What is IOTA?

What is IOTA?

IOTA stands for Internet of Things Application and it is a first open-source distributed ledger (cryptocurrency) that designed to record and execute transactions between machines and devices in the Internet of Things (IoT) ecosystem.

Moreover, in a blog post discussing IOTA’s road map, David Sonstebo, co-founder of cryptocurrency, also wrote that it was developed to enable the “paradigm shift” to the IoT by establishing a de facto standardized “Ledger of Everything”. Put simply, it means the cryptocurrency will enable data exchange between sensor-equipped machines that populate the IoT.

In late 2015, the IOTA project was originally created by Sergey Ivancheglo, David Sontesbo, Serguei Popov and Dominik. Furthermore, the development of the IOTA token is led by the IOTA Foundation (IF) – a non-profit foundation based in Berlin, Germany with its aim is to improve the world in a sustainable, fair and transparent way.

Before IOTA was officially issued, it raised funds through initial coin offerings (ICOs) and received more than 3,000 Bitcoin, at the time worth $434,000. From that, the market capitalization of IOTA has reached a high of more than $14 billion.

How does IOTA work?

IoT has been a major force in the world economy.

The vision of IOTA is to be the platform for machine-to-machine (M2M) transactions. IOTA’s founders started the company after working in the IoT industry, and they said that in order for IoT to be most useful, the devices in the network need to share and allocate resources efficiently, which means that the devices need to be able to purchase more electricity, bandwidth, storage, or data when they need it, and sell those resources when do not need anymore.

Even on a small network, this means there are potentially dozens of transactions per second as the devices communicate and use resources. With so many transactions on such a small and fast scale, the founders of IOTA believe that blockchain technology is not suitable for IoT applications because of its scalability and charging fees. Therefore, IOTA aims to solve both scalability and fees with its new network so that billions of IoT devices can use it.

According to the IOTA website, machines can exchange services or data with each other and pay for them with its cryptocurrency named MIOTA that makes it stand out from other cryptos when it has a data layer as well as a value layer. Especially, the key innovation of IOTA is to not use blockchain technology like Bitcoin or Ethereum, instead of Tangle, a system of nodes used for confirming transactions. IOTA claims that Tangle can overcome the inefficiencies of current Blockchain designs because it is faster and more efficient. Another interesting thing about Tangle is that it does not use miners like BTC.

For instance, when transactions are confirmed with Bitcoin, volunteers with their extra computing power will be rewarded with extra Bitcoin for using their resources. These miners are not really involved in the transaction, they are confirming others to transact online. This particular consensus mechanism is called Proof-of-Work (PoW).

However, the problem is that using PoW gets more and more expensive to confirm a transaction as time goes by, which makes the difficulty of mining becomes harder, needs more computing power and electricity. This also leads to slow and expensive transactions, most importantly the Bitcoin blockchain can only confirm up to 7 transactions per second.

On the other hand, in the IOTA network, things work differently, because anyone who wants to use the system to send funds must contribute to the network by confirming other people’s transactions.

The idea behind this is that the more people use the IOTA system, the more scalable the network will become. This means that in reality, there is no limit to the number of transactions the network can process per second, meaning it can expand infinitely.

what is IOTA
Source: Bitdegree website

To submit a transaction to the IOTA ledger, you must verify two other previous transactions. The method of verification means there’s no central ledger, and there’s no need for miners to power the network.

When devices on the network randomly verify each other’s transactions, they create consensus through the web that connects the transactions. In cryptography, this type of verification is called Directed Cycle Graph (DAG), but the creators of IOTA call it Tangle. Due to the computing power in Tangle grows as the network grows, transactions can be made without computing costs, securely and without fees.

In general, IOTA differs from Bitcoin in several ways:

  • No transaction fees.
  • Instead of a “blockchain”, transactions are implemented on the Tangle.
  • Presently, 800 transactions are possible per second – instead of 7 with Bitcoin.
  • The more transactions are performed, the faster they become.
  • The low computing power required makes IOTA now the greenest crypto.

The prices of both fluctuated sharply. This high volatility doesn’t facilitate the establishment of IOTA as a means of payment. At the same time, it makes cryptocurrencies become a risky investment. Bitcoin dominance is still a strong factor. If BTC rises or falls, altcoins usually follow suit.

How does IOTA differ from the Blockchain?

What is IOTA?
Source: IOTA website

The blockchain technology with the currency BTC is completely different in regard to its “character” and use. It was originally designed as a means of payment that makes middlemen like banks become unnecessary. The concept of this technology was developed in response to the 2008 financial crisis. This had exposed the level of greed (and inability) of some bank employees.

The doubt of middlemen filling their pockets is theoretically solved by a blockchain. Blockchains are chains of entries in a “ledger”. A ledger is a list whose entries cannot be changed later. Blockchain can be downloaded as a file and can be viewed by anyone, but its big drawback is the huge energy consumption.

A Russian entrepreneur bought two power plants to meet the power needs of his mining farm. Bitcoin is currently traded more in the form of digital gold because it has similar attributes.

  • Can only be exploited with considerable effort
  • Limited availability (up to just under 21 million BTC)

Community concerns

The IOTA coin project has some big ambitions, but it’s really important to understand that they are still in the development phase. In fact, the network has gone through quite a bit of technical issues.

Coordination protocol, if it stops working, the entire network can be at risk. This has happened multiple times, and at one point the IOTA could not be used for days. Moreover, the centralized coordinator has also been installed to protect the network from 34% attacks. This is when someone gains so much computing power on the network that they can make changes to it.

Currently, at least $3.94m worth of IOTA was stolen, which was facilitated by a DDoS attack against all public nodes. The biggest crypto is also at risk of a similar attack, but the hackers would need to get 51% of the total hashing power.

Besides, in Aug 2017, researchers at the Massachusetts Institute of Technology (MIT) published an academic paper that claimed the IOTA network had lots of security flaws. They said that rolling users’ own crypto means creating cryptographic systems from scratch that dangerous because systems that haven’t been battle-tested over a long period of time can contain major vulnerabilities. The IOTA team has since fixed this issue but their choice to roll their own crypto was a red flag to many in the crypto community.

A member of the IOTA team responded that the vulnerability was intentionally added to the code to protect against malicious groups copying their open-source code. Whether this is true or not, the group’s reaction adds to a growing list of concerns in the community.

While the technology behind IOTA may be interesting, it is best to keep checking their development blog, do your research and due diligence before investing in crypto-assets.


  • Some Technical Details
  • Launched: June 11, 2016
  • Total coin supply: 2,779,530,283,277,761
  • Algorithm: Proof of Work (PoW) using a version of SHA-3
  • Block time/reward: No blocks, verify two transactions to submit your own transaction

IOTA cryptocurrency uses technology – Tangle that has a lot of potentials. If successful, it could be a viable competitor to blockchain technology for transactions, and the IoT market for microtransactions will only continue to grow. Although IOTA is superior, however, its technology remains largely untested. IOTA’s Tangle may be the next big step in cryptography, but investing in an untested technology is inherently risky, so do your research carefully before giving a decision.

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