Bitcoins fees have been averaging $7 per transaction, and Ethereum’s fees have been around $3, but sometimes jump to $11 depending on how busy it is. This means it’s not yet feasible to buy a coffee or some gum at your local store. What if there was a cryptocurrency out there that didn’t use fees, a crypto where it was free to send and receive any amount?
MIOTA is a cryptocurrency that offers 100% free transactions. First off, let’s go over why it’s named IOTA. Some say IOTA stands for Internet Of Things Application. The Internet of Things is an idea where we have a bunch of different electronics like our fridge, microwave, washer, our security system, watches, even your electricity breaker and stuff like that all connected through the internet. IOTA was actually named for the 9th letter of the Greek alphabet, which stands for the lowest amount possible. IOTA is a distributed ledger that allows for very small transactions and data to be sent completely free to help connect all these devices.
Let’s dig into how they work.
Not a blockchain, but a DAG
The most unique thing about IOTA is that they aren’t even a blockchain, even though they serve to distribute a ledger similar to how a blockchain does. DAGs are similar to blockchains, but much faster and can scale better, seeming to be the next evolution of blockchain technology. IOTA is a DAG, which stands for Directed Acyclic Graph. It could get very confusing if I fully tried to explain that here, but let’s go over a brief overview.
Basically, let’s go over a bunch of terminology here. The boxes are known as nodes, and each node is a single transaction. The lines connecting the nodes are known as edges or arcs. The “directed” part means the graph has a direction. The “acyclic'' part means the graph always continues in one direction, it never has a loop.
Each node will try to point to at least two other nodes, but it can find up to 8. Once that node has two future nodes pointing to it, it will be a confirmed transaction. In a blockchain, sometimes we have to wait for 10 or 35 future blocks to have a confirmation, in a DAG, transactions are confirmed when only two other transactions reference them. One interesting thing to share is that the more people use IOTA, the faster it will get, because you’ll have those two nodes pointing to your transaction faster. Unlike a blockchain, where the more people using it will simply make the fees go up. The Tangle can handle up to 1000 transactions per second, which is much more than Bitcoin and Ethereum.
Oh, by the way, IOTA’s specific DAG setup is something they call “The Tangle”. Instead of Proof of Work or Proof of Stake, IOTA uses DAG technology to arrive at an agreement on all the transactions in their Tangle.
No miners, no fees
Also, since there are no miners, there are also no fees. Now you may be wondering “Why would I choose to participate in the network, if I’m not getting rewarded?” That is a good question.
Well, when you send a transaction, you are actually the one submitting the transaction (AKA node) to the DAG. You don’t submit it to a miner or validator to include it. Using private keys and asymmetric encryption, we can reasonably assume that someone else isn’t spending your IOTA. Since there are no miners, anyone can add transactions to the Tangle, as long as they follow a specific protocol.
Right now, there is a confusing thing called the Coordinator which makes IOTA pretty centralized, but it secures the DAG and is a rough replacement for Miners and Validators. In the future, IOTA has plans to replace the Coordinator and make it much more decentralized, however they have had these plans for at least 2 years.
One of the best use cases of IOTA is the fact that they have no fees, which should allow for millions of very small transactions a day. For example, imagine if there were no fees when you paid for your $1 coffee or if you could be paid daily by your employer, based on how many hours you worked that day. They could do this if there were no fees and the payment method was quick.
At the moment, there are no smart contracts deployed right on the main IOTA DAG. However, IOTA has plans for layer 2 blockchains planned to allow smart contracts, and are also working on a big bridge between these two layers. At the moment, they only have a testnet, but when they launch them, they will have EVM support and also the ability to create new blockchains when you want. They call this layer 2 blockchain scaling model “off-tangle” similar to how we usually call other scaling methods “off-chain”. Anyways, layer 2 of IOTA should have tokens, dApps and even NFTs, making it comparable in utility to Ethereum.
“If it’s free, how do they prevent spam?”
This is another good question. Right now, IOTA uses a ‘congestion control algorithm’ that's quite technical. On their blog post about it, they claim it is the first non-proof-of-work, DAG-based congestion control algorithm ever. It is very complicated and uses words like “Blacklist”, “Node Model”, “scheduler” and “Additive Increase Multiplicative Decrease algorithm”. I may take the time to explain it fully in another video, but it’s very niche.
Also, in the future IOTA will rely more on something called MANA. MANA is a virtual token that you earn by having and holding the native IOTA token. When they remove the Coordinator, IOTA will switch to something that is similar to proof-of-stake, except you don’t have to stake your coins to help validate. Instead, like I said, you earn MANA the longer you delegate your coins, and you can use MANA to get your transactions first in line. If the network isn’t congested, you don’t really need MANA, but if it is, people who have a lot of IOTA and have held it for a while get priority.
Something I found unique about The Tangle is that you don’t need a full copy of every transaction on the network. For example, on Bitcoin and Ethereum, to be a node (which is a fancy term for someone who wants to try to add to the blockchain) you must have a complete and full copy of the network, which is around 350 Gigabytes for Bitcoin and about 280 gb for Ethereum. To add to the Tangle, you don’t need the full network, only a portion… since you’re only adding nodes that point to a few other nodes.
Now to get into the part investors are here for, the Tokenomics of the IOTA protocol. IOTA has an unusual naming thing where they have TeraIOTA, GigaIOTA, MegaIOTA, and KiloIOTA, and then down to IOTA. IOTA is the coin used on the network, but it’s not used for transactions, this means natural demand of the coin does not arise from the use of the infrastructure, unlike Bitcoin or Ethereum.
There are 2,779,000,000ish mIOTA coins, so 2.779 quadrillion IOTA, equal to almost the max number of Satoshis out there, but all IOTA coins were all sold through an ICO raising around $500,000, and there is currently no planned inflation. However, due to the fact that people will naturally forget their wallet keys or lose them, this makes IOTA very slightly deflationary. If you check the IOTA wallet distribution, you see that 30 wallets hold more than 50% of all coins out there. This was a big question to me, but the team on Discord said it was due to the fact that large exchanges hold a lot and also that they use UTXO transaction model. Long story short, this means you can have one private key but many different wallets, so it is difficult to see who truly holds the most coins.
Thanks for watching our video, we hope you enjoyed it, we really hope you learned something, and most of all, we hope to see you in our next video!