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.
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.
- 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.
- 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:
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.