The Marriage of Blockchain and IoT: A Market Overview

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TL;DR: IoT and distributed ledger technologies are both still in their very early stages, thus real market value and adoption will not realize for 2–5 years. Among leading distributed ledger-based IoT projects, VeChain is the strongest market-ready solution and has the greatest chance for major gains in the next 2–3, while IOTA is best positioned for long-term success.

The Internet of Things, or IoT, consists of a network of devices embedded in physical objects connected via the internet. These devices can exchange data and, in turn, integrate the physical world with digital systems.

IoT is a very broad tech categorization with a myriad of use-cases in the industrial, commercial, and consumer sectors, ranging from smart homes to supply chain management. A recent study published by MarketsandMarkets forecasted the IoT market to grow from ~$170.6B in 2017 to ~$561.0B in 2022, at a CAGR (compound annual growth rate) of 26.9%.

However, IoT implementation has run into a number of technical roadblocks, most notably security concerns over cloud storage providers and IoT devices, resulting in waning confidence in these systems.

A successful IoT network is fast, trusted, secure, and scalable. To accomplish this, many analysts have pointed to blockchain and distributed ledger technology (DLT) as a solution to IoT’s woes, but the application is not exactly a direct one.

In this overview, I will discuss the potential benefits and drawbacks of blockchain for IoT applications, analyze top existing blockchain-IoT projects, and provide my market outlook for the space.

How Can IoT Benefit From Blockchain

First, we will take a look at areas where IoT can benefit from blockchain integration.

Decentralization
Blockchain facilitates coordination between parties without requiring they trust each other, removing the need for a centralized intermediary. By shifting IoT from an architecture relying on centralized data servers to a trustless, distributed peer-to-peer network, massive overhead costs, concerns over centralized data control, and single points of failure are significantly reduced. In addition, decentralization can unify siloed IoT devices and promote easier distribution of updates throughout the network.

Autonomy
Via smart contracts — digital agreements that self-execute when the necessary terms are met — blockchain-empowered IoT devices can automate transactions between devices and improve machine-to-machine communication.

Security
Blockchain security protocol, coupled with the transparency and immutability of on-chain data, can offer a solution to arguably the largest issue facing the development of IoT. Disincentives to hackers and robust fault tolerance mechanisms are critical elements of successful blockchain ecosystems and lend themselves well to tackling the problem of security for IoT.

Ledger transparency and immutability also enhance network security, as a complete, unalterable data history can be seen for each unique address. This provides publicly auditable evidence of authorized interaction on the system, as well as a platform for improved identification and authentication in IoT.

Market of Services
Blockchain also accelerates the establishment and growth of a market of services and data marketplaces. With blockchain, information is stored in transactions, and micropayments can be safely and easily made for services and data. This is especially important in IoT, where the machine-to-machine economy is currently based on micropayments and expected to remain so in the future.

Problems Facing Blockchain for IoT

Although blockchain can benefit IoT systems in many aspects, the integration is not without its limitations. Below are the main problems facing blockchain’s application for IoT, which blockchain-IoT projects will have to consider in order to succeed.

Scalability
Before blockchain can realize network efficiency and reach mass adoption in any market, let alone IoT, issues with scalability must be addressed. As Cryptokitties exemplified back in December 2017, traffic spikes can flood the blockchain with transactions, greatly outpacing miners and resulting in network congestion and major transaction delays.

This problem is exacerbated as more users join and transact on a network, and with IoT networks typically containing very large numbers of nodes, blockchain-based IoT systems cannot be implemented effectively until appropriate scalability solutions are found and tested.

Mining and Overhead
Mining plays an important role in many current blockchain ecosystems, especially in Proof of Work (PoW) consensus models, where miners are rewarded for providing computational power to verify transactions on the network and extend the ledger. The mining process is energy- and time-intensive, disincentivizing potential hackers.

But, IoT systems require low latency and devices tend to be resource-restricted, making the traditional mining schema difficult for IoT integration. Also, an IoT network needs significant bandwidth to accommodate its many nodes, but computational overhead produced by blockchain protocols can constrain maximum bandwidth.

Moreover, technologic limitations of hardware have constrained the IoT industry throughout its early growth, and while blockchain can offer value to current IoT software, innovative hardware solutions are still necessary.

Security
Although blockchain can bring improved security measures to IoT systems, blockchain is not without its own vulnerabilities. 51% attacks, sybil attacks, and code bugs are among the security concerns of blockchain protocols, and without solutions, these will be critical issues for blockchain-IoT networks.

Real-world processes for embedding devices also need solutions for accountability and standardization. Certain IoT applications, such as tracking and provenance of luxury goods, require a system where users can be sure that IoT devices have not been removed and embedded in inferior items.

Top Blockchain-IoT Projects

As I have highlighted to this point, while blockchain can add value to the IoT space, common blockchain architecture is not an exact fit. Now, I will discuss the three leading blockchain- and DLT-based IoT projects, examining how they combat the issues inherent with IoT application and evaluating their long-term market potential.

IOTA
IOTA (token symbol MIOTA) is the largest project on this list and the only one not based on blockchain technology. It is an IoT solution based on a concept known as direct acrylic graphs, or DAGs.

IOTA’s protocol, the Tangle, is unlike blockchain, where transactions are verified and added to a linear chain by miners. With DAGs, transactions are represented as vertices on a graph and users must verify two previous transactions before placing a new transaction.

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Visualization of blockchain vs. Tangle, via iota.org

Thus, as more users and transactions are added to the network, throughput increases while the issue of computationally intensive mining is mitigated. The blockless architecture removes bottlenecks associated with block size and discovery, and the synchronization of nodes in the network enables the system to reach consensus.

The Tangle boasts feeless transactions with possible network speeds of over 1,000 transactions per second. But, while providing a lightweight, peer-to-peer network for more efficient IoT implementation, DAGs like IOTA’s Tangle bring up new concerns regarding security, as well as potential bandwidth limitations for nodes.

Instead of 51% attacks, DAGs can be vulnerable to a different kind of attack — 34% attacks. Essentially, due to the nature of their “mining” set, less control of the network is required to perform an attack on a DAG than a blockchain.

IOTA has addressed this concern in their whitepaper, stating that the flow of “honest” transactions should always be larger than the computational power of a malicious actor when the system is sufficiently large.

In the early stages of IOTA’s development, before organic activity reaches a large enough volume, additional security measures are required to circumvent an attack, which include a temporary Coordinator whose primary responsibilities are to protect against hacks and coordinate “snapshots” limiting Tangle size for bandwidth availability.

The use of a coordinator has become the most contentious issue with IOTA, as purists view this as a concession towards centralization. But, if removed once the network reaches a sustainable level of activity, the Coordinator could prove to be a helpful bridge during IOTA’s growth stages.

IOTA’s hardware solution, JINN, is also an important part of the project’s value add and key in removing resource-related bottlenecks. These microprocessors use ternary computing, an improvement over binary logic utilized in most current IoT devices, to bring necessary processing speeds to distributed ledger-based IoT systems. However, not much is known about the JINN processors, as non-disclosure agreements have restricted public information.

Much of IOTA’s potential long-term success will depend on both the efficacy of the hardware solution and integrity of the protocol at scale. Also, its use-case is far more abstract than other leading projects, meaning IOTA’s growth realization is farthest off.

VeChain
VeChain (token symbol VET) is the second largest project tackling IoT integration. Their VeChainThor blockchain, which went live at the end of June, uses a two-token economy, semi-centralized governance structure, and Proof of Authority (PoA) consensus model to overcome obstacles associated with blockchain’s application to IoT.

The VeChainThor economy consists of the VeChain token (VET) and VeThor token (VTHO). VET is used for value transfer across the network and held to generate VTHO, which is used to pay transaction fees. The two-token model is meant to offer sustainable transaction fees on the network, as holding VET for sufficiently long will generate enough VTHO for fees.

VeChainThor’s governance structure aims to find a balance between decentralization and centralization through a hierarchy of voting authority. Large VET stakeholders (masternodes and smart contract owners) vote to determine the Board of Steering Committee, with voting authority proportional to their VET holdings. The Board of Steering Committee, the governing body of the VeChain Foundation, is then responsible for overseeing operations and facilitating network coordination and development.

The PoA consensus model relies on this governance structure to provide a platform where computational power requirements are low, nodes do not need to communicate to reach consensus, and system continuity is guaranteed. Masternodes are responsible for block validation and production, and therefore must go through a rigorous KYC process and disclose their identities to the network.

Because masternodes have their identity and reputation at stake, they can be held accountable and are incentivized to act in the best interest of the network. Consensus is reached when the majority of available masternodes agree on a blockchain state, and block validators are randomized to help further combat 51% attacks.

VeChain is seeking to become the leading enterprise level solution for IoT integration, and is gaining support from businesses suffering from counterfeiters such as fashion and luxury goods. The foundation has formed strategic partnerships with PwC in China and Singapore and DNV GL, and has already begun implementing their technology.

VeChain uses an internally-developed smart chip, which utilizes RFID and NFC technology, to track products throughout their lifecycle and accommodate blockchain data requirements. Their smart chips also protect against retagging, as tearing the device renders it broken.

VeChain’s technology addresses a real problem facing fashion and luxury goods, its CEO and co-founder is the former CIO of Louis Vuitton China, the hardware is ready for implementation, and the project was runner-up in the 2018 LVMH Innovation Prize. There is a strong product-use case fit and significant corporate interest, making VeChain’s use-case the most clear and achievable in the next 2–3 years.

Waltonchain
Waltonchain (token symbol WTC) is a project focusing on blockchain enabled IoT with devices connected using RFID technology. Waltonchain’s proprietary RFID readers are nodes on the chain, and Waltonchain navigates blockchain’s IoT shortcomings through their parent-child chain ecosystem and Proof of Stake and Trust (PoST) consensus mechanism.

The Waltonchain serves as the parent chain in the ecosystem, with application-specific subchains — or child chains — affording customizable native token and block data structures. The Waltonchain serves as the public ledger of WTC transactions and provides a number of core functions including transaction and subchain management, smart contracts, and cross token transaction support within the ecosystem.

Their PoST consensus mechanism is based on the Proof of Stake (PoS) model. With PoS, all users are “miners” vying to validate transactions and discover blocks, of which the probability, and thus reward, is proportional to the amount of token staked. PoST expands on this idea by introducing a node reputation mechanism, adjusting the block discovery difficulty to better choose “honest” miners and improve network security.

Looking at use-case and ecosystem development, Waltonchain is actively working on contracts with the Chinese and Korean governments, building systems such as IoT-connected smart air purification solutions. Waltonchain also launched WTC-Food and WTC-Garment, initiatives to improve traceability of food and garments in countries like China that lack robust tracking procedures.

The timelines of these contracts and initiatives place Waltonchain’s growth realization at 3–4 years, while its proposed use-cases and corporate interest are not as intriguing as VeChain’s.

Market Outlook

Projects like IOTA, VeChain, and Waltonchain seek to be the foundational layer for future IoT applications, so long-term project success will depend on partnerships and network adoptions, in addition to quality software and hardware.

With that said, VeChain appears to be the strongest market-ready project for IoT integration at the enterprise level. The technology solves a real market need in the fashion and luxury goods industry, and its solutions to blockchain’s shortcomings in the IoT space, and major corporate partners position it well for the quickest success of prospective distributed ledger-based IoT solutions.

However, many experts in IoT and Big Data believe that IOTA’s Tangle holds the best long-term answer to data transfer and machine-to-machine communication. Along with the Tangle, major corporate partners, such as Volkswagen and DNB ASA (Norway’s largest bank), applications built on their protocol, including Oyster and Peaq, and the JINN processors could help IOTA eclipse the success of VeChain. But until more is known about IOTA’s hardware development and removal of early stage security measures like the Coordinator, IOTA’s long-term potential remains speculative.

All things considered, IoT and blockchain technologies are both still in very early stages, and with ongoing technical developments and onboarding, real market value and adoption should not be expected to realize for the next 2–5 years.

Disclaimer: The author holds a long position in VeChain. This document is a personal investment analysis of highly risky assets and should not be considered investment advice.

Written by

Blockchain investor and enthusiast. Economics @UPenn.

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