A Distributed Secure Protocol is the Answer… But Do We Need Fees?

As we discussed before in Part I & Part II, data is going to be the resource of the future, and connected devices will be the the mechanism in which data is collected. After diving into IoT we understand that there is a high need for a secure standard messaging layer and the Tangle is that answer. With the Tangle, data will travel securely between connected devices at the edge and to and from the cloud. Streams of data flowing seamlessly around the digital space, this is how the Internet of Things currently works, and will work in the future. After analyzing whether a centralized network may be the answer we found that indeed it is not. Instead, we need a distributed decentralized system where all participants have free access to use and secure the network. The next question becomes, can a decentralized network be viable which is based on fees support the foundation of the IoT? You must understand, that every time data is sent from and across connected devices, we considered this a transaction. Such as, when you scan your visa card, you are not only making a single transaction which records the amount on the visa ledger, but that transaction also sends additional data. This data includes information such as; this transaction was completed at store X, at this time, on this date, for this amount, at this location, etc. We see that a simple exchange of value for something creates an immense amount of data which may be completed as a single transaction or several transactions. Let’s now look at one use case and how using secure data applies, and most importantly, how many data transactions will occur. The following example is a real-use-case that is live now on the Tangle, and an application built on the Internet of Things use the secure messaging layer.

ALYX, EVERYTHING, Avery Denisson and IOTA collaborated and worked together to offer supply chain transparency. Sustainability is becoming more important to our societies and the ability to ensure that products we purchase are manufactured in environmentally conscious methods. We need a way to confirm these facts. Or, we may simply want the piece of mind knowing that what we purchased is a true product, not a fake, and that what we are buying is actually what we are getting. By ensuring the data integrity, The Tangle offers manufactures a secure and trustworthy end-to-end solution. Customers can now prove not only that their products were produced in sustainable manner; but as well as, we won’t need to trust the store, we can simply scan and check the Tangle for proof.

So what does this look like when using the Internet of Things for product purchasing? When we make a purchase (and this can be ANY product! Clothing, electronics, car parts, etc), we can quickly and easily view the life-cycle of that product. We can verify where the label was produced, where were the raw materials supplied from, where the garments manufactured, where they were stored during transit, and the location were they purchased? Each of these “data points” are recorded on the Tangle’s Distributed Ledger through the action of transactions. Now the question becomes, what does this look like with, and without fees?

Let’s take clothes for an example, and specifically denim jeans. FashionUnited stated that 1.25 Billion pairs of jeans are sold every year. As we can see with the ALYX label and their Product Journey example, they recorded 9 transactions for a single product on the Tangle. Let’s now compare this with fees vs. no fees. Also, as many fee based Distributed Ledger Technologies are creating great efficiencies and lowering those transactions costs, let make an assumption of $0.001 dollars transaction fee. Let’s consider if, as in the Product Journey of ALYX, all companies offered such transparency and trustless sales with denim jeans. Again, as FashionUnited.uk found that 1.25 Billion jeans are sold annually worldwide. Let’s apply this number to a fee based system.

1.25 Billion items x 9 transactions per item = 11.25 billion transactions

11,250,000,000 transactions x $0.001 dollars = $11,250,000

Ok, so $0.001 dollars might be a bit high assuming that as time goes and technological advancement occurs, blockchain will become more cost efficient. Let’s go with $0.0001 dollars.

11,250,000,000 transactions x $0.0001 dollars = $1,125,000

Ok, so $1,125,000 is a much more manageable cost compared to $11,250,000 when considering a global scale. However, let’s not forget that this is specifically for “denim” jeans. If we take into account ‘ALL’ of the pieces of clothing produced in the world it may be a bit different. In an article by Mckinsey & Company ‘Style That’s Sustainable: A New Fast-Fashion Formula’, they state that “The number of garments produced annually has doubled since 2000, and exceeded 100 billion for the first time in 2014”. Using this number as a reference, and let’s take 90 Billion pieces of clothing as a lower average, and then apply the transaction fees. Let’s see what it looks like when we scale The Internet of Things on a global aspect with a fee based layer.

90 Billion items x 9 transactions per item = 810 Billion transactions

810 billion transactions x $0.0001 dollars = $81,000,000.

That is $81 Million dollars in fees!!!

Now, this is just clothing. Think of your car. Think of all of the parts involved with your car. Think of your phone, your computer, your beauty products, tooth paste, vitamins, and your food. The items which we use daily that are produced throughout the world becomes a very high number. Now, imagine how many transactions this becomes? A car may have over one thousand transactions. Each and every single part within your car was produced. How do we ensure authenticity for that piece? The majority of those parts will each have 5 to 15 transactions. Where was the iron ore mined? Was it mined in a country that uses slave labor? Where was the Iron ore smelted into steel? Where was the steel shipped to and did it pass quality control? What factory machined the steel into the cars frame? Where was the car manufactured. Was that car REALLY 85% German made? Well now we can purchase a car and if the manufacture says it was built in Germany and made in a sustainable and conscious fashion we know that it truly was. We no longer simply have to TRUST them. Instead, we can simply scan a QR code and view the history which shows validity. Eventually, we will have an application which we can simply scan and see either, “Yes”, or “No”, this product is valid. Take it a step even further, once we, the people, have that option; will anyone even attempt to make fakes anymore? Will companies still attempt to deceive their customers? The answer is no, because it is a trustless system and they can’t. However, that is only if there is a protocol layer that offers security and immutability. As we have realized, this can only be done by a distributed secure messaging layer, but also, for it to globally scale it must be a fee’less network.

Let’s run one last quick analysis. I could not find an estimate of how many physical products are produced in the world. However, if for clothing there is an average of 90 Billion, and considering everything from food, to cars, to phones, let’s take a wild guess and say 850 billion items are produced. Some of those may have more transactions per good and some less. Let’s just go with 12 transactions on average per good..

850 Billion x 12 transactions per good = 10.2 Trillion transactions

10.2 Trillion Transactions x $0.0001 dollars tx fee = $1.02 Billion dollars

That is $1.02 Billion Dollars in transaction fees JUST for manufactured physical products!

One thing business owners and government entities understand is future planning. When forecasting future developments within a business or an organization the cost of operations must always be considered. A cost can be of two variables.

Fixed Cost — A fixed cost is an expense or cost that does not change with an increase or decrease in the number of goods or services produced or sold.

Variable Cost — A variable cost is a corporate expense that changes in proportion to production output. Variable costs increase or decrease depending on a company’s production volume.

In regards to planning, fixed costs are much easier to account for in comparison to variable costs. Variable costs are even harder to plan for if they do not maintain consistency and follow a proportional trend in relation with production. So what kind of cost is a transaction fee? In a blockchain, or a fee based Distributed Ledger Technology (DLT), the fees are based on the network demand. Hence, there is a correlation to demand of the network. The the higher the demand, the higher the transaction fees. The opposite correlation applies as well. The lower the demand, the lower the fees. What is important to point out is a transaction fee within a fee based DLT is variable. So one year it may be $0.0001 dollar per transaction; however, the next year it could be $0.05 cents. Five cents per transaction still seems very small though. Currently, Ethereum’s average transaction fee is $0.156 cents. Yet in January 2018 the fees had shot up to over $4 during an increase in network demand. Yet as stated, efficiencies improve with technology, so even if there was a great increase in demand on a network, a high transaction fee would most likely not be more than $0.05 cents. Yet, what does that look like with globally produced goods which we analyzed prior?

850 Billion products x 12 transactions per good = 10.2 Trillion transactions

10.2 Trillion Transactions x $0.05 cents tx fee = $510 Billion dollars

That is $510 Billion Dollars in transaction fees JUST for manufactured physical products!

This is a clear example how a variable cost is not only extremely difficult to plan for when considering global scalability, but simply not applicable when creating a foundation for the Internet of Things. That is, it doesn’t matter how small the transaction fee, if there is one, it is not a suitable system for IoT. The real question becomes, IF there is another option, if there is a foundation that isn’t based on a fee based system, why not create it? Why not use it?

The Solution to the Problem! A Fee’less Network!

When it comes to the Internet of Things, and a secure permissionless distributed network, there is only one that saw the challenge and decided to take it on. The founders of IOTA saw that a fee based network simply will not work with the Internet of Things. A fee based system will only hinder growth and create a weakness of both scalability, and “eventually” (over several years), offer a weakness in security. Despite all odds, the Founders sought out to build such a network.

The Tangle offers a secure distributed protocol that requires zero fees to send either a data transaction, or a value transaction using IOTA’s. This means, that industries, such as those who manufacture and sell denim jeans, can choose between a secure network that potentially has hundreds of millions of dollars in variable transaction costs, or a secure network that is free to use.

The above examples are only one small portion of the Internet of Things. With a connected electrical grid that offers charging points for vehicles, neighborhoods in which neighbors exchange and trade excess energy, this can only be completed with micro-payments. With micro-payments a contract is not needed at all. The asset (energy), is simply exchanged when the (value) is transferred. Meaning, if a car wants to purchase electricity from a charging station, it send (N) Iota’s per second, and as long as the charging station is receiving Iota’s, it returns (X) watts of electricity. The second the electricity stops flowing then so does the Iota stream. Or, as soon as the Iota stream stops sending, so does the electricity stop flowing. There is no agreement at the beginning. There is no paying the pump station up-front. As well, the company that sells the electricity does not need Visa. They do not need to give 2% for a transaction fee, and they certainly do not have to worry about a charge back. Both the consumer and the seller do not need to trust a 3rd party at all. This system becomes a trustless seamless exchange in real-time when using micro payments.

Yet, can you imagine how many transactions would be conducted when charging your car for 4 hours? What would happen if you paid a transaction fee every second? Well, that would be 14,400 transactions, and at a very low fee of $0.001, that would only be $14.80 cents in fees that you would pay for a 4 hour charge. Or, you could go with the IOTA option of paying zero fees. The two variables compliment each other. Micro-payment streaming is required to offer a trustless exchange without the need of smart-contracts, and Micro-payments can only be completed on a non-fee based protocol. Such that, with a fee based network micro-payments are not practical.

Does The Internet of Things Need to be Closed Sourced?

The answer is no. Again I think it comes down to the use case and primarily how many transactions will be needed. Does it need to be permissioned and does it need to be 100% secure? IBM & Bosch offer closed source IoT infrastructure solutions as well as many others. Generally these type of services that are closed-source come with service agreements that charges monthly fees. We see this when considering Microsoft & Apple and comparing them to Linux. This is a clear example where a closed source application (Microsoft & Apple) charges a fee for purchasing the product or has an annual contract cost. With Linux however there is no purhcase fee and no annual contract. If we dive deeper I think you will find that within industries many networks are built upon Linux strictly for its open-source benefits. IOTA and the Tangle is not an application, it will be a standard protocol. Having intellectual properties and a closed source product would never be accepted globally. It would be like someone trying to privatize the World Wide Web and start charging a monthly subscription… well, let’s just be blessed that Tim Berners-Lee created the internet to be free.

As companies test Proof-of-Concepts with the Internet of Things and try different approaches, we see that many are looking for an open-source protocol. This has been stated by Austin, Texas municipalities, and clearly can be seen by Jaguar. Jaguar is taking the opportunity to use IOTA and the Tangle by integrating their car sensor data with the Internet of Things. They will use the data collected by the car to be sold for IOTA’s which in turn can pay for parking, tolls, etc. Currently they are running a test case in Ireland to see how this proof-of-concept works and can be developed further. We can see that there are some companies, organizations, and governments that may prefer a closed-source option, while others that prefer an open-source one similar to organizations using different operating systems like Windows, OS, and Linux.

Conclusion:

One thing is for certain, on a global scale, when using the Internet of Things, fees on a Distributed Network simply do not work! It doesn’t matter if it is $1.00 for a transaction fee or $0.00001 cent for a transaction fee, it just doesn’t scale. The only fee that should be required for using a secure permissionless distributed network is the electricity cost to run your connected device, and this fee has always been present. Take for example the bar code scanner. Product goods are scanned as they transit through their production life and the data is kept privately by companies. Now, instead of being held in a private data silo it will simply go to the Tangle and be able to offer a trustless track and trace for the consumer. The bar code scanner though used electricity before the Tangle and will use electricity after the Tangle. That electric cost was present before and after the invention of The Internet of Things. Not only is integrating the Tangle not adding an extra cost, but it will offer efficiency and save costs!

So there we have it. We have a solution for the 5th Industrial revolution. A secure standard protocol! A fee’less secure data/communication layer in which a new Internet of Things EcoSystem can be built on, and a trustless value transfer method that can be conducted in micropayments; The Tangle, Powered by IOTA’s!

The only question left is, what can we build on-top of it? What can such a foundation allow to blossom and grow?