What Is IOTA?

IOTA is a distributed ledger technology (DLT)-based, permissionless network that has been developed to meet the needs of the rapidly evolving global economy. As explained on its official website, the IOTA platform has been built to support transactions involving Internet of Things (IoT)-based applications.

The IOTA platform maintains data integrity while also allowing seamless transactions between network participants. According to its developers, there is a lack of transparency in the existing financial system as it depends heavily on trusted intermediaries to settle transactions. 

Existing Systems Depend on “Delegated and Unverifiable Trust”

As noted on IOTA’s website, traditional financial institutions maintain a ledger that contains records of account holders’ debits (withdrawals) and credits (deposits). Bank account holders must trust the banks to accurately and honestly manage highly sensitive financial data. 

In addition to trusting banks with sensitive financial records, there is currently no reliable way to verify information that is found on the internet. As pointed out by IOTA’s developers, the existing information systems depend on “delegated and unverifiable trust” – which is considered a major obstacle for a permissionless economy. 

Huge Efficiency Gains Realized After Removing Third-Parties

However, the IOTA team notes that DLT-enabled systems for data and money allow us to store sensitive information in a highly secure, decentralized, permissionless, and distributed manner. Per IOTA’s development team, this type of data management system effectively eliminates the need for middlemen or trusted third parties – as their services are no longer required when finalizing transactions.

By removing intermediaries from the transaction settlement process, individuals and businesses are able to realize “enormous efficiency gains.” This is according to IOTA’s creators, who believe that new “value propositions” will emerge in the future economy – after third parties have been replaced by more effective DLT-enabled systems.

Blockchain-based Crypto Networks Are Unable to Scale Effectively

While most cryptocurrency networks are based on blockchain technology, IOTA’s technical team has argued that the blockchain data structure itself has fundamental technical flaws. Due to these inherent design limitations, major blockchain-powered platforms such as the Bitcoin (BTC) and Ethereum (ETH) network suffer from the scalability problem.

Currently, the Bitcoin network can only process around 4 transactions per second (TPS) while the Ethereum blockchain is limited to just 15 TPS. In addition to slow processing times, transaction fees on large blockchain networks can be quite high.

Becoming Increasingly Centralized Around “A Few Powerful Actors”

Other challenges faced by existing blockchains involve problems related to platform governance. As part of the network management process, transaction validators must be compensated fairly for their efforts. 

However, IOTA’s developers note that financial incentives for validating transactions have become quite competitive. This, the IOTA team argues, has led to blockchain networks becoming increasingly centralized around “a few powerful actors.”

Blockchains Not Suitable for Enterprise-Level Applications

According to IOTA’s creators, the need for inclusive and permissionless crypto networks has increased significantly in the past few years. But current blockchain-enabled cryptocurrency platforms are not suitable for enterprise-level applications, IOTA’s developers claim.

In order to develop a more scalable and robust distributed platform, the creators of IOTA have built a network that is based on the Tangle. The IOTA team believes that the Tangle will complement the core technologies that are being developed for the Web 3.0 standard and also for what’s referred to as the “Internet of Everything.”

“Empowering” Humans and Machines

Operating as a settlement layer with a zero-fee transaction model, IOTA’s network will be highly secure and it will also be able to support a large number of applications. As stated on its website, IOTA aims to “empower machines and humans” by allowing them to freely participate in new permissionless economies.

Notably, the IOTA team is currently developing the “Machine Economy” – which is considered one of the most important parts of the global permissionless economy. As a DLT network created specifically for IoT-enabled applications and devices, the IOTA platform will aim to support the machine economy – which may consist of millions of sensors and CPUs that interact with each other.

Existing Blockchains Can’t Meet the Requirements of the Future Economy

While communicating and exchanging data, the entities on an IoT network may have to make micro or nano-payments in order to settle transactions between each other. Due to the fundamental limitations of blockchains and the use of energy-intensive network management processes like mining (by proof-of-work chains), IOTA’s technical team thinks these platforms cannot meet the demands of the future economy.  

In order to allow IoT devices and their associated intermittent networks to communicate and transact in a more efficient and cost-effective manner, the IOTA team has designed a distributed ledger that does not require grouping transactions into blocks and linking them to form a chain (which is how blockchains organize transaction data). 

Small Amount of Computational Power Needed to Verify Transactions

Instead of using the blockchain data structure, the IOTA network is based on “a stream of individual transactions entangled together.” To participate on the IOTA platform, users must verify two previous transactions that were broadcast on the network. Unlike mining on the Bitcoin network (or other PoW chains), only a relatively small amount of computational power is required to validate transactions on the IOTA network.

Network management on IOTA does not require a hierarchy of user roles and responsibilities like those found in delegated proof-of-stake (DPoS)–based cryptocurrencies such as EOS and Tron (TRX). All network participants on the IOTA platform are able to receive the same incentives for verifying transactions.

IOTA-based Transactions Will Always Be “Completely Fee Free”

To conduct transactions in the Tangle, only two previous transactions must be verified. Those who validate at least two transactions on the IOTA network are rewarded by having their own transactions processed for free (no fees charged). 

Referred to as the “pay-it-forward” system of validating transactions, IOTA’s creators believe a DLT network can function effectively without financial rewards. The platform’s developers claim that IOTA-based transactions will “always be completely fee-free.”

IOTA Platform Confirms Transactions Faster As Network Activity Increases

IOTA’s development team states that the platform’s zero-fee model allows it to securely store sensitive information within Tangle-based transactions. The IOTA network also has the ability to spread large chunks of data across several grouped or linked transactions. 

Based on directed acyclic graphs (DAGs), the Tangle structure can handle a large number of transactions – which is a requirement for most enterprise-grade applications. Notably, IOTA’s technical team claims that the IOTA network actually becomes faster at processing transactions when there is “more activity in ‘the Tangle’.”

How Does the Tangle Work?

As explained on IOTA’s website, the Tangle data structure has no blocks or chains, both of which are used by most existing blockchain networks to organize and manage transaction data. Instead, the Tangle consists of “a stream of interlinked and individual transactions.”

These interlinked transactions reside on a distributed platform that is managed by a decentralized network of participants. As noted by IOTA’s developers, the DAG-based Tangle was used to implement the IOTA network (instead of a blockchain) – as it can potentially process a large number of transactions. 

Tangle’s DAG-based Data Structure Manages Transactions and Approvals

The IOTA team explains that blockchains have inherent limitations as they require that all participants agree on “the longest chain” – while forks and side branches are discarded (during this process). The Tangle, however, lets separate branches of the DAG gradually come together and merge, which allows the IOTA platform to achieve far greater throughput than blockchain networks.

As a DAG-based data structure, the vertices (or the endpoints) on a Tangle represent transaction data and the graph’s edges represent “approvals.” When a new transaction is broadcasted on the IOTA network, it is registered (or recorded) as a new vertex in the Tangle’s DAG.

Only Transactions with Verifiable History May Be Approved

As mentioned, transactions are also linked to two previous transactions, which have been approved via a process (described above) followed by other transactions made on the network. Only transactions that have a verifiable history may be considered valid, the IOTA team states. Moreover, the IOTA network protocol only approves valid transactions. 

Accounts that contain approved transactions always have a positive balance, which ensures that network participants cannot engage in double-spending or try to conduct fraudulent transactions. 

First Transaction Registered in IOTA’s Genesis Stage

The first transaction recorded in the Tangle is known as “the genesis.” According to IOTA’s founders, all IOTA tokens were generated in the genesis stage, and no additional tokens will be created. All transactions made in the Tangle “approve the genesis directly or indirectly”, the IOTA team notes.

Transactions may become part of the IOTA network’s evolving consensus mechanism – after they have been approved by “a larger number of newer transactions.” Once a transaction is considered part of the network’s consensus, the IOTA technical team claims it is practically impossible to modify the original transaction. 

Small Proof of Work Required to Prevent Spam and Forks

The integrity and immutability of IOTA’s ledger and its transactions are maintained by requiring that each new transaction perform a small proof-of-work computation. In a manner that is similar to how the Bitcoin network aims to prevent DoS attacks by requiring miners to perform proof-of-work, the IOTA platform makes it expensive to “spam or fork the Tangle” after consensus has been reached.

How Transactions Are Processed on the IOTA Network

In order to conduct transactions on the IOTA network, a process called “tip selection” is performed by “randomly walking” from the genesis “towards the tips.” As explained by IOTA’s developers, “the walk stops” after reaching a tip. The walk is repeated so that two tips may be selected. 

“Biased” Towards Transactions with Large Cumulative Weight

According to the IOTA team, the walk is “biased towards transactions” that have a larger cumulative weight, or give priority to transactions that a larger number of other transactions have approved. In other words, IOTA’s website states that this is similar to “walking towards the heaviest branch.”

This type of selection allows bigger branches to further increase in size, while smaller branches begin to get smaller and “eventually disappear” – meaning that they are not approved by the newer transactions broadcasted on the IOTA network.   

“Heaviest Branch” Concept Similar to Longest Chain Idea in Blockchains

As noted by IOTA’s developers, the “heaviest branch” concept is somewhat similar to the concept of the longest chain in blockchain networks. However, IOTA’s design team claims that the heaviest branch technique allows for greater flexibility, as it lets the smaller branches merge with the larger branches. 

According to the IOTA team, a Tangle-based network is able to achieve significantly greater throughput than blockchain-based platforms – while also being able to function as “a trustless consensus system.”

Only Transactions with Large Cumulative Weight Added to Consensus

While blockchain-based transactions are confirmed after they have been validated by several blocks on the network, IOTA-based transactions may be approved and added to the network’s consensus after they have acquired enough cumulative weight.

As noted by IOTA’s developers, cumulative weight is determined by calculating the amount of proof-of-work required to validate transactions. This type of design approach prevents malicious entities from altering transaction history or “un-approving” transactions as they would have to perform a considerable amount of proof-of-work when trying to alter transactions that have a very large cumulative weight.