IOTA has made a name for itself in the cryptosphere by jumping dramatically into the top ten cryptocurrencies in within less than a week. The little known coin increased by 1200% over the past month and over the past week increased by almost 300% – remarkable returns within a short period of time. Many were asking – “What is IOTA? What does IOTA do?” – This article hopes to answer those questions and address some possible concerns around IOTA.

IOTA, the economy of things :

First off, it’s a weird name. Their website says it stands for “Internet of things”, while the A could mean applications or nothing, depending on who you ask.

So the IOTA is trying to create a backbone for the internet – much like Ethereum. While Ethereum is focusing more on web development and applications like gaming, email, or website backbones. IOTA is focusing on broadcasting information to devices and connecting them to each other but could also be used for peer to peer payments, bank transfers, or steam micropayments. It has a wide range of possible applications. It’s an exciting project and possibly has great potential as automation becomes widely used.

IOTA has some interesting features that aren’t like the rest of the space. The first is IOTA uses a system of keeping record called “The Tangle” as opposed to Bitcoin which uses a “blockchain.”

The Tangle :

The Tangle is like the blockchain in that it’s a distributed database and validation system for the network. But the Tangle’s structure is different. Rather than having transactions linked to one another via a chain, The Tangle uses a tree like formation to organize and store the transactions, the proper term is called a Directed Acyclic Graph (DAG). Learn more about DAGs.

The DAG or directed graph is arranged such that every path leads to a new and different place on the graph; such that you can not go back to where you started from if you follow the directed path. This feature of a DAG makes it ideal for a number of applications from scheduling, family history, citation graphs, data compression, and data structure.

Picture of a DAG from Wiki

But as far as IOTA is concerned the DAG is useful for data structure and confirming transactions.

Another feature of IOTA’s DAG is each transaction references two previous transactions – except the starting transaction.

So each time I want to make a transaction with IOTA my computer performs processes (performs proof of work) on two randomly chosen transactions. Then my transaction is randomly picked by the network and processed by someone else. At that point my transaction is confirmed by the network and processed – that is how it’s supposed to work but not how things currently work.

Currently, consensus and confirmation happens when the network processes the transaction and checks the DAG pathway for a special type of transaction. This special transaction or “Milestone” is broadcasted to all other participants in the network by a computer ran by the IOTA foundation, called the “Coordinator.” The Coordinator sends out a milestone transaction every minute to all network participants. If one DAG pathway fails to have the most recent milestone transaction – your transaction fails. You then have to retry it.

The coordinator won’t last forever though. As the network grows in size the coordinator stops being as effective. Why? Because as the network grows there are more people processing transactions. The more people transacting increases security as a attack would need 34% of the network power to do anything meaningful in an attack. But for now Iota, with the small network, chooses to use the less effective, coordinator method, to secure its network.

Iota seems like a very powerful and innovative technology but as with most things there have been some growing pains with Iota. I’ll list a few.

There are a few Issues with Iota :

The Coordinator is it makes the network pretty centralized – in comparison to other currencies. Most of Iota’s source code is not open sourced making hardcore decentralization and crypto people a little skeptical. the Iota devs had a serious security flaw with their hashing algorithm and had to create a completely new one from scratch. Iota is quantum secure but with security of wallets is limited to individual uses – while this is both a plus and a drawback for reasons explained below.

But allow me to address each of those:

The Coordinator – as far as I can tell – is little more than a full node. But there’s very little ACTUAL information regarding the Coordinator and even more speculation. But the only time it’s been shut down was when the Iota foundation was updating the entire network and asked ALL nodes to shut down as well. This caused a network blackout for around 23 hours as they updated everything. There’s no demonstrated point where the coordinator fell or was shut off and the network continued processing on its own. However, there’s never been a point where the coordinator was shut down by anyone outside the Iota team. There are very good reasons to keeping the source code under wraps. The Tangle or DAG is a fairly new idea and rarely used on other coins. Keeping it secret makes sense from a competition perspective – first movers get large network effects. That being said there are two other coins that use a DAG rather than a blockchain – Paragon and Byteball. I don’t think this is a huge concern. I won’t go into it much as you can learn more here but basically there was a vulnerability in the hashing function – a basic core element of cryptocurrencies – that could have been a large problem. It was caught and PATCHED so it’s no longer an issue. However, combined with number 2 this might be a reoccurring issue with this dev team. Opening the source code might be a good idea to provide feedback on their code. The biggest draw for most people is the quantum security with IOTA. The quantum security comes from lamport or Winternitz signatures. The idea behind them is using addresses and signatures only once gives greater security than using them multiple times. A potential attacker could reverse engineer your private seed if you use your address more than once. Effectively there’s an exponential degradation of security the more you use an address. This is an interesting way to deal with a post-quantum world. But for the normal user this increases the likelihood of them losing their IOTA. Some users might just forget to create a new address each time they spend IOTA. The community needs to educate their investors/users on this or create wallets that detect usage and generate a new address thus removing any human error – this is already in the works by the foundation.

Finally before I conclude let me address one final thing that’s a misconception around IOTA.

IOTA does not have free transactions. It has “nearly free transactions” as the only “cost” to transact on the network is to help process two other transactions. That processing takes a small amount of computing resources from your computer – electricity. So there are nearly free transactions with IOTA but free is a misnomer.

Conclusion :

IOTA is a revolutionary cryptocurrency in the way it handles consensus and it’s ahead of the curve by anticipating the rise of quantum computers. The past has shown the IOTA foundation to be a little scary with the way it handles its network and development – network blackouts, failing to find coding errors these are not acceptable. But even considering those issues the IOTA foundation and the currency has a bright future, in my opinion. The uses cases for IOTA are almost limitless and as cryptocurrencies gain more adoption this could see major use. If there really is a market for a cryptocurrency dealing with automation, machine 2 machine transactions, and peer 2 peer payments with almost free transactions IOTA seems like a good one to bet on. But just be aware of the issues in IOTA’s past. But also keep in mind the cryptospace and IOTA are all still in development and beta testing phase. All will have growing pains. All will face struggles. But perhaps IOTA has anticipated a few of the struggles like quantum computing and scaling. Only time will tell. But considering the returns it’s already gotten, the appeal to a wide range of industries, quantum security, and the nearly free transactions, IOTA seems primed to rock the world or at least be a contender for the next coin in your portfolio.

Disclaimer:

I was originally very skeptical of this coin considering their past. But after doing research into this coin I think it has real promise – although, I have yet to purchase any. But digging into my twitter feed will show my skepticism. But in the spirit of crypto I try to be transparent about my previous/current biases.

Like always – my thoughts are my own, please do your own research before investing, never invest more than you can afford to lose.