The blockchain of 2018, 10 years after Satoshi’s whitepaper…

In 2008, Satoshi Nakamoto’s world-famous whitepaper was published, in which he sketches a framework of a distributed money system without central power. An interesting idea that actually saw the light of day in 2009. Meanwhile, it has become clear that Bitcoin and especially the underlying (blockchain) technology has a lot of potential.

With the increasing adoption of Bitcoin, the weaknesses of blockchain as a technology come to light. Where it had the promise to be able to facilitate fast and cheap transactions, it now appears that due to the increasing popularity (read exploding rates) these important properties are under pressure.

The disadvantages of blockchain

To understand it, it is important that you know how a blockchain functions. If you want to know more, Justin Schlee explains it here. In this example, we assume the Bitcoin blockchain. On average, it processes a block of 1mb of transactions every 10 minutes. In short, this means that when more than 1mb of transactions per 10 minutes are broadcasted, the network fills up and the quantity cannot be processed. This makes the network slow and, due to the high transaction costs, totally unsuitable for small purchases. You can imagine that you will not buy a cup of coffee of €2.50,- if you have to put €1,- transaction costs on top. These are two problems, on which solutions can only be implemented through agreement of the entire network. And this seems to be a difficult road… The rise and impact offorks trying to tackle the problem are a phenomenon that many people still have to get used to.

If, in addition to these disadvantages, you also include the growing energy consumption (due to the increasing required computing power) and the formation of mining pools(domination through a form of centralization), it is clear that the technology is not yet fully ready for large-scale use.

IOTA

A new technology that potentially solves the shortcomings of blockchains is the tangle protocol of IOTA. This is a ledger technology with no transaction costs and with a special feature. The more the network is used, the faster and more reliable it becomes. The technology makes it theoretically possible to carry out an infinite number of transactions per second in the future. The expectation is that this will become important in the near future, but none of the current technologiesis capable of doing so.

BTCEthereumPaypallVISAIOTA
Transacties per second42045056,000infinite
Fee’sYesYesYesYesno

How does IOTA work?

The tangle does not make use of miners that mine blocks and therefore has no difficulty or transaction costs. The tangle is a “Directed Acyclic Graph” (DAG): an infinitely scalable cryptographic decentralized network. It uses a different form of encryption that makes the network even resistant to attacks from quantum computers (p20).

Tangle vs Blockchain

Confirming a transaction via the tangle does not require a lot of computing power, which makes it possible for every connected (modern) device to verify transactions. As a result, every participating device is potentially a node. For every transaction that a device sends, it must confirm two other transactions. This means that twice as much capacity is always available than is necessary to confirm the transactions. This creates the special situation in which the network becomes faster and stronger as more participants, creating more transactions, join the network. These features make IOTA very suitable for the Internet of Things, where millions of devices perform large amounts of transactions and check each other randomly.

Every device that performs a transaction checks two arbitrary previous transactions.

Transactions can take place at a very high speed via a tangle. This makes it possible to pay per minute or even per second for the use of, for example, an electric car or a WiFi network. Large companies such as Bosch, Cisco, UBS, and Gemalto have already joined the IOTA platform. They have promised to develop the technology and apply it to their devices.

The differences between Tangle and Blockchain

Tangle:

  • has no transaction costs
  • can be scaled to (almost) the infinity
  • does not have to be mined, therefore has no blocks and no difficulty
  • is not necessarily made as a currency, but mainly as an interoperability protocol
    (protocol for mutual exchange and/or communication) that solves problems for the internet of things
  • is focused on the machine economy

The challenges of IOTA

Apart from all good signs, there are also issues that still have doubts cast upon them. One important question is how decentralized the network actually is. As mentioned earlier in this document, IOTA has the special feature that as it grows more, it becomes faster, more scalable, and more decentralized. In addition to advantages for the future, this has the same drawbacks for the present (the start-up phase). The network is still small and therefore vulnerable to outside attacks.

It is a matter of time before this problem resolves itself, but until that time the IOTA Foundation has chosen to use a so-called ‘Coordinator’. The most important function of this is to keep the tangle safe until the network is strong enough to protect itself. This means that the team behind IOTA can influence the direction in which the tangle develops. IOTA seems (is) at this time, still centralized. The IOTA Foundation promises to release the source code for the coordinator in the future, but there is no clear communication concerning this. This is indeed something to be aware of.

What does the future hold?

Given the advantages of IOTA, the potential of the technology is promising. Recently, Xurux projects & Consultancy and ICTU have developed an open source Proof of Concept for the municipality of Haarlem, which verifies digital security. For the citizen, the consequence is that they no longer have to go to the town hall for every application, to pick up a printed paper with a stamp. This solution is ready to go into production in 2018. From then on, we will experience the first effects of this new technology.

Besides the use for the Internet of Things, the application above shows that IOTA can play a role for reliable transactions. The speed of the network and the absence of transaction fees can be decisive for choosing IOTA compared to the ‘classic’ blockchain.