocol in that its proof of work algorithm has economies of scale and therefore cannot be used to implement sustainable decentralisation.

    • just one comment: The “proof of work” algorithm doesn’s scale. I guess you mean that the required hardware does have some scale effects ?

      • I mean that running a big mining operation is cheaper per unit than a small scale one, hence small miners are crowded out. Similar economics as regular cloud hosting, where a few top players (AWS, Microsoft, etc) dominate. Which is unfortunate where you want to achieve decentralisation (ideally 1 user 1 vote).

  • Thanks for the comment. We will see how this turns out. But I guess i will only make a move when we are further down the “hype cycle”.

    And no, I don’t think that any Cryptocurrency wlll be “worth” one trillion.

    • Value Investigator

      Why not? Let’s assume there is “the one” digital currency that works well across borders. This kind of sounds like the future to me, though it may of course never realize.

      Even bitcoin already reached 33% of a one billion market cap two weeks ago. With the current volatility, it would not be a huge surprise to me if bitcoin would have a market cap of only 10 billion or up to 1 trillion USD within the next 12 months.

      Whether this corresponds to the true “value” is of course a different question.

      PS: Just to be sure, I meant one trillion in English which corresponds to one “Billion” in German (not one German “Trillion”).

      • I don’t think that there will be “one” digital currency. At the moment there are 1.600 and the number is increasing.

        • Value Investigator

          Obviously there is no need for 1600 different cryptocurrencies. Since most of them do not provide any real value over current centralized systems, nearly all of them will most likely end up with a valueless and once that becomes obvious, it should also slow down the rate of new ICOs considerably.

          On the other hand, some cryptocurrencies already seem to provide some value and they are backed by lots of developers and companies that are interested in experimenting with the new technology.

          I think there are a lot of similarities between crypto-projects and tech companies. We do not need 20 search engines, Google is sufficient. We do not need 10 e-commerce market places if Amazon is doing a great job. We do not need 8 OTAs if almost all hotels are listed on booking.com. We only need one social network, its better to have your connections centralized on Facebook/ WhatsApp or Linkedin. f course, some competiton is useful here, too, but these examples are natural monopolies where the costumer benefits from one dominant solution.

          Likewise the utility for all users is obviously not maximized if there are 30 peer-to-peer cryptocurrencies with a similar market cap. Interestingly, Bitcoin´s market cap is nearly 50% of the market cap of all cryptocurrencies – despite its serious flaws. They hence seem to have some kind of first mover advantage as they are the oldest/most famous/established/trusted solution.

          I think it is still early days with cryptocurrencies. Above all, it remains to be seen if there will be at all one cryptocurrency that provides a real benefit in the sense of a superior technology. If that happens, we will probably have a dominant currency for smart contracts, a dominant one for peer-to-peer payments, etc. Even then, there is a risk for the investor in these coins that an even better solution for the same use case may emerge.

          It is indeed a fascinating topic. The market is extremely irrational as evidenced by the pricing of Bitcoin relative to other cryptocurrencies. Rational investors cannot rely on classical valuation methods and maybe not even one single coin will ever provide a real value in the sense of a superior technology. On the other hand, the potential price of finding the right coin is extremely high. If succeeding, the total market cap of all cryptocurrencies will be much higher than 1 trillion USD in my opinion. Add to this that lotteries are appealing to most individuals (i.e. investors are fine with a negative expected value for small investments as long as the potential payout is huge) and you have the perfect recipe for a mania / bubble that may just have begun.

        • I think it is a mistake to compare the Crypto currencies to Google, Facebook etc. So far, despite the run up in price, the major crypto currencies have diseconomies of scale, i.e. their utility deecreases as adoption increases. But let’s see, maybe Bitcoin will go to infinity ? Who knows. But other than George Soros I will stay out of Bubbles. I just like watching them from the outside.

      • Do you think market cap, calculated with made up numbers (both prices and ”shares outstanding” are dubious), is an indicator of ”worth”?

  • Value Investigator

    Very interesting. I recently made my first cryptocurrency investment into IOTA for similar reasons you outlined in your article. In particular the (theoretical) scalability and zero transaction fees.

    Currently, transactions still take a long time (30 minutes to 12 hours) and the whole network is currently run by a “coordinator”. The coordinator currently solves problems with “spam transactions” that are obviously designed to bring the system down. As you point out, meanwhile there are a lot of people with large stakes in this ecosystem and for example the miners or large bitcoin investors would not be happy to see a new, superior cryptocurrency making their bet irrelevant. It remains to be seen when the coordinator will be taken off and if the system actually brings quick (1-3 second) transactions that are free of fees and safe (no double spending). To me it seems that the founders are quite confident – I hope for a reason, but who knows…

    Use cases:
    – instant, zero-cost peer to peer transactions are a potential killer application in my opinion. I do not see why it would not be possible to implement this in a smartphone app or as an online payment method.
    – The initial focus is however on the internet of things, in particular machine-to-machine payments. Imagine your electric car getting energy from your neighbours solar panel and the car directly pays the neighbour using IOTA per kwh.
    – They recently started a data market place (around 30 companies are involved), where you can buy data from sensors (e.g. weather stations) using IOTA.
    – I believe micropayments could potentially enable a whole new ecosystem. For example, I hate paywalls and there is no way I will pay a monthly subscription for each of: Financial Times, Wallstreet, Sueddeutsche, etc. I would however be willing to pay small sums for each article that I find interesting. IOTA may finally enable such a business model.

    Market cap / price:
    A market cap of 10 billion USD sounds like a lot for such an early stage project with unclear chances of success. However, I think this must not be confused with a common startup where we could look at a PE-ratio or price-sales ratio. If IOTA will ever be a meaningful medium that enables one or more of the described use cases, I believe that a huge total market cap of coins will be needed to run theses systems. Add to this that a large fraction of the coins will not be part of the necessary free-float because it is beeing held by long-term investors. I believe in a successful scenario, the total market cap can be 1 trillion USD or more. That would be an increase by a factor of 100. Given today`s market cap, IOTA`s implied chance of success may be around 1%.

    First-mover advantage / “Winner-takes it all”:
    That is difficult to judge. Today to me it seems clear that bitcoin and ethereum will not be the winners – the fees and lack of salability makes any interesting use case I can think of unfeasible. More promising projects (IOTA, Cardano) are currently beeing built. At some point of time, the new projects will be good enough and the scale combined with the first mover advantage will be superior to an – in theory – slightly better platform that is not gaining traction (no developers, use-cases, ecosystems). What I like about IOTA is that they appear to be quick and effective in establishing partnerships with major internet of things companies (Bosch, Fujutsu…).

    In summary, it is fun to watch that new area and for me IOTA is worth a small bet. Looking forward for more crypto-articles in your blog 😉

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