What is IOTA and Why Does it Matter?

Dean Decho, 12 min read
Last Updated: 2 October, 2023

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IOTA is poised to become the backbone of the Internet of Things (IoT). This cryptocurrency takes a radical new approach to distributed ledger technology, enabling feeless transactions that can scale to the demands of a rapidly growing network of connected devices.

IOTA has attracted some of the largest global corporations as ecosystem partners for its open-source protocol. The project offers a glimpse into the future machine economy, where smart cities, intelligent energy grids, and worldwide supply chains are powered by frictionless machine-to-machine payments.

Key takeaways:

  • IOTA enables feeless, scalable transactions for IoT through its innovative Tangle architecture
  • The project overcomes limitations of fees, centralization and scalability faced by blockchain networks
  • Adoption is accelerating with 100+ partnerships across automotive, supply chain and smart cities
  • MIOTA token provides exposure to this emerging value transfer system for the IoT ecosystem
  • Future growth depends on execution of the roadmap and enterprise adoption

How Does IOTA Work?

IOTA is a permissionless, decentralized network focused on enabling seamless data and value transfer between humans and machines. It was created in 2015 by David Sønstebø, Dominik Schiener, Sergey Ivancheglo and Serguei Popov as an open-source protocol specifically designed for the Internet of Things (IoT).

Unlike traditional blockchain networks like Bitcoin and Ethereum, IOTA has no fees and requires no miners. Instead, it uses a system called the Tangle – a directed acyclic graph (DAG) that requires each transaction to validate two previous transactions. This innovative approach allows IOTA to offer infinite scalability as more transactions means more validators to secure the network.

  • No blocking, each transaction is handled individually
  • Users become miners
  • Job verification is no longer such a complex mathematical process on the network
  • 2 previous transactions must be verified before each new transaction

OK, but what are the advantages of eliminating miners?

Very simple: the biggest benefit is definitely to minimise the huge energy consumption that other blockchain networks have to deal with. You’ve probably already read it somewhere: the environmental burden of computer mining has for years been one of the biggest criticisms levelled at Bitcoin and others. IOTA’s innovative consensus mechanism shows a possible solution, but it also has its downsides. The network requires a minimum ‘bandwidth’ (i.e. a minimum number of transactions processed) to protect it from attackers.

Understanding the IOTA Protocol: A Detailed Overview

In this chapter we take a closer look at the Tangle technology. But don’t worry, we try to reproduce the mathematics behind it as simply and comprehensibly as possible. As already mentioned, ‘Tangle’ in German can be translated as ‘disorder’. The brilliant trick of IOTA’s consensus mechanism is to impose order on this huge mess of transactions. Unlike the blockchain, where transactions are organised in blocks, IOTA can process transactions asynchronously.

IOTA-Tangle

This means that each of the blocks seen in the figure represents a single transaction. At the same time, however, this means that users must become miners. But an extremely powerful computer is not required to validate IOTA transactions. IOTA is based on another variant of PoW, the so-called ‘network-bound PoW’.

Unlike CPU-bound ‘Proof of Work’, IOTA requires only the solving of a small hash puzzle. It is so small that even the smallest sensors and microcontrollers can perform it. If you want your transaction to be validated by the network, you must first verify two other transactions.

Therefore, the entire transaction history must be searched to verify that you actually have the correct digital signature (i.e. the token property) and to make sure that these tokens have not already been sent. This work is done by software called Wallet IOTA. However, that was a lot of information at once.

IOTA Advantages: The Third Era of Distributed Ledger Technology

After the first generation of blockchain (Bitcoin) and Blockchain 2.0 projects (such as Ethereum), IOTA has entered the third era of ledger technology. IOTA no longer uses the blockchain, but the so-called Splot is based on a mathematical model of graph theory, the so-called directed acyclic graph (DAG). IOTA-Tangle-vs-Blockchain-Illustration DAGs promise to solve some of the traditional problems associated with blockchain:

Advantages of IOTA

  • Scalability (very high speed)
  • Full decentralisation (elimination of miners)
  • No transaction costs (micro-transactions possible)

In particular, free transactions represent a huge innovation in the cryptocurrency world. Even 1 IOTA, or a fraction of a cent, can be sent without transaction fees! We will explain later exactly how the Tangle technology can make this possible. In any case, it should be noted that what the developers of IOTA have done is very impressive!

How Does IOTA’s Tangle Work?

IOTA’s consensus mechanism is called the Tangle. It is essentially a DAG data structure where transactions are represented as vertices on the graph.

When a new transaction occurs, it must validate two previous transactions before being added to the Tangle ledger. Through this validation process, consensus is formed in the network.

The two key advantages of using a DAG over a traditional blockchain are:

  • No fees – Transacting parties do not need to compensate miners or validators as users validate transactions themselves.
  • Infinite scalability – More transactions leads to faster confirmation times as there are more nodes validating the Tangle.

This means the IOTA can achieve high throughput with low resource requirements, making it ideal for micro-transactions between IoT devices.

Problems Solved by the IOTA Network in IoT and Blockchain

IOTA was designed to overcome some of the key limitations holding back mainstream adoption of blockchain technology and IoT – namely scalability, centralization, and transaction fees.

IOTA-Blockchain

Scalability

Legacy blockchains like Bitcoin and Ethereum are struggling to process more than 30 transactions per second. This restricts their ability to support high transaction volumes demanded by IoT machine-to-machine micropayments.

In contrast, IOTA’s Tangle architecture allows throughput to scale linearly with more transactions. Network tests have shown IOTA handling over 500 transactions per second with zero fees.

As such, IOTA provides the scalability and efficiency needed for real-time nano-transactions between billions of devices.

Centralization

Most blockchain networks rely on miners to validate transactions. However, this leads to centralized governance controlled by a handful of mining pools.

The Tangle’s recursive validation process allows IOTA to stay decentralized. Anyone can run a node to submit and validate transactions without expensive mining equipment or electricity costs.

This permissionless architecture helps build an open ecosystem owned by its participants.

Fees

Processing transactions on blockchains requires miner fees to incentivize validation. This makes micropayments inefficient and cost prohibitive.

IOTA has zero fees for transactions of any size. Combined with fast processing, this enables frictionless exchange of value at nano-scales between IoT devices.

By solving the bottlenecks of scalability, decentralization and fees, IOTA provides the missing backbone for the emerging Machine-to-Machine (M2M) economy.

The Roadmap: What is the Future of IOTA?

IOTA launched its 1.0 version Chrysalis in 2021 with upgrades like reusable addresses and smart contract support. Chrysalis helped resolve previous vulnerabilities and laid the foundation for large scale adoption.

The next major milestone is IOTA 2.0, expected to launch in 2023. IOTA 2.0 will introduce ‘Coordicide’ – removing IOTA’s central coordinator and making the network fully decentralized.

This is a key step in IOTA’s maturity and will enable permissionless access to anyone wanting to use the protocol. IOTA 2.0 will also improve security and introduce parallelized validation known as sharding.

Beyond 2.0, IOTA plans to add complementary modules for identity, access control, oracles and more. The future roadmap focuses on making IOTA production-ready for IoT and Web 3.0.

If successfully executed, IOTA is well positioned to become the standardized fabric empowering seamless exchange of value between connected devices and entities. While competition is heating up in this space with projects like Nano, Hedera Hashgraph, IoTeX and Dfinity, IOTA enjoys first-mover advantage.

Who is Behind IOTA team?

IOTA was co-founded in 2015 by David Sønstebø, Sergey Ivancheglo, Dominik Schiener, and Dr. Serguei Popov. The IOTA Foundation, a non-profit organization, was later established in Germany to develop the protocol and drive adoption.

David Sønstebø – Co-founder and Co-chair of the foundation. Primary visionary and leader focused on strategy, Use case partners, and adoption.

Dr. Serguei Popov – Russian mathematician and Co-founder of IOTA. Developed key parts of the original mathematical theory behind  the IOTA Tangle ledger.

Dominik Schiener – Co-founder and Co-chair of the Foundation. Heads technical development and supports startups looking to build on IOTA.

Sergey Ivancheglo – Founder of Jinn Labs and inventor of ternary computing hardware. Developed key elements of IOTA including signatures, tip selection, and Coordinator.

The Foundation consists of over 150 team members including developers, researchers, and operational staff. The IOTA community also has thousands of active participants.

Adoption and Partnerships in the IOTA Network

IOTA focuses on building relationships with corporations and government agencies to drive real-world adoption. The Foundation has already established close to 100 partnerships and collaborations to develop proofs-of-concept and commercial applications.

Some major global partners working with IOTA technology:

  • ZTE – Major Chinese telco integrating IOTA for smart healthcare, supply chains, and cities.
  • Dell Technologies – Exploring IOTA for autonomous device management and regular payments between devices.
  • Jaguar Land Rover – Testing device wallets and electric vehicle charging with IOTA integration.
  • ENGIE Lab CRIGEN – Using IOTA for decentralized energy data tracking and payments on smart grids.
  • Netherlands Organization for Applied Scientific Research (TNO) – Researching autonomous electric vehicle infrastructure and coordination using IOTA.
  • TM Forum – Leading communications industry group partnered with IOTA on smart city initiatives.
  • Norwegian University of Science and Technology – Academic partnership and research focused on distributed ledger capabilities.
  • European Smart City Consortium – Nonprofit promoting IOTA for implementing smart city infrastructure and the Economy of Things.

IOTA’s expanding ecosystem indicates it is gaining recognition as a leading technology for enabling secure and scalable machine-to-machine transactions.

Real-World Use Cases for IOTA in the Internet of Things

IOTA intelligent machine

With such a diverse range of partners, the technology is being applied in many innovative ways. Here are some of the most common real-world IOTA use cases:

Smart Cities

  • Secure connected infrastructure like traffic sensors, electric vehicle charging, and parking. Micropayments can manage electric vehicle charging access and parking fees.
  • Environmental monitoring through city-wide sensor networks. Sensors transact data and value with each other and a smart city dashboard.
  • Digital citizen IDs to access and pay for services across smart city infrastructure. IDs are stored on the Tangle for security and convenience.

Industrial Internet of Things

  • Supply chain tracking with tamper-proof data integrity. Parts can be monitored across each step and machines can autonomously pay for materials or production steps.
  • Predictive maintenance and asset monitoring in factories through connected sensors and equipment. Payments trigger alerts and automatically deploy maintenance when needed.
  • Electric vehicle charging coordination and payments between vehicles, charging stations, and the electric grid.

Healthcare

  • Secure medical record storage and sharing across healthcare providers. Micropayments facilitate data exchange and data marketplace opportunities.
  • Remote health monitoring through body sensors that transmit encrypted data to healthcare providers. Sensors can trigger automated care actions.
  • Medical supply chain tracking from production to hospitals/pharmacies using shared ledgers between entities.

Smart Energy Grids

  • Decentralized energy data coordination and transactions between consumers, producers, and utilities to track usage.
  • Electric vehicle coordination with charging stations and the energy grid to balance load.
  • Micropayments between consumers and producers for electricity generated from solar panels or other renewable sources.

Smart Retail and Supply Chains

  • Track goods through entire supply chain lifecycle from production to consumer purchase using tamper-proof product identities.
  • Pay per use models – devices pay tiny increments in exchange for services like electricity or data consumption.
  • Automated inventory management and restocking triggers based on connected device data in warehouses or stores.

These examples offer just a glimpse of what is possible when machine-to-machine transactions become frictionless. IOTA is poised to become the standard platform for the Internet of Things economy.

Participation Through IOTA Tokens (MIOTA)

The IOTA token (MIOTA) is required to participate in the IOTA network – it functions as a means of value exchange and for securing the ledger through proof-of-work.

As of October 2023, the total supply is approximately 2.8 billion MIOTA tokens, all of which have been distributed via crowdsales or provided to the IOTA Foundation. There will never be mining or new IOTA coins created.

The IOTA token initially launched on cryptocurrency exchanges in 2017. MIOTA trades actively on major exchanges like Coinbase, Binance, Bitfinex and OKEx.

Anyone can buy IOTA tokens on exchanges and transfer them to an IOTA wallet to begin transacting on the Tangle. You can also run an IOTA full node or connect applications through client libraries like IOTA JavaScript.

Participation is open – one of the core benefits of permissionless distributed ledger technology.

How IOTA Enables Feeless Payments Between Machines

If we are to believe technology researchers, one thing is certain: the Internet of Things will completely change our daily lives. No one can yet say how much this technology will influence our lives, but one suspects that it will take on a similar dimension to the Internet 20 years ago.

One example is the vision of Amazon founder Jeff Bezos. The latter company recently announced that in a few years, Amazon’s parcel orders could be delivered by drone. This would be an excellent application for IOTA currency. Each drone could be equipped with an IOTA wallet, which is topped up with credit after the drone has successfully delivered a parcel. With this IOTA credit, the drone would be able, for example, to recharge at solar stations on the way back. Sounds absurd? We think so too! However, technological progress is now so fast that this vision can certainly be realised. Dominic Schiener also addressed this topic in a very informative lecture on the TNW website:

How to Buy IOTA Tokens (MIOTA)

The IOTA cryptocurrency token used on the IOTA network is known as MIOTA. The total MIOTA supply is fixed at 2,779,530,283 tokens.

These tokens serve as a means of exchange and secure value on the IOTA distributed ledger. MIOTA can be purchased from most major cryptocurrency exchanges like Binance, Bitfinex and Coinbase.

As of October 2023, the price of 1 MIOTA token is around $$0.25 USD. MIOTA prices reached an all-time high of $$5.69 USD in December 2017 during crypto’s last bull run.

When purchasing MIOTA, investors should consider factors like:

  • IOTA’s progress on research and development
  • Adoption rate amongst enterprises and governments
  • Speculation and hype amongst crypto traders
  • Overall sentiment in the cryptocurrency markets

While risky like all cryptocurrencies, MIOTA offers upside potential for investors who believe in IOTA’s vision of an open, decentralized Machine Economy.

Protecting Your Investment in IOTA: Security Tips


Like many other cryptocurrencies, IOTA is still a very new technology. Therefore, you have to be very careful when storing your tokens. Buying IOTA from CFD brokers allows you to invest in IOTA currency without the risks associated with hackers or network bugs. There is no need to create a wallet. However, if you opt for physical IOTA coins, make sure you always follow the following 5 rules to keep your IOTA tokens safe:

1. Always use the latest version of the wallet

With Firefly Wallet, the IOTA Foundation has provided great software that you can use to store your IOTA tokens. Make sure you always use the latest version from the official IOTA website.

2. Use a hardware wallet

IOTA’s Firefly Wallet can easily be paired with the Ledger Nano X wallet. Only with a hardware wallet can you be sure that your IOTA coins are protected from hackers. A short guide to creating a Ledger wallet for IOTA is available here

3. NEVER use generators

Never trust websites or software that recommend generating secure seeds for IOTA! Use the KeePass password creation tool recommended by the IOTA Foundation, or better yet: generate your password starting with capital letters (A-Z) and the number 9, using dice or another random method.

4. NEVER use the addresses twice

IOTA is based on so-called unique signatures. This means that once a digital signature is issued to confirm a transaction, much of the security of that address is lost. Usually, the IOTA wallet software automatically ensures that a new address is generated. However, it may happen that IOTA coins are sent several times to the same address (e.g. if you provide a deposit address on its website). As soon as you make an outgoing transaction from this address, the coins that are subsequently transferred there are no longer protected!

5. Keep the seed phrase for yourself

Under no circumstances should you share your 81-digit seed with anyone. Your code is similar to your bank card PIN. If you wish to pass on your ‘account number’, these are IOTA addresses that can be generated in your wallet software. You should write down your personal codes on paper and keep them.

If your code is lost, there is no chance of recovering your IOTA coins. For this purpose, we have created a template that you can print out and write your passwords on. We recommend that you laminate your IOTA paper wallet to protect it from moisture.

Just as the processing of e-mail addresses was technically very complicated 20 years ago, the storage of cryptocurrencies is now very complicated. However, we are sure that in the next four or five years, the users’ task will be much easier. Until then, CFD brokers offer an excellent opportunity to invest in cryptocurrencies without technical obstacles.

Conclusion: How IOTA’s Scalability Unleashes the IoT Economy

IOTA represents one of the most groundbreaking and ambitious projects in the entire blockchain/cryptocurrency space. It dared to rethink distributed ledgers from the ground up to meet the demands of the emerging machine economy.

By combining feeless transactions with unlimited scalability, IOTA cracked the code to enable micro and nano-payments between connected devices at a global scale. This lays the foundation for smart cities, intelligent factories, and worldwide supply chains predicated on frictionless machine-to-machine transactions.

Of course, ambitious visions take time to implement in the real world. Delivering fully on this promise will still require maturing technology and overcoming adoption hurdles. But IOTA offers perhaps the most promising pathway yet to a decentralized, permissionless IoT.

With its expanding ecosystem of high-profile corporate partners and the ambitions of the foundation driving development, IOTA adoption seems poised for liftoff. As the machine economy unfolds, we may find that IOTA provides the connectivity that brings it all together on a global fabric of trustless machine transactions.

References

Whitepaper: https://IOTA.org/iota_Whitepaper.pdf

Documentation: https://docs.iota.org/

Foundation: https://www.iota.org/

Blog: https://blog.iota.org/

Live Price: https://ecoinomy.eu/crypto/live-prices/IOTA/

Price Predictions: https://ecoinomy.eu/crypto/price-predictions/iota-mIOTA/

How to buy guide: https://ecoinomy.eu/crypto/guides/how-to-buy/

FAQ section

How does Iota’s approach to consensus differ from traditional blockchain networks?

Unlike proof-of-work blockchains, Iota uses a directed acyclic graph (DAG) structure called the Tangle to establish consensus. Transactions must validate two previous transactions in the Tangle before being confirmed. This removes the need for energy-intensive mining and allows consensus to be reached through recursive validation.

What mechanisms does Iota employ to ensure security and prevent attacks?

While the Coordinator node is still active, it helps mitigate certain attacks like double spends. Beyond that, Iota utilizes a tip selection algorithm to select valid transactions. Economic clustering incentives also encourage honest participation. Once the Coordinator is removed, attacks are prevented through validation requirements, reputation systems and heuristics that identify dishonest transactions.

How does Iota handle issues like transaction finality and certainty without global consensus?

Individual transactions can reach local consensus quickly through the validation process. However, global consensus across the Tangle is probabilistic. The longer a transaction remains immutable on the Tangle, the higher its certainty. Absolute finality is not guaranteed but transactions gain confidence through elapsed time and subsequent approvals.

What are some of the open challenges and criticisms faced by Iota?

Iota is still in early stages and faces challenges like protecting against attacks, avoiding centralization risks and resolving inconsistencies in orphaned transactions. Due to its novelty, the long-term security risks are still being studied. The lack of incentives for validators and reliance on altruistic participation has also faced criticism by some blockchain experts.

How does Iota plan to scale while keeping the network sufficiently decentralized?

The Iota roadmap includes upgrades like sharding which will allow parallel validation across partitions of the Tangle ledger. This increases throughput while retaining decentralization. The team is also implementing mana – a reputation system that ensures bad actors cannot compromise validation. Economic incentives will be added to mana to encourage honest participation.

What major competitors does Iota face in the DLT space?

Some alternative networks aiming to connect IoT devices and enable microtransactions include Nano, Hedera Hashgraph, IoTeX, Holochain and Constellation DAG. However, Iota enjoys substantial traction thus far. Its Tangle architecture gives it advantages in throughput and scalability over earlier blockchain-based platforms.

Dean Decho

Dean is a passionate advocate for the financial freedom and independence offered by Bitcoin and the cryptocurrency space. He's built this crypto learning platform to help others in the industry learn, grow and be part of it.