Will IOTA power the machine economy? An alternative to blockchain

Image: IOTA Foundation

Cryptocurrencies are hot. In our last post we talked about Bitcoin: it has the potential to change our world in many useful ways, but at a price. To keep its blockchain secure, Bitcoin requires as much energy to run as entire countries. In a world where climate change is a growing concern, people may start to ask questions.

In fact, there are a number of alternative technologies in development. An interesting example is IOTA, which is envisioned as a distributed ledger for the Internet of Things. It’s not based on a blockchain, but instead uses a Directed Acyclic Graph called the Tangle. So, what exacly is the Tangle, how will it allow payments between smart devices, and how is it different from a blockchain?

Blockchain

Image: IOTA Foundation

A blockchain, as the name implies, consists of a chain of sequential blocks. Each block contains a number of transactions. New transactions are gathered in a new block, that will then be added to the end of the chain. To link the blocks together, miners perform intensive calculations, verifying the integrity of the entire chain. This makes it very hard to fake a transaction: to do so, you would need to falsify the entire chain and you could only get away with that, if you had more computing power than at least the majority of miners together.

Tangle

Image: IOTA Foundation

The Tangle, on the other hand, does not use blocks. Each new transaction is attached to two already existing transactions, that could be anywhere in the existing graph, not necessarily at the end. This way, each transaction confirms two other transactions. While this requires some calculations, that’s nothing compared to the effort needed to validate an entire chain of transactions. One might argue that this must also make it easier to falsify a transaction and in fact IOTA uses a central node, called the coordinator, as arbiter to decide which transactions will be confirmed.

Since IOTA does not need miners making intensive calculations to verify transactions, energy consumption of the network is neglible compared to Bitcoin and transactions can -in theory- be processed very quickly. As no miners need to be paid for their efforts either, it allows IOTA transactions to be free of charge.

These properties make IOTA very suitable for making many small transactions and it could ideally be used to power the machine economy, allowing Internet of Things devices to make payments and record transactions. Imagine your electric car connecting to a charging station and paying for the exact amount of energy received, without you having to do anything. Or think of smart sensors all over the city, measuring air polution and recording their data onto the Tangle. Some of this may still sound like Science Fiction, but it may be closer than you think. In fact IOTA is already being used in real-life situations, for example to verify the results of COVID tests at German airports.

So, should you sell your Bitcoin and invest in IOTA instead? Maybe, but remember there are some drawbacks to IOTA as well. The technology is still very much in development and one of the disadvantages of not using a decentralised army of miners to verify payments, is that (at least for now), IOTA relies on a central coordinator to validate transactions. For many cryptocurrency believers that’s a big no, as this means that – unlike with Bitcoin – you’ll have to put all your faith in one party. This technology is still very much in development, but if (that’s an if) the IOTA Foundation manages to overcome these obstacles, the Tangle may hold huge promise.

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