Internet of Things
The security of the Internet of Things will be put to the test by the recently discovered KRACK vulnerabilities in WPA2. jeferrb/Pixabay

Over the past two months IOTA tokens suddenly became one of the most-talked about cryptocurrencies of 2017. CoinMarketCap estimates IOTA now has a market cap of more than $10 billion, which outranks more popular tokens such as monero, zcash and Neo in terms of global transactions and speculative value. Robert Bosch Venture Capital recently became the first VC firm to invest in IOTA.

IOTA is still considered an extremely young cryptocurrency in terms of technical development and adoption. Its white paper was first published in 2015. Then a group of volunteer developers ran a token generation event (before initial coin offerings became a hip trend) to raise around $500,000 and establish the nonprofit IOTA foundation in Germany. IOTA offers a radically different approach to cryptocurrency, one without miners or a traditional blockchain network. This solves two of bitcoin’s biggest pain points: Slow processing and high transaction fees.

Even beyond powering blockchain systems, miners have a very important role in a currency's lifecycle: Miners create new tokens. Dollars are printed and tokens are usually mined with fancy software. New tokens compensate miners for lending their computing power to verify data. It's like a food chain. How could a cryptocurrency work without this foundation?

“In IOTA, validation of others’ transactions is an intrinsic property of sending your own transaction,” IOTA co-founder David Sønstebø told International Business Times. “This means we get rid of miners entirely and instead have a completely democratized and decentralized network where everyone is an equal validator and user, thus no fee.”

IOTA’s creators already made lots of tokens, 2,779,530,283,277,761 tokens to be precise. So there’s no need for miners to make more of them. Every user pitches in a little bit of computing power to making sure data is correct and complete. Theoretically, there’s no need to line up and wait for a miner, who then deserves compensation for such heavy-lifting.

“The more users there are on the network, the more validation occurs, which is the number one bottleneck for blockchain architecture,” Sønstebø said. “Right now, during the bootstrap phase of the network, we have a coordinator which helps the network to grow and protect it against certain attacks.”

However, fast and free micropayments required a trade-off when it came to decentralization and security features. The Massachusetts Institute of Technology Media Lab pointed out several serious flaws in this new cryptocurrency network. They took issue with the claim that IOTA doesn’t have any fees. “Most people wouldn’t be interested in buying a refrigerator operated by a hand crank, even if the advertisement said ‘No electricity required!’” the MIT report said.

Secondly, there are technical questions about the security of IOTA’s underlying algorithms and infrastructure. Right now the nonprofit’s central “coordinator” software facilitates most IOTA transactions, filling in the role miners play in the bitcoin or Ethereum network. The IOTA team plans to deactivate the central coordinator when more users organically take up the workload. But it is impossible to say if or how that would actually work when high transaction volumes flood the network.

Regardless, IOTA has more similarities with bitcoin than differences. Modest and rare fundraising campaigns support specific infrastructure projects, as opposed to trendy startups. Passionate volunteers help develop the technology because they believe in IOTA's long-term potential. Such is the case with Ralf Rottmann, a serial entrepreneur who works with some of Germany’s largest brands implementing Internet of Things sensor networks. “IOTA is not another general purpose cryptocurrency. It has been designed for a very specific purpose,” Rottmann told IBT. “To serve as the low level backbone for Internet of Things applications and provide a means of exchanging value.”

The IOTA foundation is developing a global marketplace to tokenize the vast amounts of data collected by IoT devices. In the future, when high-tech products automate buying more eggs for your smart fridge when you run out, IOTA might be an ideal currency for those tiny payments. Companies like Microsoft and Deutsche Telekom are already experimenting with the bare bones of this system.

Whenever a new participant publicly declares interest in IOTA's marketplace or network, token prices surge. IOTA tokens cost less than $0.50 in November, according to CoinMarketCap, then peaked at $5 a piece on December 20. It stands to reason that IOTA prices could continue to rise if the marketplace attracts more enterprise users.

“Our goal is to launch the marketplace at the end of 2018 ,” IOTA co-founder Dominik Schiener told IBT. “We hope to have some of the first use cases run on the IOTA mainnet in 2018...we perceive IOTA as the backbone of many security applications that power the future of the Internet of Things, such as machine identities, supply chain tracking, health care and so on.”

Unlike other cryptocurrencies, like litecoin and monero, few IOTA users aspire to directly shop or pay for services with IOTA tokens. There are some traders who buy IOTA tokens for speculative value and quick profits. Yet huge swaths of the IOTA community are technologists coming to cryptocurrency from different fields. “Most of the community come from some sort of IoT background and really want to help IOTA become the backbone for the Internet of Things,” Rottmann said. “I know about lots of PoC [proof of concept] implementations which are being built as we speak.”

Cryptocurrency veterans often criticize IOTA by raising qualms about the network’s tokens. For example, crypto hedge fund manager and Coinbase alumni Lindia Xie wrote a blog post saying the IOTA team’s take on cryptographic hash functions raised several red flags.

Supporters hear that criticism and agree the token's system still has many kinks to work out. Most IOTA supporters believe it will take a long time to perfect the token. In the meantime, volunteers are developing the network's IoT backbone, including a global data marketplace and unique features for a variety of high-tech devices.

“IOTA is not just another cryptocurrency. IOTA tokens are deeply linked to the broader vision and promise of the technology,” Rottmann said. “IOTA wants to build a decentralized, independent, permission-less infrastructure for Internet of Things solutions. The tokens are just one required aspect to provide a means of exchanging value. Investing in IOTA tokens means that you believe in this broader vision."