IOTA is a decentralized, micro-transaction token that is geared towards the Internet of Things (IoT). The crypto-token runs off of Tangle, which has similarities to a blockchain but is much more versatile.

The Tangle Ledger

Tangle is a cryptocurrency that was developed for the Internet of Things in 2015. The aim of the project was to enable machine-to-machine payment transactions and ensure accurate and consistent data was being maintained. The idea was conceived when the creators realized that most internet-connected devices need a secure way to transfer data and transactions in order for the whole IoT to work smoothly. You can read more about Tangle here (PDF).

While there are other forms of cryptocurrencies, such as Bitcoin, they have their drawbacks. One such drawback is that there is no way to make micro-payments. The need for these micro-payments has recently increased due to the rapid development for the IoT industry. In order to allow micro-payments to become accessible, a new technology system is needed.

Bitcoin and the other cryptocurrency systems are based off of blockchain technology. Blockchain is a distributed database that maintains a large list of ordered records called "blocks". Every block has a time stamp as well as a link to the prior block. Once recorded, the data contained within the block cannot be altered.

In currently available systems, a fee must be paid in order to make a transaction of any amount; hence the lack of microtransactions as customers do not want to pay a fee for such small amounts. On the other hand, the creators of the blocks are the ones getting paid to provide this service, making it near impossible to get rid of these fees. Below is an illustration of how Bitcoin's blockchain works.

Image courtesy of BlockGeeks

Differentiating Blockchain from IOTA

The illustration above shows that blockchain uses a consecutive chain and then separates the entire network into individual users and block validators. On the other hand, IOTA utilizes a directed acyclic graph (DAG), which is also known as a Tangle. This DAG architecture assumes the user and validator as the same. A DAG consists of many vertices and edges, where each edge is directed from one vertex to another; this is to ensure that there is no way to start at vertex A and follow a consistently-directed sequence of edges that eventually loops back to vertex A again. An example of a DAG is illustrated below.

Image courtesy of David Eppstein

In order to participate in a transaction on the Tangle, a user must first authorize and approve two previous transactions. Network nodes must make sure that these approved transactions do not conflict with each other. For a given transaction, as it receives more and more approvals, the system will become more accepting of it. This method is to ensure that the system doesn't accept a double-spending transaction, which is now nearly impossible to do on the Tangle.

You might be thinking, "What will happen to previous devices that are using or will continue to use blockchain?" Luckily, Tangle will allow for future communications between IoT and previously established currencies.

IOTA solves quite a few problems of blockchain's current structure:

No micropayments Transaction fees are used to pay block "miners" and reduce the amount of spam attacks. The fees also set a threshold on how small a payment can be due to users not wanting to mine the block.

No centralization of monetary control With blockchain, users can form large groups in order to increase the amount of blocks they can mine as well as increase their reward. This could potentially lead to concentration of power and possibly harm the network.

Costly hardware equipment In order to mine bitcoin cryptocurrency, costly hardware is required due to the complexity of the processing logic required.



Applications of IOTA

IOTA is geared towards IoT devices which means theres nearly an endless amount of possibilities of what it can be used for. IOTA could be pivotal in remote monitoring and control, asset tracking and tracing, and smart energy. Quick payments via methods such as ATMs, vending machines, and parking meters also could be incorporated.

The future is increasingly IoT-oriented and IOTA is in a position to help develop IoT security for microtransactions. It may still see stiff competition from other cryptocurrencies, however, as the race continues.