ICO Analysis: IOTA

The IOTA ICO raised 3000 bitcoins in a presale, a remarkable amount of value. It bears exploration. In a quick web search, one of the first things we come across reads:

Iota is the first cryptocurrency without a blockchain. It uses the “Tangle”, which is based on DAG technology. In a traditional blockchain, various transactions are bundled in each block before this bundle of transactions is verified by miners. In the Tangle, every single transaction forms a new block and is essentially verified by itself: In order to successfully conduct a transaction, you first have to verify two randomly chosen transactions is the network. This is done with help of a very simple version of proof-of-work, therefore one could argue that transactions aren’t zero-cost. Yet, the transaction costs are essentially not existent, as the needed PoW is so low that every single device is able to independently carry it out.

This seems out there, on first glance, especially as a virtually untested technology – or is it? IOTA’s goal is to be a currency used in the burgeoning Internet of Things market, one whose growth will likely increase as more millenials buy homes in the coming decades. Overly invasive or home-altering technologies are slow to adopt with generations who didn’t grow up surrounded by technology, but people who had smart phones and iPods in high school will be interested in improving their home experience with the cloud and so forth. As such, monetized data sets could emerge which would, in turn, assist people in everyday routines. Perhaps people would not know they were paying for such things. This is just one case where IOTA might come in, there are many others. IOTA is part of a recent line of very forward-thinking, high value (and high value target) token-based ICOs which are purely for the purpose of fundraising and speculation on the part of the funder.

Instead of offering yet-another-coin or what-have-you, these ICOs intend to innovate with technology that solves problems across broad spectrums. It is no wonder IOTA funded so heavily, for even if it turns out to be a failure, any relevant code could be revived by jilted investors and potentially tried again. Even privately funded, such an idea could garner millions of dollars a month, a week, a day, an hour? It’s hard to tell how much you could make through a platform like this, but the important thing to keep in mind with any newfangled technology is that you can also, get ready for it, make absolutely nothing at all.

Yet, if you’re betting in the cryptocurrency space, you’re already looking for some action, some volatility. So ICOs that are offering solid technology are important to bring to the attention of all involved, and as such let’s run over the merits of the IOTA platform, before diving into some of the finer points:

  • IOTA introduces a concept of “non-blockchain” blockchain tokens. It’s evident that such a system is going to require testing, and this does affect its safety as a value token – but since the token has already raised some funding before even going public, it would seem that confidence in its ability to eventually return value is high.
  • Further revolutionary, as it were, (or counter-revolutionary, depending on your level of Bitcoin maxmalism), IOTA aims to have no fees. The fundamental argument behind the incentivized ledger of Bitcoin, rather than a blast of tradeable tokens at the outset, is that the security and sanctity of the ledger becomes the imperative of the users to preserve, such that they can continue to be reward. Without this monetization, the blockchain must somehow be immune to alteration from “unauthorized” parties – which is funky concept already when you are dealing with blockchains. We will have to look further into this below.
  • One way this could be seen as working is simple: a public rail is provided by someone, and they ask others if they want to provide information over this rail. With it, they can cryptographically prove the location of, say, the UPS, or mail man, or something along those lines. Pets, even children. The GPS location of the registered item could be accessed at any point, using the public rail, having paid a subscription fee to the owner of the rail. One might ask why Bitcoin or an Ethereum token could not simply achieve this goal, and the answer is that they could. In the whitepaper, the authors freely acknowledge:
    • “The rise and success of Bitcoin during the last six years proved the value of blockchain technology.”
  • IOTA’s offering is fundamentally different in that it does not:
    • require mining
    • consider block sizes
    • lack incentive among users to use.

Incentives in a Tangle? Maybe Not

Nevertheless, we must go over the finer point of the incentivization of a blockchain. Numerous banks and others have, over the years, with little or no prompting nor research to back them up, proclaimed that cryptocurrencies will be short-lived, but the blockchain itself is some great advancement. But the blockchain without a cryptocurrency tied to it is not only uninteresting, it’s not actually secure. People need incentive to ensure that something is legitimate – there is overwhelmingly the opposite incentive with centralized currencies and financial institutions. As such, a ledger like Bitcoin, which is trustlessly agreed upon by dozens of thousands, if not more, miners across the globe, all competing for scraps of digital gold, it becomes evident that such a thing must be at least accurate or else one or the other would be able to gain some advantage by having a smaller version or something.

But those are the incentives in Bitcoin.

In IOTA, the incentive to use it is that you must use it in order to use it. In order for one’s own transactions to be entered into the ultimate register, one must also act as a relay for at least two other transactions. As such, a mining conglomerate is not required to certify that a transaction has taken place. As the nodes meet each other, the transactions permeate. It’s a fundamentally different approach to data storage, but perhaps no less valid. Importantly, it doesn’t at a given time require a “longest” identifiable file, but rather all the data will eventually mesh with all the other data, cryptographically forming a representative of the economic community.

Collectively, this representation of transactions/economic activity is referred to as a Directed Acrylic Graphic (DAG), which in the context of IOTA is a “tangle.”

The transactions issued by nodes constitute the site set of the tangle (i.e., the tangle graph is the ledger for storing transactions). Its edge set is obtained in the following way: when a new transaction arrives, it must approve two previous transactions; these approvals are represented by directed edges, as shown on Figure 1 and others (on the pictures, times always goes from left to right). If there is no directed edge between transaction A and transaction B but there is a directed path of length at least two from A to B, we say that A indirectly approves B. There is also the genesis” transaction, which is approved (directly or indirectly) by all other transactions, see Figure 2. The genesis is described in the following way. In the beginning there was an address with balance containing all the tokens. Then the genesis transaction sent these tokens to several other founder” addresses. Let us stress that all the tokens were created in the genesis (no other tokens will be created), and there no mining in the sense miners receive monetary rewards”.

Thus, if Bitcoin’s blockchain is a trustless ledger, IOTA’s tangle is a sort of trutless mesh + ledger.

What will be battle-tested, then, in the launch of IOTA, is the notion of a completely different kind of ledger technology, competing in the same space, with the same ideals, as Bitcoin, but usurping its utility in terms of various applications – in this case, Internet of Things, but others could come along. One can envision all sorts of uses for very specific, very intelligent tokens that don’t require a long approval (confirmation) process before becoming useful. Although cryptocurrencies using the same fundamentals as Bitcoin have solved this problem already, like Dash with its InstantSend, there are a lot of areas where Bitcoin does not perform for some markets that others can rise to replace and compete with it for the crown.

The IOTA Team

A bet on IOTA very much involves the team behind it, since even if it works in theory, it must execute in practice as close to flawlessly as possible given that it is serving financial needs. While IOTA does not put their developers front and center on the website, the very highly polished delivery is anything but a mistake.

One of their developers is a definitely active developer, Oliver Nitzschke, whose Github profile shows significant activity over the past couple of years. He works on several different types of projects, including a number of issues related to mobile technology. The company he concurrently works with, Pinpong, is an Android development company. Presumably, mobile platforms will play a huge rule in the IOTA economy – fewer and fewer business people would be caught without at least one smart device, but many have multiple devices. The higher levels of these, like the smart phone and the tablet, could generate and share transactions for a purpose, virtually eliminating the need of specialized hardware – which is another drawback to the conventional, tested Bitcoin model.

Other developers have little or no public information about them at all, but still appear to have contributed to multiple modules of the project, like Developer Come-from-Beyond.

Given recent past experience, such oversights as a lack of easy-to-access “team” information is not a huge problem for ICOs, especially not in this heightened hype bubble climate. Such climates are always good for the agile trader, ready to liquidate positions and hold others beyond reason. The Github list of people can do for now.

The Co-founder of IOTA, we learn in this manner, is Dominik Schiener. As you would expect, given the nature of the IOTA whitepaper and the innovativeness of the technology being discussed, this guy has no lack of chops when it comes to coding and cryptocurrency. He has a fully functioning public voting system for the Ethereum platform and much more to his credit via Github. Needless to say, he knows what he’s talking about. Attempting to introduce a “blockchainless cryptocurrency” is an interesting, if noble, pursuit, however. It should be noted that no cryptocurrency, at this point in the scheme of market adoption, is truly in competition with any other. They all share enough properties that a few of a number of things could happen to any one of them and significantly increase their value, utility, and validity in a very short period of time.

The Verdict

Well, do you like to live dangerously? Investing in a completely nascent, truly untested technology is… exactly what the Bitcoin millionaires all did. They had a feeling that it would work, they bet big, and they won big.

However, just as Bitcoin is already seeing other coins begin to edge in on it in terms of usage and adoption and buzz, IOTA could face stiff competition from similar rivals, based on the same ideas or slightly tweaked – or even improved – versions of them. Popov’s Tangle proposition could prove valid indeed – but ultimately be executed by someone else, the way a theory one developed today could be proven after one had lived. This problem faces any nascent technology. People could feel that tangle itself is the innovation, and build alternative solutions using it directly. The risk of companies doing this in a semi-proprietary way is there.

Nevertheless, this type of innovation is the kind you either have the guts to get on board with you or you don’t. The author has considered leaving it unrated, but feels comfortable saying a 7/10 in terms of safety/ability to get the value of your tokens back from them at some point, and hopefully a profit. Getting in early on a totally new way of transacting has to be worth something, and having enough shares could net a healthy sum. Yet, all the same, as with all things in the cryptocurrency space, me-too products will follow, and some of these will be just as awesome.

Investment Details

IOTA will begin trading at Bitfinex on Tuesday at 1PM UTC. According to Bitfinex, it was a rare move to add such a nascent currency:

Several factors have gone into our decision when considering the addition of IOTA trading on Bitfinex. Some of these factors include user requests, market capitalization, design parameters, and a thorough assessment of the token’s development process; including the team behind the token, their strategies for solving technical and nontechnical problems, as well as addressing the scaling issues currently confronting traditional blockchain technologies.

Bitfinex has an awful lot of traders who love some good moon shots, so it should be an interesting week for IOTA.


Website: http://phm.link

P. H. Madore has covered the cryptocurrency beat over the course of hundreds of articles for Hacked's sister site, CryptoCoinsNews, as well as some of her competitors. He is a major contributing developer to the Woodcoin project, and has made technical contributions on a number of other cryptocurrency projects. In spare time, he recently began a more personalized, weekly newsletter at http://ico.phm.link