Perspectives

IOTA explained...in under 100 words

Blockchain (or “Distributed Ledger Technology” / DLT) has been attracting spectacular levels of attention from fans and critics alike over the past 12 months, not in the least because of the ups and downs in the cryptocurrency market.

While cryptocurrencies are but one out of many possible applications of Blockchain technology, they have so far received the bulk of the general public’s attention. With the most prominent currencies Bitcoin and Ethereum being featured even in mainstream news sources, much less attention has been paid to other representatives of the cryptocurrency genre. IOTA is one that stands out in particular with its direct acyclic graph (DAG) feature, which markedly distinguishes it from other cryptocurrencies.

In our “Explained in under 100 words” series we would like to take closer look at IOTA and explain how it works – as promised in less than 100 words!

John wants to make a transaction. He is given the ones from Tom and Kevin awaiting verification (“tips”), who submitted their rent payments just before him and which now need to be checked (to avoid issues like “double spending”). John has his computer verify both transactions, with the effort going into it (his “proof of work”) entitling him to have his own transaction be added to the IOTA network for the next user after him to validate it. A clerk (the “coordinator”) reviews the verified transactions one final time and shares his confirmation with the network (a “milestone transaction”).

The above explanation is of course simplified and IOTA has a host of features that deserve a more extensive explanation. One key aspect is that strictly speaking it is not a Blockchain solution due to the coordinator serving as a central control feature, which goes against the idea of Blockchain as “distributed ledger technology” (DLT). IOTA proponents however maintain that while it does have a single point of failure, the benefits its solution brings compared to Bitcoin (namely enhanced scalability and lower transaction costs) are duly justified. The incentive alignment of all participants in the IOTA tangle stands out in this respect: Unlike with Bitcoin for example, where miners and transacting users have opposite incentives (users wanting fast transactions and low fees, but miners wanting the opposite), IOTA does not have such a conflict of interest.

Time will tell if the IOTA team manages to convince a critical mass of users to start using its “tangle” and thus make it a dominant player in the still growing field of crypto currencies and Blockchain-based transaction solutions

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Explained in under 100 words series