What is IOTA?

Even as bitcoin has usurped headlines and valuations, another lesser-known cryptocurrency has exploded in price recently. A month ago, IOTA, a coin for Internet of Things (IoT) transactions, was priced at $0.35 per pop and had a market valuation of less than one billion dollars.

At 21:09 UTC Wednesday, it was trading at $4.17 and had a total market capitalization of $11.6 billion. This past week, IOTA overtook Ripple to become the world’s fourth most-traded cryptocurrency. In a CNBC interview, IOTA's co-founder David Sonstebo described it as a “sleeping giant." (See also: 3 Obscure Cryptocurrencies To Watch.)

Here is a brief primer on IOTA. 

What Is IOTA?

In a blog post discussing IOTA’s road map, David Sonstebo, co-founder of cryptocurrency, wrote that it was developed to enable the “paradigm shift” to the Internet of Things by establishing a “de facto standardized “Ledger of Everything.” Simply put, this means the cryptocurrency will enable data exchange between sensor-equipped machines that populate the Internet of Things.

IOTA does not use the traditional blockchain design used by most cryptocurrencies. Instead, it has developed a new platform called Tangle, which uses a mathematical concept known as Directed Acyclic Graphs (DAG). For its own transaction to be valid, each node in a DAG Tangle must approve two previous transactions at other node. This has two consequences. First, it removes “miners” as entities to validate transactions, thereby removing a possible bottleneck when transaction speed and numbers are high. Second, the network’s growth and speed becomes directly proportional to the numbers of its users.

IOTA also does not have transaction fees and claims to have solved scaling problems, such as network delays due to block congestion, related to bitcoin.

IOTA use is expected to simplify transactions and processes involving objects that have sensors. A simple use case is that of an IOTA-enabled vending machine, which can dispense soda without the associated transaction costs and latency of bitcoin.

A more advanced use case is illustrated in this Reddit chain. For example, you might be able to scan the code at the bottom of your milk carton and have it delivered to your door from Amazon using IOTA funds. Again, this is not possible with bitcoin because of its high transaction costs and network delays.     

What Caused the Recent Spike in IOTA’s Valuation?

According to consultancy firm Bain, the IoT market is expected to be worth $470 billion by 2020. Through IOTA Foundation, the German nonprofit behind the cryptocurrency, IOTA is an early mover in this space. It has already partnered with companies which will play a leading role in IoT, such as Cisco Systems Inc. (CSCO) and Samsung Electronics Ltd. (SSNLF), to create a data marketplace that can be monetized later. IOTA has also partnered with Innogy, an energy company.

“We can expect that a machine will be able to pay its assembly, its maintenance, its energy and also for its liability insurance by giving data, computing power, storage or physical services to other machines,” said Kerstin Eichmann of Innogy. The network effect of these partnerships is expected to popularize IOTA and nanotransactions on its platform. At the end of 2016, IOTA claimed to have processed more than 3 million transactions on its platform.

What’s The Catch? 

The Internet of Things is a glamorous buzzword but it might be a while before a sensor-filled future of machines becomes a reality. Also, IOTA is a technology under development and is still improving flaws in its protocol. For example, the MIT Media Lab recently uncovered a security problem with Tangle. According to the MIT team, the IOTA protocol’s hash function, Curl, produced collisions or a situation where different inputs hash pointed to the same output.

“Once we developed our attack, we could find collisions using commodity hardware within just a few minutes, and forge signatures on IOTA payments,” Neha Narula, director of MIT’s Digital Cryptocurrency Initiative, wrote. IOTA later rectified the problem.

The cryptocurrency’s adoption rates could also be stymied if players within the IoT and ecommerce ecosystem, such as Amazon.com Inc. (AMZN), develop their own cryptocurrencies or form their own separate alliances for data sharing. (See also: Why Did Amazon Buy Up Cryptocurrency URLs?)

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