IOTA is aspiring to reinvent Bitcoin from the ground up
IOTA aspires to become what Bitcoin originally intended to be: a permission-less ledger anyone can join, where no special groups have special access or control over the network.
That’s a very lofty goal, one that even Bitcoin itself fails to fully measure up to in this respect: A handful of crypto mining giants (half of them in China) control the lion’s share of the computing resources on the Bitcoin blockchain.
IOTA developers went back to the drawing board.
They asked themselves how to build a network where value can be transferred safely, every participant is equal, and transactions take only a few seconds to settle.
And in an attempt to achieve these goals once and for all, they did something very novel: They discarded the entire concept of blockchain itself.
What do they use instead? A non-blockchain data architecture called “Tangle.”
Let’s say you want to make a payment on the network. Here’s how you’d do it … First, you validate two transactions on the ledger. You check the wallets of both parties in each transaction. You make sure they had sufficient funds. Then, you look at prior transactions to see where those balances came from. If everything adds up, you “witness” that all transactions were made in accordance with the rules of the network.
Now, you’ve validated two prior transactions on the network. And this simple contribution qualifies you to execute your own transactions.
Just be sure not to make a payment from your digital wallet without sufficient funds. For IOTA, that’s the crypto equivalent of check kiting. So, anyone caught doing it gets banned from the network. For life.
The remarkable benefit of this approach is that literally anyone can participate on the network. And at least for a very short period of time, even malicious actors bent on destroying the network could get in. What’s supposed to keep everyone in line is the requirement that every active participant must check every other participants’ work.
In theory at least, all of this would make IOTA far more decentralized than any Proof-of-Work or Proof-of-Stake crypto in existence today. In practice, however …
IOTA still has big, potentially fatal challenges to sort out. Here are the main ones:
First, the internet is fundamentally anonymous. So, you can never know for sure if a “participant” is a real person. One single entity could control an unlimited number of bots that are not real participants.
Second, a malicious actor could take advantage of IOTA’s open and decentralized design to flood the network with millions of fake transactions, all fully validated by other fake transactions.
Third, if the flood is big enough, network participants would have a hard time separating the true transactions from the fake ones.
Result: It would be impossible to execute a transaction without the fear that your funds will be stolen along the way.
At the moment, IOTA has no mechanism to resolve these problems. That is, except for one that has led to loads of controversy: The “Coordinator”.
Essentially, the Coordinator is a special kind of validator under the auspices of the IOTA Foundation. And all transactions approved by the Coordinator are considered 100% valid. Why? Because the Coordinator says they are.
But naturally, that leads to an elephant-in-the-room-sized irony: A single authority deciding what’s valid and what isn’t — precisely what Distributed Ledgers were born to get rid of in the first place.
Thus, the insertion of the Coordinator into the mix turns IOTA right back to the same kind of legacy system it was supposed to disrupt. To their credit, the IOTA development team is fully aware of these conundrums. And they are doing serious, peer-reviewed research on how to get rid of the Coordinator — an event they call “Coordicide” — without compromising any of the security or decentralization their core vision demands. However, this also makes rating IOTA’s technology something of a delicate balancing act. We cannot give it rating based strictly on the promise of what it could one day become. Yet, we also understand investors may wish to bet on IOTA’s potential to solve these problems down the road. Like buying call options on its future.
Technology model: IOTA gets high marks for its potential decentralization, high speed and lightweight design. It also gets points for addressing smart contracts and distributed applications in a novel way that’s both highly efficient and highly decentralized, without requiring every single participant to perform every single calculation (as with the likes of Ethereum).
However, IOTA loses points because of the Coordinator, which not only centralizes the ledger, but also prevents a full roll-out of second-layer features (such as dApps and smart contracts). Further, since the Coordinator has to validate all activity on the Tangle before giving its “stamp of approval,” transaction processing time is disappointing. In sum, we see a big gap between IOTA’s amazing potential and what it can actually do today. Both realities are reflected in its Technology Score.
Adoption model: IOTA is getting recognition from major German brands like BMW and Bosch — both of which are considering using the public IOTA ledger. IOTA also has a strong presence across the European Union, as a founding member of the International Association of Trusted Blockchain Applications (INATBA). Its team is committed to serious research and development of the protocol. And usage metrics rival those of Bitcoin. All of these achievements are remarkable.
Risk/Reward Models: IOTA was a favorite of the 2017 bull market, but fell hard out of favor in 2018. It’s now a relative underperformer, as crypto prices recover from the bear market of the last 12 months. This is disappointing but not unexpected. After all, crypto trading is usually driven by short-term gain, and virtually none of IOTA’s strengths are playing out in the short term. Plus, disappointment over slow progress of the development team also likely contributes to sluggish price action.
This is not financial advice. I don’t take into account of your personal investment objectives, specific investment goals, specific needs or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation. Any expression of opinion (which may be subject to change without notice) is personal to the author and the author makes no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.
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