IOTA (MIOTA) has been one of the cryptocurrencies that have been attracting a lot of attention lately. Earlier this month IOTA had a massive rally, which saw its price rising more than 100% in about a week. And while the rally has cooled off in more recent days, the IOTA price has remained relatively stable, hovering around $0.90. The token currently ranks as the sixth-largest digital currency on the market, with a total market capitalisation of around $2.4 billion.
Despite its recent market success, IOTA remains largely unfamiliar to the general public and that’s hardly surprising. It got its first listing on a Bitcoin exchange, Bitfinex, only a couple of months ago and prior to that trading took place over-the-counter between users. It is one of the new kids on the block, and a somewhat weird one at that.
IOTA is very different from a typical cryptocurrency such as Bitcoin (BTC), Litecoin (LTC) and Ethereum. Its creators describe it as a “next generation blockchain”, which seems like a very bold claim, but in this case it might actually be justified. In fact, the technology underpinning IOTA is not even a blockchain.
The most interesting aspect of IOTA is its distributed ledger protocol dubbed Tangle, which is a directed acyclic graph (DAG), rather than a traditional blockchain. From mathematics we know that a graph is a collection of points (known as vertices) and lines (commonly referred to as arcs or edges) that connect these points. In a directed graph the edges also have a direction associated with them.
IOTA uses this concept to build its peer-to-peer network. So in Tangle each vertex represents a transaction and the edges represent how it links to other transactions on the network. And here is the interesting part – in order to issue a transaction, a user must validate (link to) two previous transactions. This ensures that the consensus (colloquially known as the miners) is no longer separated from the transaction process.
In blockchain-based networks such as Bitcoin, transactions are validated by miners, who use special software and expensive computer hardware to solve complex mathematical equations. But since miners are separated from the transaction process, they need to be incentivised to perform these services. These incentives come in the form of transaction fees.
IOTA’s approach ensures that no external incentives are needed. Because a user needs to validate two other transactions in order to issue one of their own, the validation process occurs much more organically on the IOTA network. As a result, users can transfer value without any fees.
Another big advantage of this approach is that, since transactions are only validated by their neighbours, they can be much faster compared to traditional blockchain-based cryptocurrencies.
The vision of IOTA team is for the token to become the backbone of the Internet-of-Things and a future autonomous ‘Machine Economy’. Essentially, the IOTA network could enable machines to make micropayments to each other, as well as store data from sensors securely and verified on the ledger. So for example, your smart fridge at home notices that it has run out of milk and connects to a delivery drone at a nearby supermarket to order more. The drone picks up the order, completes the delivery and gets paid for the service.
Now this sounds exciting (and a little scary), but for now it only hints at a future potential. The IOTA network is pretty young and is still developing. It seems that a potential IOTA-fuelled Machine Economy could make good use of the smart contract system supported by Ethereum, but such a system has not been implemented in Tangle. However, the IOTA team is reportedly already working on its own version of smart contracts, so this may not be an issue much longer.
The technology is young, but it certainly shows great potential. With a unique distributed ledger technology, allowing for fast validation and feeless microtransactions, IOTA could one day become the next generation blockchain it aims to be. It’s the new kid on the block, but it certainly hopes to stay for a long time.
In today’s trading, the IOTA price stood at $0.877, as of 12:20 BST. The token has gained just over 5% over the past 24 hours, according to data from industry tracker Coinmarketcap.