IOTA is the crypto-currency of the future

The following is a translation from an article on The Motley Fool, Germany.

Even today, machines manage to do their job without human intervention. If, in addition, an autonomous payment transaction between machines needs to take place, one requires a digital currency. But for good reasons that will likely not be Bitcoin or Ethereum, but more recent developments like IOTA.

The Internet of Things (IoT)

Kevin Ashton, who has created and co-founded an international standard for RFID (Radio Frequency Identification) and other sensors at the Massachusetts Institute of Technology (MIT), is viewed as the inventor of the Internet of Things (IoT).

The objective is to give all things that are currently dependent on the control of their human owners, a kind of own life using the Internet.

Such applications already exist today, but we are only just at the beginning. Networked thermostats are already learning when to stay where in our home and adjusting the temperature to save on heating costs.

IoT is currently particularly interesting for logistics, as more and more packages and containers have to be sent to our global market. The basic idea is simple: Packages are identified by a chip, which not only stores product information but also their transport destination. Like data streams on the Internet, broadcasts find their way to the destination itself.

If a consignment arrives at a sorting machine, informs it of the destination, it will be sorted accordingly and forwarded to its destination. These processes run quickly and autonomously without a central authority. The package thus finds its own way.

Such decentralized self-intelligence allows for local failures to have an impact only on the entities themselves and not affect the processes as a whole.

RFID is the basic technology for networked goods and their environment. This technology uses radio transmission to read and write data from tags without contact and thus manages information related to the goods themselves.

RFID tags and the things they are attached to become standalone objects that find their way through the Internet of Things and control the systems within which they move.

If we think of self-driving cars, they must also be able to communicate within the Internet of Things. If a deer runs in front of the car, the car must recognize the deer in milliseconds and apply the brakes. Sensors and brakes must be able to communicate with each other without human intervention. Artificial intelligence is a necessity on top of that.

Why Bitcoin does play a role in the Internet of Things

Bitcoin consists of a database, the blockchain, a kind of journal, in which all Bitcoin transactions are recorded. The Bitcoin payment system uses a peer-to-peer network to which all participating computers connect.

This Bitcoin network records all Bitcoin transactions. The blockchain is redundantly and decentrally stored on all Bitcoin nodes, managed and constantly updated over the Bitcoin network, eliminating the need for banks.

So could Bitcoin take over all of our current payments using the blockchain? There are interesting facts that justify a clear no, at least for now. In the case of the Bitcoin blockchain, annual energy consumption has already reached the level of consumption of a medium-sized country like Cuba. And that with very few transactions!

To illustrate this: for a single digital currency transaction, 215 kilowatt-hours of electricity are needed; i.e., the annual energy consumption of a fridge! Overall, about 0.08% of the world’s current energy consumption is attributed to Bitcoin activities, and the trend is rising.

Therefore, it is a fact that globally produced energy would not be enough to cover all previous payment transactions with Bitcoin.

So what to do now? Global digital networking could soon make it possible to connect all machines in an industrial production chain. Such so-called machine-to-machine relationships (also called M2M) will play an important role in the near future in order to optimize processes decisively.

IOTA offers fast and secure processing of the transactions, without Blockchain as would be customary with Bitcoin. IOTA is based on a new distributed ledger, Tangle, which overcomes the inefficiencies of the current blockchain design and introduces a new way of consensus in a decentralized peer-to-peer system.

If you take a look at blockchain today, it is a single chronological thread that connects one block with another. This has limitations such as the 10-minute interval at Bitcoin. What IOTA is doing now is that it uses many chains instead of one chain.

This allows people to use IOTA, for example, to transfer money without any fees. And especially micro-transfers such as parking fees, car wash, bread rolls or your regular tabloid can be executed free of charge and fast.

As the Tangle grows, and more participants perform transactions, the overall system becomes even safer and faster, and verification times continue to decrease.

At IOTA, there are no miners like Bitcoin that require a transaction fee to validate a transaction and include it in the next blog. Instead, the consensus is completely decentralized, with each network participant executing a transaction, and the previous transactions are directly and indirectly confirmed.

For IoT, where machines pay machines, we need a payment system that can process tiny transactions in huge numbers and in real time. It must be cheap, or even better, free, fast and scalable. And that is exactly what Bitcoin cannot do, according to experts, but it remains to be seen what improvements the newly created Lightning network will bring.

Here, payments are to be executed via many separate micropayment channels, which make it possible to execute transactions virtually in parallel to the Blockchain. Instead, two users can make as many transactions as they like, without informing all the participants in the blockchain about the cash flow. Only the final amount of their transaction will be noted afterwards.

Summary

IOTA is scalable and payments are free, making many applications in the IoT viable. Not without reason are companies like Bosch very interested in such technologies, because a future in which each car pays for itself in the parking garage makes our lives easier.

Whether IOTA can prevail, only the future will show, because a “proof of concept” must be provided in real world applications. As with Bitcoin, the risk of the bubble is significant, because without genuine applications I personally consider such a crypto-currency worthless.

What is exciting, however, is whether the Lightning network will have a positive effect and whether profitable applications may soon be on display.

Nevertheless, IOTA currently seems to be much better equipped than the energy waster Bitcoin, which is why it is at least part of my watchlist.

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