The IOTA Foundation recently presented a research paper with a novel algorithm for improving the network’s ability to combat spam attacks and congestion. The algorithm takes elements from proof-of-work algorithms, like Bitcoin’s, and proof-of-stake algorithms, like that being developed for Ethereum.

Improving the IOTA algorithm

The paper, “Achieving Fairness in the Tangle through an Adaptive Rate Control Algorithm,” co-authored by Dr. Luigi Vigneri, the senior research scientist at the IOTA Foundation and member of the Coordicide team, proposed three main changes to the network’s algorithm:

Each transaction requires a computer to expend resources on a proof-of-work puzzle. The difficulty of the puzzle increases with the number of transactions sent over a given time period. Senders can stake IOTA as collateral to reduce the overall difficulty of these puzzles.

The research was presented at the May IEEE International Conference on Blockchain and Cryptocurrency.

Inspiration from other cryptocurrencies

One of the main challenges for IOTA is building a system with small, resource-constrained IoT devices in mind.

In proof-of-work, people develop specialized hardware (ASICs) solely for cryptocurrency mining. These devices are often millions, and sometimes billions, of times more efficient than general purpose computer hardware. Those leveraging ASIC technology exert a disproportionate amount of control over proof-of-work networks.

In a proof-of-stake system, centralization occurs because the “rich” have a disproportionate amount of power over the system, oftentimes allowing early-adopters to hijack the governance of a platform.

Collateral requirements for participation are not a novel concept, either. Block producers in EOS and masternodes in DASH requires hundreds of thousands of dollars worth of cryptocurrency to become a validator. More similarly, Ripple’s XRP Ledger has a 20 XRP minimum to create new accounts to prevent spam attacks.

The research paper combines elements from both proof-of-work and proof-of-stake, keeping their limitations in mind.

Benefits of the proposed algorithm

Senders with limited hardware or low collateral would be able to send a limited number of transactions cheaply. Meanwhile, those with faster or more specialized hardware (ASICs) cannot spam the network because of the increasing puzzle difficulty combined with the collateral requirements.

The algorithm has two major benefits. It ensures that even if someone had an infinite amount of computing power, they couldn’t overwhelm the network because of limitations imposed by collateral. It also incents users to create a single identity, with a large amount of collateral, rather than multiple identities with smaller amounts of collateral, should they want to minimize transactions costs—again reducing the risk for spam attacks.

As an additional benefit, as IOTA is tied up as collateral for sending transactions it will take coins out of circulation—increasing the price.

Unraveling the Tangle

Unlike most major cryptocurrencies, IOTA does not use a blockchain. Instead, IOTA leverages a different distributed ledger technology called a directed acyclic graph (DAG), which allows for multiple chains of transactions to co-exist and interconnect. IOTA’s implementation of a DAG is called the “Tangle.”

DAGs allows for high scalability but presents different security, decentralization, and asset management challenges.

Unlike Bitcoin, which relies on miners to validate transactions and maintain network security, the Tangle instead requires the sender of a transaction to validate the correctness of two other transactions. This makes the network self-sufficient and scalable.