Our path to a Crypto World — IOTA

If the worldwide usage of cryptocurrency is truly our future, there are some things we have yet to consider. Today, around 3.9% of the world population owns a crypto asset, for comparison, this is more than the entirety of the population of Russia and Mexico combined. Yet, currently, cryptocurrency hardly seems to have any real life usage, other than speculation or buying other currencies. In this article, we’re going to be looking at what are the major problems with cryptocurrency and how can we solve them.

Is Bitcoin really Peer-to-Peer?

One common misconception about Bitcoin is that it got rid of a middle man by having a decentralized network. It is true that you no longer need a centralized institution like PayPal or banks to send funds to another wallet, however you still need a middle man. In order to issue a transaction on the blockchain, it must be validated by the so-called miners, who, just like anyone, won’t work for free. Bitcoin operates with a Proof-of-Work (PoW) consensus mechanism. In order to avoid fake transactions or double-spends from being validated, different miners will use computational power to ensure that a transaction is legitimate, those are rewarded with newly created coins and transaction fees. This also mean that if someone possesses 51% of the total computational power of a PoW blockchain, they have the power to create new coins by validating fake transactions, see 51% attack. This once happened in 2014, when the mining pool GHas.io gained the majority of bitcoin’s computational power. This raised many questions about Bitcoin’s security at the time, thankfully GHash.io voluntarily ensured that their mining pool didn’t exceed 50%.

Proof-of-Work uses A LOT of energy

“Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment.” ~ Elon Musk

Bitcoin consumes annually 121.36 TWh per year, this is more than the totality of annual energy spends in Argentina. There are other consensus mechanisms that use less energy than the previous such as Proof-of-Stake (PoS), instead of having different miners compete to create a block in the blockchain, an algorithm chooses a few validators based on their stake. If one validates an invalid transaction, they lose their stake (their money). This is much more eco-friendly, since the blockchain is not “controlled” by those with the most computational power, rather by those who own most of the currency. This also means that in order to make a 51% attack, the attacker has to own 51% of the currency. In Cardano, the biggest PoS cryptocurrency, such an attack would cost over 28.05 billion dollars, and if the attacker failed, they would lose all their money. Even if they succeeded, they would lose money, as prices would fall.

The problem with fees

In order for a PoW or PoS blockchain to properly work, users have to pay fees, or else, miners would be enslaved. This naturally makes crypto much less attractive to the real world as fees can fluctuate to extremely high numbers. In May 2021, Ethereum gas fees were at US$70 for simple transactions (they are currently at around US$6). Those systems also penalize chains with lots of transactions, as congested networks have higher fees and are naturally slower. This is what we call in the crypto world the scalability/crypto trilemma. A distributed ledger (such as a blockchain) cannot be secure, fully decentralized, and scalable at the same time. Or can it?

The solution

IOTA, a so-called third generation cryptocurrency, solves the middle-men issue by turning the user into the validator. The Tangle (Iota’s distributed ledger) is a DAG, rather than a blockchain. In the Tangle, the more transactions there are, the faster it works, since that for each new transaction, previous ones are verified.

With IOTA, the middle-men aren’t corporations with big computational power, nor are they rich stakers. With IOTA, the middle-men are also the users. Here, the motivation to validate other transactions is to add your own transaction to the tangle, making it completely feeless!

But you might ask, what stops me from validating fake transactions to create fake money? IOTA uses a weight system in order to decide whether a transaction is trustable, as of today, a coordinator ran by the IOTA Foundation is used to help bring consensus into the network, making IOTA semi-centralized. But do not worry, IOTA Developers have already found a solution to this problem, they call it the coordicide (dramatic music).

With the coordicide, the Tangle uses a fast probabilistic consensus mechanism, nodes signal their opinion on which of the conflicting transactions they prefer and readjust their opinion based on their neighbours. This solution comes with other modules such as Mana, a reputation system that helps to recognize which nodes can be trusted, more to that here. The coordicide has already been released in IOTA’s DevNet Nectar, and is being tested at this exact moment.

This update also comes with the support to Smart Contracts and NFT’s, opening the doors to the creation of innumerous projects within the Tangle, such as a feeless NFT marketplace.

When the coordicide is fully released in the Mainnet, IOTA will be the first cryptocurrency to have successfully solved the Crypto Trilemma, the environmental issue of crypto and the middle-men problem, making it completely ready for real world usage.

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