IOTA: Distributed Ledger Technology, Minus the Blockchain
A commendable conundrum: DAGs could be an alternative solution to blockchain’s higher transaction costs and slower speeds. But some say if you lose the blockchain then you also lose decentralization.
Updated October 25, 2021 • 6 min read
IOTA is an open-source distributed ledger technology (DLT) platform powered by MIOTA, its native cryptocurrency. The IOTA network is primarily intended to boost the trajectory of the Internet of Things (IoT) revolution. Instead of a blockchain, it uses a Directed Acyclic Graph (DAG) as the foundation for its DLT-based network. Benefits of using a DAG structure include free transactions, no complex Proof-of-Work (PoW) mining architecture, and higher transaction-per-second (TPS) capabilities. However, some experts in the blockchain space are concerned that DAGs like IOTA are insufficiently decentralized, inconclusively tested at scale, and deficient in some of the robust security components that blockchains can provide.
The IOTA Crypto Network’s Inception
The Internet of Things (IoT) is a term that characterizes an interconnected network of smart devices. In theory it can connect everything from locks, lights, and home appliances to cars, cities, and energy grids, in a vast network. In practice, however, this level of connectivity requires a cheaper, faster, and more secure network than many current systems can adequately support. For example, blockchains are very secure, but transaction costs and difficulties achieving the necessary forecasted transactions per second (TPS) may require another approach. IOTA’s Directed Acyclic Graph (DAG) structure is one such solution.
Conceived in 2015, and funded through an Initial Coin Offering (ICO), the IOTA cryptocurrency network went live in 2016. As one of the first crypto projects to use a DAG in lieu of a blockchain as its distributed ledger, IOTA is the largest DAG by market capitalization in the crypto space as of 2020. IOTA’s native coin, “MIOTA,” is consistently ranked among the top-50 crypto coins. MIOTA supports the network’s system of accounting, paying fees, and setting up smart contracts. As exemplified by its name — an acronym for Internet of Things Application — IOTA aims to be an enterprise-level solution for the Internet of Things (IoT) future that many see on the horizon.
Pros of the IOTA Crypto Protocol: DAG Speed, Scalability, and More
Instead of linking together blocks full of transactions that build a blockchain, IOTA links transactions themselves together. IOTA achieves this by requiring the transacting party to approve two previous transactions and perform a small Proof-of-Work (PoW) function. This “do it yourself” approach is arguably faster, simpler, and more direct than the standard blockchain-based PoW structure pioneered by Bitcoin (where multiple third parties on the network perform much more intensive PoW functions to help verify a transaction).
On the IOTA cryptocurrency platform, newer transactions are linked to older transactions in a somewhat similar way to how new blocks are chained to the end of a blockchain. However, their linkage structures follow different sequences. Blockchains are generally linked in a linear manner — with transaction 1 connected to transaction 2, transaction 2 is then connected to transaction 3, and so on. In contrast, a DAG is structured like a web — where one transaction can have multiple parent transactions connected to it as well as multiple child transactions.
Those transacting on the IOTA network conduct simple, easy to solve, PoW mining functions on their own transactions and validate other transactions that are connected to theirs. The two parent transactions are approved by including their transaction hashes in your own transaction. Any one transaction in a DAG could be validated by multiple other transactors at any given time, reducing the potential waiting time when compared to a linear blockchain system.
In other words, there is no group of dedicated miners who have the financial incentive to secure the network — instead, there’s essentially a barter system. It’s as if a group of parents teamed up with other parents in the same area to take turns babysitting a group of each other’s kids, instead of hiring a babysitter. Parents would be incentivized to treat each other’s kids as they would their own, knowing that their own children will also be in the hands of the other parents soon. In the digital world, this kind of model especially makes sense for a massive volume of small data points. IOTA’s fee-less data and value transfer makes IoT more realistic and practical. You wouldn’t want to pay a transaction fee every time your smart coffee maker sends data over the network.
No blocks means transactions are immediate, as you don’t have to wait for blocks to be confirmed. Perhaps most importantly, DAGs may be much better at scaling their transactions per second (TPS) output. You may have heard about the maximum TPS ceilings on Ethereum and Bitcoin causing delayed transactions and high transaction fees. While Bitcoin and Ethereum are quite secure, they simply can’t match the several-thousand TPS volume that IOTA’s DAG can process. Many popular blockchains can’t even process more than 50 TPS, let alone thousands.
IOTA’s (DAG) Downsides
IOTA has yet to be battle-tested at scale to see if it can achieve the high throughput levels claimed by developers. It may take more time for IOTA and other DAG IoT projects to reach maturity and prove themselves in the market. More importantly, some experts argue that IOTA is currently deficient in a key feature of most blockchains — decentralization.
IOTA’s DAG protocol is called Tangle. Like Bitcoin, Tangle has nodes that validate transactions, but unlike Bitcoin, it also has a Coordinator. The Coordinator is a centralized node that approves all transactions on the IOTA DAG. It is a single point of failure, and is currently needed to secure the IOTA crypto network and prevent the double spending of MIOTA. Many in the crypto space see this as a major vulnerability. For example, if someone with criminal intent were to target the Coordinator, they could theoretically control the entire network and manipulate it for malicious purposes.
While IOTA has a roadmap in place to remove the coordinator, critics counter that they’ve already worked on the problem for years without much progress toward a solution. In addition, IOTA now has competition from other DAG ledgers with different design characteristics that some prefer, including Nano and Hedera Hashgraph (HBAR).
IOTA Cryptocurrency Hacks and Downtime
IOTA has not been exempt from attacks on its network and, in some cases, has suffered from network downtime as a result. In September 2017, a vulnerability was discovered that in some instances allowed for forged transaction signatures. The following month, another bug was discovered that revealed a portion of private key addresses. The network also shut down for 24 hours in December 2019, leaving users unable to process transactions.
The most devastating IOTA hack occurred in January 2020. Hackers breached the proprietary IOTA crypto wallet (called Trinity) and stole more than two million U.S. dollars worth of MIOTA. IOTA used the aforementioned Coordinator to shut off the network for nearly a month to prevent more losses. This also required Trinity wallet users to use a seed migration tool to move their funds prior to restarting the network. Without taking this precaution, IOTA suspected that the hacker could have more avenues for exploiting the network once it went live again.
Uptime is particularly crucial for an IoT system, whose value lies in its ability to reliably send on-time data at all hours, and to and from all locations. This uptime requirement is all the more crucial for services that aim to operate on an enterprise level at a global scale. For comparison, Google averages only a couple of hours in downtime per year — not weeks, as IOTA experienced in 2020.
Although one of the founders reimbursed those who lost funds, the 40% drop in IOTA’s value at the time was largely attributed to this incident. Fortunately, the Coordinator-enabled shutdown prevented more thefts. Critics argue that with the Coordinator, IOTA is nothing more than an expensive database at this point. Time will tell if IOTA will be able to function without the Coordinator node and transition to a network with a more resilient decentralized system.
IOTA Crypto Protocol: A Foundation for the Future IoT?
Despite the concerns, many believe IOTA — or a DAG competitor — will play a key role in facilitating the IoT ecosystem that is taking off. The U.S. government has also notably expressed interest in leveraging IoT. It has reserved L-band radio frequencies for 5G and IoT. These frequencies are another infrastructure component that will, along with a secure network, allow the IoT ecosystem to thrive in the coming years.
Is IOTA’s Roadmap Achievable?
Detractors say that IOTA and other distributed ledger DAGs are promising but not yet technologically superior to blockchains. While many focus on IoT use cases, IOTA and other DAGs can also be used for data storage, communication, microtransactions, smart contracts, and more. IOTA is free, fast, and has promising scalability potential, but some question the network’s viability, given its past security vulnerabilities; others say it must embrace decentralization before it can be taken seriously.
On the other hand, proponents say that IOTA’s roadmap is one of the most transparent in the crypto space. IOTA has also made development changes for the better, and has enacted stronger security protocols and testing. Others add that IOTA is a very ambitious project that aims to provide a permissionless, autonomous, decentralized, and fee-less ledger network to facilitate IoT adoption that would affect a vast range of industries.
While other projects have tried and failed to combine the best aspects of blockchains and DAGs, it’s certainly possible that IOTA or another project can take DAG open-source distributed ledgers to the next level and compete with blockchains in the distributed ledger technology (DLT) space for market share. While some don’t give one iota about IOTA, others see IOTA and other DAGs as an evolutionary improvement over distributed ledgers that use blockchains.
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