Gianmarco Fiorilla, is Accenture Management Consulting Analyst (Finance & Risk) | Blockchain Enthusiast
“It’s the year 2017, and the word blockchain is virtually on anyone’s mouth in business. However, the latest trends in the DLT ecosystem promise to make the blockchain model obsolete very soon: one of the most glaring examples so far is IOTA. IOTA is a new-generation cryptocurrency conceived in 2014 for the IoT industry, which relies upon the idea that blockchain is not suitable for IoT because of the industry’s heavy reliance on micropayments: implementing blockchain in IoT would mean having to pay fees that are larger than the amount of value being transferred, which is not economically reasonable.
In order to overcome this problem, IOTA developers have devised a revolutionary kind of Distributed Ledger: the Tangle. Unlike the blockchain, The Tangle is not a linked list of blocks but instead it takes the shape of a Directed Acyclic Graph, namely a unidirectional graph (from left to right) where each transaction is connected to two subsequent transactions. Observing the main differences with blockchain can help us explain how the Tangle works.
The Tangle eliminates the need for transaction fees to keep the system working. That’s right: no blocks, no chain and no transaction fees. But then you may ask, if there are no miners, how is consensus reached? And what incentives drive users to do their job properly?
The Tangle and the Blockchain rely on two different protocols; in other words, consensus between nodes is achieved in different ways. In the blockchain model there is a clear distinction between transaction issuers and validators, with the two having very different goals. While the former want to have their transaction to be validated as soon as possible, the latter are only interested in winning rewards, which are covered through transaction fees that can be very expensive.
In a Tangle, consensus is part of the transaction mechanism, which means that transaction issuers also become validators. Anyone who wants to issue a transaction must first validate two previous transactions, which in turn reference two other transactions and so on. In the picture above, each square represents a transaction and the lines represent the validation of other transactions. The darker squares are called tips, and they are newly issued transactions that have not been validated by any issuers yet. The aim of any person who wants to issue transactions is to approve tips as soon as possible. When validating a transaction, issuers must do some Proof of Work to check if the transactions they are trying to validate are conflicting with the tangle history or not. In this system, each issuer contributes to the safety of the network. Transactions can be validated either directly (connection from A to B) or indirectly (connection from A to C through B). The more times a transaction is validated, the higher its reliability.
In this system, transaction fees are eliminated since issuers do not need economic incentives (reward) to do their job; their reason to validate transactions is to be able to issue transactions themselves.
With the advent of Quantum Computing recently confirmed by IBM, cryptographic systems used to enhance blockchain are becoming obsolete and easier to crack. While the existing cryptocurrencies have to go through a decision-making process and a possible fork to change their system to become quantum resistant, the Tangle was designed to resist to quantum attacks. This makes IOTA a very secure Distributed Ledger where breaking into someone’s wallet is virtually impossible.
CENTRALISATION OF CONTROL
On blockchain-based models small miners typically tend to form big groups to reduce the variation of the rewards. This leads to concentration of power in the hands of mining pools, thereby allowing the same to apply a wide spectrum of policies on certain transactions. On a tangle centralisation of control is not possible as there are as many validators as there are users with the same interests
Some cryptocurrencies have limits on the number of transactions that can take place each second. Too low values may hinder the growth of the userbase, while too high values may open the system to different kinds of attacks. Unlike blockchain, In IOTA there is no finite number of transactions per second. As they are issued, transactions automatically validate other two transactions; as a result, IOTA scales proportionally to the number of transactions ad infinitum.
Unlike blockchain, the entire network in the Tangle does not need to check all the transactions in the network but only its neighbours (each transaction validates two other transactions), which implies that transaction can take place at a much faster pace than in blockchain. Moreover, non-neighbour transactions can also be approved indirectly (e.g. A approves C through B).
Despite all the innovations brought about by the Tangle, this new system is still at its early stages, and it presents some risks and drawbacks that the team will have to address in the future. The most known problem that the Tangle presents is that of high load. In other words, when a large number of tips is on the tangle, the network slows down. IOTA developers are currently using a coordinator that regulates traffic on the Tangle, which means that the Tangle itself is actually centralised at the moment, which makes it more vulnerable to hacking. The IOTA team will soon have to find a way to automatically regulate traffic so to avoid network overload and enhance security.
IOTA is a young cryptocurrency, but a very promising one. Several universities have already recognized the potential of IOTA and decided to work with it. Be it automated vacuum cleaners requiring drone transportation or people interacting with AI-enabled robots, the Tangle promises to substitute the existing blockchain-based ledgers. Whether it will be a success or a failure, IOTA represents a novelty that is moving the world of DLT towards next step of its evolution process.