IOTAs multi-asset multiverse is coming! Huge implications for its tokenomics
Have you ever wondered what the actual use of the IOTA token is within a feeless network? Well, you are not alone. One of the most frequent questions regarding the IOTA protocol always was how adoption by governments and industry will translate into demand for IOTA token and therefore into rising prices. And even though good arguments could be made that IOTA tokens would have been used for smart contracts and payments, the now released update plans lift IOTA tokenomics to a completely different level.
The IOTA Foundations plans two distinct updates:
1. Tokenization framework will introduce a multitude of new functionalities
2. Dust protection will tie almost every use of the IOTA network to the IOTA token — while still remaining feeless.
Let´s start with IOTAs new functionalities
SimpleOutputs
OK this one is actually not new, but let´s have a quick look at it in order to later understand how dust protection improves IOTA tokenomics. A SimpleOutput is a “normal token transaction”. More precicely, it is an unspend transaction output (UTXO), that holds IOTA tokens.
ExtendedOutputs:
Now we come to the juicy part. ExtendedOutputs will vastly extend the functionality of the IOTA network. It will transform from a single-asset ledger without NFTs or smart contracts to a literal multi-asset multiverse and utility-beast. Let´s have a look at the new output types.
Token foundries
A token foundry output is a transaction (UTXO) that can print new tokens out of thin air. Any user can very cheaply print a basically infinite amount of user-defined tokens, so called native-tokens, directly on the IOTA mainnet. These can be used to represent currencies, like Euro, Dollar or Bitcoin, fractional ownership over houses or cars, stocks, meme-coins or anything else that the founding entity wants them to represent. All these new tokens can freely move on the IOTA mainnet in parallel to the original IOTA tokens.
If you wonder how this can improve demand for IOTA tokens, wait until you see the dust protection mechanism later in this post. It will be eye-opening.
Aliases
Alias output types allow smart contracts to interact with the Tangle. They will be able to act as entities on the network, send and receive any kind of output and can therefore, for example, create wrapped tokens (via foundry outputs) or NFTs. Aliases are so integral for the use of smart contracts, that the tokenization update will most likely happen at the same time as the IOTA smart contract protocol (ISCP) update on the mainnet.
NFT Outputs
Non-fungible tokens (NFTs) are unique tokens that cannot be reproduced in any way. They usually hold specific data in order to represent things that only exist one single time, like collectibles, art, trophies or badges. Just like the native tokens from foundry outputs, NFTs can be created out of thin air. They can carry any kind of meta-data, for example a link to a picture (like most popular art NFTs). A unique identifier and a cryptographic signature by the issuer ensure their uniqueness in the data-base.
IOTAs new tokenomics comes through “Dust protection”
The tokenization update comes together with a second update called “Dust protection”, which will tie up the whole picture and will reveal IOTAs new tokenomics.
IOTAs feeless nature leads to a very unique problem. As in every distributed ledger (DLT), including all blockchains, all addresses (more precise: all UTXOs) on the ledger must be saved on the hard-drives of all participating nodes in the network. UTXOs use up real, physical disk-space in other people real computers. As anyone can imagine, saving the data or balances from 1000 UTXOs uses up less disk-space than 1 million or even 1 billion UTXOs. This becomes a problem when someone uses IOTAs feeless protocol to simply take 1 MIOTA (1 million IOTAs, currently worth around $1.30) and send each individual IOTA to 1 million individual UTXOs on the Tangle. The result would be an exploding data-base that nodes would be unable to handle. Moreover, this damage would be permanent, since nobody could ever retrieve all these micro-amounts (called “dust”) from these UTXOs.
The solution: Link database-usage to ownership of IOTA tokens
Database size is a scarce resource. This means its use should be given to those who are invested into the protocol.
This will work as follows: Every UTXO, be it a SimpleOutput or one of the more complex ExtendenOutputs, has a certain data size. Outputs will be only allowed to exist in the Tangle, if they are backed up by a IOTA token deposit that lies on the same UTXO. The size of the deposit will be proportional to the space they take up in the shared database. This means that a SimpleOutput will have the lowest possible deposits, since it carries no additional data except address and token amount. NFTs or token foundries will vary in size, but will always require larger parts of the database and therefore need larger IOTA token deposits. This deposit-mechanism also enables arbitrary data to be permanently saved on the Tangle, simply by adding an IOTA token deposit to any data transaction (for example to permanently store digital identities)
The IOTA token deposits can either sit on the receivers UTXO or they can be part of the senders transaction. In that second case the sender can either gift the deposit amount to the receiver or get it back by making use of the new “return-amount” functionalities, which effectively work as very simple smart contracts that get automatically triggered once the receivers UTXO gets consumed or a defined amount of time passes.
All deposits can be claimed back by the owner of the respective UTXO at any time — Data and NFTs can be deleted, foundries can be dissolved, in order to release their connected IOTA token deposits.
So, how much of a deposit are we talking?
The details are more complicated but in short:
SimpleOutputs: will probably require around 0.5 -1 Mi deposit
ExtendedOutputs: strongly depending on individual size of the output, but probably mostly around 0.5–20 Mi
The IOTA token deposits directly link the limited resource “database size” (for example defined as 1 Tb) to the limited resource “IOTA tokens” (there are about 2.8 billion Mega-IOTA in existence). This means the deposit costs will be directly derived from the yet-to-be-made decision on the maximum database size of the Tangle. This choice cannot be made lightly, since it will set strong limits on what kinds of nodes will be able to participate in the network. If the database size is chosen to be very high, the necessary deposits can be very low. But then only very strong and performant nodes can realistically follow the network, thereby reducing decentralization. If a very low maximum database size is chosen, many smaller nodes can participate but token deposits will be very high, since a given number of bytes is a larger piece of the total cake.
What does this mean for IOTA token demand?
Since the upcoming update has two parts it also means two different but intertwined things:
1. Tokenization update vastly increases possible use-cases
2. Dust protection update links EVERY use-case to IOTA token demand
The increased usability will attract more use-cases, from serious business to meme-coins. The dust protection will make sure every use-case increases token demand.
For example, token foundries can create new tokens almost for free, but whoever wants to receive them must have a minimum IOTA token deposit in their possession. Everyone can cheaply and without wasting much energy create NFTs, but whoever wants to hold them must hold a minimum IOTA token deposit too! Government, industry and individuals will pin important data into the Tangle by linking a deposit to it, thereby locking up parts of the total supply. Digital identities will be stored on the main-layer and thereby lock up even more.
In short: Any kind of network usage will increase demand for the IOTA token and will therefore increase its price.
Quick maths:
There are only ~2.8 billion MIOTAs around (assuming zero have been lost)
If the average IOTA token deposit would lie at around 1 Mi there would not be enough UTXOs for every human being on this planet, let alone every machine (cars, smart homes, IoT sensors, etc).
This means data-space on the Tangle (and therefore IOTA tokens) could become extremely valuable.
The potential implications of this for the end-game vision of IOTA (from “network for everyones coffee buy” to “fundamental base-layer of trust”) will be discussed in a future article.
Wen?
Both the tokenization and dust protection updates are currently well advanced RFCs (request for comment documents). They will need further review before they will be implemented on the IOTA Chrysalis testnet for intense and thorough testing. After that the IOTA Foundation will aim for mainnet release, which must also be very carefully prepared. Don’t expect mainnet release of these updates very soon, but follow their progress on Chrysalis testnet, IOTA Discord and Twitter in order to stay up-to-date.
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Sources:
IOTA tokenization blogpost: https://blog.iota.org/iota-tokenization-framework-specifications/
Dust protection RFC: https://github.com/muXxer/protocol-rfcs/blob/master/text/0039-dust-protection-based-on-byte-costs/0039-dust-protection-based-on-byte-costs.md
