Coordicide is coming

A new academic paper describing the functional principles of the new version of the IOTA network has been released in recent days. You can find it here

Those who read my writing knows that I’m a fan of technology, crypto currency in general and especially IOTA.

Now I could go on describing the innovative ideas that the new WP of IOTA contains, enumerating the various components that ensure the distribution of consensus even in the absence of economic incentive.

I could, but I don’t, because the document would deserve an in-depth examination for practically every page, but I don’t think this would help to understand once and for all what the value of the IOTA is and why it is fundamental for technological development in the coming years.

So I try to give an answer to this simple question: what is the reason why the IOTA should be successful, perhaps more than any other DLT seen so far?

We have to say that only time will tell whether IOTA will be more or less successful than other projects, but that I personally have very few doubts.

My feeling comes partly from the fact that I am fortunate enough to be able to read documents like this new WP and get a clear idea of the feasibility. But it also comes from the fact that by now daily news of new patents of applications and technologies in which IOTA is mentioned as a specific solution to manage critical and functional aspects. If also Intel, Bosh, Siemens and dozens of other giants of the IT and TLC market have the same perception as me, maybe it is not a wrong feeling.

IOTA will therefore (almost) certainly be successful as a technological system for IT and IoT solutions where the use of a public network of nodes is useful, convenient or fundamental.

In practice IOTA is on the same level as the Internet: both are advantageous because they scale, are free and are public.

A solid argument, but one that certainly does not satisfy the most skeptical and especially those who are used to thinking of a decentralized network as a system that can exist only if the nodes that make it up get a reward.

Yet there are many examples in nature of organisations (including human ones) in which each individual participates and contributes to the functioning of the system in an absolutely voluntary way and without economic return. Bringing this model into a technological system seems not easy, but in reality it is exactly what will be achieved with the implementation of the content of the IOTA whitepaper.

To explain how a completely decentralized network works without economic incentives, I must highlight some aspects of the design of the best known decentralized networks such as Bitcoin, Ethereum, Dash, Tezos, ...

These network are defined “peer-to-peer”, meaning that value exchange takes place between nodes that communicate directly. In reality, since 2010 (therefore already in the Bitcoin system) nodes have undergone a process of specialization that has distorted the idea of peer-to-peer.

Today it is the “wallets” that create transactions and pass it to a node that propagates it but does not manage the creation of the block. This phase is supported by miners with dedicated nodes and processors specialized in calculating the hash function. A transaction created by the “wallet” is practically non-existent until a third party takes it over and inserts it into a valid block.

More or less this is true in all crypto networks, both POW-based and POS-based.

Master node, validators, routers, miners, full nodes, light nodes, etc. are all elements that make up the network, creating a sophisticated organization that specifically supports an extremely secure monetary application. Any other application can be realized as a superstructure of the monetary application.

The problem is that this model based on specialized components is not supported if the critical nodes are not incentivized.

There are various ways to encourage the participation of key nodes. A direct incentive is the fees paid for each transaction that are obtained by the fastest miner or the validator that approves it. Another method is the rewards paid per block, another is the interest given to those who delegate a masternode by providing capital.

Finally, there is also a form of “deferred” incentive constituted by the possibility that the value of the token grows as the size of the network grows, which gives an incentive to activate functional nodes even without direct reward. This is the form that worked best for Bitcoin.

This is because even if all the nodes were not remunerated, if the network grew without moving tokens there would not be a real economic effect capable of creating a demand for tokens and therefore to its growth.

Here’s the difference with IOTA: it is a network equipped with a token having the same name, but is specifically designed to handle non-economic transactions and support decentralized communication in an unreliable medium.

This type of transaction moves data and to do so, since a data can have a negligible value, it cannot be burdened with a cost, neither direct in the form of fees, nor indirect in any other form that brings an advantage to those who own the token.

If there was a form of indirect cost it would still be a cost that would make the network unusable for many applications.

So IOTA has no fees, no mining, no reward and no specialized nodes. Each node is functionally equal and equivalent, at least in the main network. Satellite networks for specific real time applications will have particular nodes, but they will always use either the same protocol and the same design philosophy.

These simple features explain why IOTA is the ideal solution for industrial applications that have made it chosen by the world’s technology giants: you can design an application using IOTA technology without having to worry about any side effects.

In practice IOTA provides designers with one thing that no other network can do: define and respect KPIs (Key Performance Indicators) of a service based on an IOTA node.

For example, it is possible to size the node to handle a certain amount of transactions per second. This performance level is not affected by what happens on the other nodes and is therefore perfectly controllable.

In other words, the IOTA makes it possible to design any type of distributed application without the constraints arising from the monetary application of the network limiting its feasibility.

In summary IOTA provides the same advantages as a private DLT, but as the node is part of a public network, it also provides a token and distributed consent on the status of the register of economic transactions.

One may now wonder what is the purpose and value of the token. The answer is twofold.

First of all, it should be noted that the “applicative nodes” that create only data transactions, being equal to any other node, help to provide consent to economic transactions. This is a unique advantage among crypto systems.

Secondly, being able to move data reliably over a public network without cost is exactly what happened in 1995 with the birth of the web. In that case the data was complex “content” and intended for human users. Today, recipients are among the billions of connected devices that can benefit from buying and selling data and services.

While the in the web, intended for human beings, is inevitable to reuse the same currencies that we use in the real world, in the “web of things” there is no reason to use Euro, Dollar or Swiss Franc. On the contrary, there is a very good reason not to do it.

The reason is that economic transactions made with payment systems designed for us humans have a very high cost, justified by the value of what we buy online and the ancillary services provided. But how much can information like “car engine temperature” be worth right now? Probably a few thousandths, or less. In addition, things, unlike humans, do not need additional features, such as credit or the cancellation of a transaction made by mistake.

Here then it is evident the usefulness of the token that, like the data, travels on the IOTA network at zero cost allowing to move value and complete micro business transactions.

At first glance it may seem like little stuff, but if only 10% of 3 trillion devices will need to buy and sell data or services, the token economy will explode.

So, a completely different approach, not in competition with other networks or even with traditional currencies, which has a very solid rationale derived from a new market that has a very high probability of birth.

I can then mention what will happen after the end of the “coordination”.

The dev team is already working to expand the IOTA protocol to support the specificities of the Qubic project.

So we have to expect further evolutions that will lead to new functional levels of the network with nodes able to perform smart contracts and produce consensus on data authenticity. In this case, since smartcontracts cannot have a predefined and limited cost, the nodes that will support them will get a reward. However, this is not a reward for participating in the network, but for making specific calculations and helping to give consensus to a specific Qubic transaction. A cost and a reward given not in competitive terms leading to a cost race.

Finally, we will see another step forward focused on giving each person and each device an identity. Today this issue is addressed and solved with a tool like our ProductID, but it is obviously impossible to imagine that every smallest device, every even insignificant object is equipped with a smartcard. The ideal solution is to have certainty of a person’s identity and to associate their “things” to their profile.

This is also a specific theme that, at network level, only IOTA has the goal to study and solve.