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IOTA explained: decentralized ledger technology for the Internet of Things

Bitcoin (BTC) and Ethereum (ETH) have been major catalysts for the cryptocurrency industry, each sparking a wave of innovation and ushering in many new use cases. These pioneers were early proponents of decentralization and security, which helped to spotlight the transformative potential of blockchain technology.

However, as the industry expanded and network sizes grew, challenges surfaced in the areas of interoperability, scalability, and energy efficiency. The absence of seamless interoperability among different blockchain networks has led to fragmented ecosystems, hindering the efficient exchange of data and value across networks. At the same time, these challenges gave rise to heightened transaction fees and posed limitations in effectively handling increased transaction volumes.

IOTA emerged as a response to these challenges, designed with a vision to deliver an interoperable, scalable, and energy-efficient network. In this guide, we'll walk you through the functionalities of IOTA, shedding light on its architecture, diverse use cases, token dynamics, and more.

What is IOTA and how does it work?

IOTA is a distributed ledger technology (DLT) designed for the Internet of Things (IoT). A DLT functions as a network of distributed nodes that replicate, share, and synchronize digital data and value across diverse locations. Unlike a centralized database, there’s no singular central administrator overseeing the entire process.

IOTA offers a suite of open-source solutions for individuals, businesses, and institutions looking to navigate the Web3 landscape. These solutions encompass a spectrum of applications, including supply chain tracking, digital identity, value transfer, and decentralized finance (DeFi).

At the heart of IOTA lies the Tangle — a directed acyclic graph (DAG) that redefines the traditional blockchain structure. Unlike linear blockchains, the Tangle operates in a multi-dimensional manner, offering enhanced scalability and efficiency. Alongside the Tangle is Shimmer, the staging network for IOTA. This is where new protocol changes undergo rigorous tests for functionality, scalability, and security before making their way to the IOTA mainnet.

Let’s take a closer look at the features of IOTA:

The Tangle: understanding IOTA’s architecture

In traditional blockchains, transactions are organized into blocks and linked together in a sequential chain. However, IOTA takes a different approach by employing a DAG data structure called the Tangle.

In the Tangle, transactions are interlinked within a network of nodes rather than a linear chain. This structure enables a decentralized and scalable system where participants assume the roles of both users and validators. Instead of relying on miners to validate transactions and add them to the blockchain, each transaction in the Tangle confirms two previous transactions, creating a mesh of interconnected transactions.

IOTA’s Tangle offers several advantages, including scalability and speed, feeless transactions, energy efficiency, and the ability to process minuscule transactions. This all positions IOTA as a notable player in the world of distributed ledgers.

  • Scalability and efficiency: Owing to its DAG architecture, IOTA can swiftly confirm transactions in parallel, contributing to its scalability and transaction speeds. Moreover, the absence of miners means IOTA transactions avoid delays associated with waiting to be included in newly generated blocks.

  • Feeless transactions: IOTA transactions don’t incur fees for processing on the network. This is achieved by removing the need for miners who are traditionally incentivized to process transactions.

  • Energy-efficient: The IOTA Tangle has one of the smallest energy footprints among public DLTs. This energy-efficient design aligns with IOTA's commitment to sustainability and sets it apart in the landscape of blockchain technologies.

  • Ability to process minuscule transactions: Processing smaller transactions presents challenges in traditional blockchains, stemming from constraints like block size, congestion, impractical transaction costs and computational overhead, and more. IOTA's Tangle overcomes these hurdles through parallel processing, the absence of miners, and fee elimination, making it well-suited for handling smaller transactions, particularly in IoT devices and applications.

The Shimmer: IOTA’s staging platform

Shimmer is a production-grade staging network for the IOTA mainnet. It serves as a testing ground for upcoming protocol changes, meticulously assessing functionality, scalability, and security before integration into the IOTA mainnet.

Unlike most staging grounds, Shimmer has its own token, SMR, which is actively traded on major exchanges. This unique feature adds real monetary value to the network, creating an additional incentive for testing upcoming protocol changes.

IOTA 2.0

IOTA 2.0 represents a significant protocol upgrade that aims to rebuild IOTA's architecture, steering it toward full decentralization. This upgrade is not merely a technical enhancement but a commitment to reshaping IOTA's core to meet the evolving demands of the decentralized digital landscape.

In essence, IOTA 2.0 positions itself as a user-centric, globally accessible, and efficient DLT infrastructure. Focused on achieving digital autonomy, IOTA 2.0 introduces five core principles:

  • Accessibility: Users become block producers, eliminating conflicts of interest. The high block generation rate achieved through DAG architecture guarantees true accessibility.

  • Parallelism: DAG architecture enables parallel and continuous block processing. Conflict DAG efficiently handles double spending, allowing the Tangle to grow seamlessly.

  • Volume and velocity: Prioritizes efficiency for handling high transaction volumes on consumer-level hardware. Optimizes transaction throughput, balancing speed and scale.

  • Social dynamics: Introduces digital twins, which are digital representations of real-world entities or systems, enabling users to have identifiable representations on the ledger. This is achieved through account abstraction on the IOTA UTXO ledger, which provides a mechanism that supports digital twins and reflects the social interactions and relationships within the system.

  • Sustainable economics: A rewards system based on increased throughput helps avoid inflation, encouraging a long-term commitment from users. The infrastructure prioritizes natural actors, safeguarding users and their assets from short-term value extraction.

IOTA use cases

IOTA is a versatile solution applicable across industries, serving as a trust layer and underlying protocol for secure data and asset sharing. It eliminates the reliance on third parties for verification, providing security and transparency in documenting every step of a chain. Its architecture supports various use cases, including unique identification, micropayments, and secure global transactions.

Organizations in IoT, Industry 4.0, smart cities, and more adopt IOTA for applications, inspiring new options to meet diverse needs. Let’s take a look at some case studies.

Industry 4.0: improving data reliability for critical decision-making

In collaboration with Dell Technologies and Intel, IOTA addresses the challenge of confirming the trustworthiness of large and expanding datasets crucial for automated decision-making in Industry 4.0. Through Project Alvarium, innovative methods were developed to evaluate and guarantee the reliability of diverse data sets, including those from intercompany transactions. This initiative aims to significantly enhance the reliability and efficiency of decision-making processes, potentially leading to cost reductions in modern industries heavily reliant on automated algorithms.

Travel and e-health: establishing a secure global vaccine verification system

Zebra Technologies formed a partnership with IOTA to address the challenges posed by the COVID-19 pandemic, particularly in enabling safe travel. Together, they developed an open, secure, and interoperable infrastructure for the creation and verification of digital green certificates. These certificates validate an individual's COVID-19 vaccination status, negative test results, or recovery, facilitating safer, more flexible, and efficient travel processes within the European Union.

Smart cities: enhancing traffic infrastructure securely and in real-time

ETO Gruppe applied IOTA to enhance smart traffic infrastructure through a sensor module embedded in delineators. These delineators seamlessly exchange crucial data, enabling safe autonomous driving by providing information about traffic and weather conditions. Using IOTA ensures low power consumption and processing requirements, enabling the creation of a secure end-to-end history of urban safety conditions. This innovation allows the general population to optimize routes based on real-time traffic information, empowering individuals and businesses to save time and costs while protecting the integrity of critical data.

The IOTA team

Behind the scenes of IOTA is the IOTA Foundation, established in 2015 as a charitable non-profit organization with its headquarters in Berlin, Germany. This foundation brings together a diverse and dedicated global network of developers, designers, engineers, and entrepreneurs committed to advancing the IOTA protocol.

Operating across more than 25 countries, the IOTA Foundation is guided by a shared vision. Dominik Schiener, the Chairman and co-founder, along with Board Member Dr. Navin Ramachandran, leads the Board of Directors, steering the foundation's course. The Supervisory Board, including members Clinton Walker and Prof. Serguei Popov, provides crucial strategic oversight.

IOTA tokens: IOTA, Mana, SMR

IOTA's ecosystem is underpinned by a trio of essential tokens: IOTA, Mana, and SMR. Each plays a distinct role in the functionality and sustainability of the IOTA network.

IOTA

IOTA (previously MIOTA) is the primary medium for transferring value within the IOTA mainnet. Unlike traditional cryptocurrencies, IOTA transactions incur no fees, making them an attractive option for microtransactions. The total supply is capped at 4,600,000,000.

Mana

Mana serves as the crucial resource for accessing the IOTA ledger and updating its state through block creation. Tracked in the ledger, Mana is spendable and extends its utility to power smart contracts, DeFi applications, and various services. It acts as a reputation system within the IOTA network, preventing abuse and providing equitable access to resources, particularly in consensus-related activities.

By holding, purchasing, or delegating IOTA tokens, users can acquire Mana, which enhances influence and voting weight for nodes, reducing the risk of Sybil attacks. This approach encourages sustained network commitment and discourages short-term speculative behavior.

SMR

SMR is exclusive to the Shimmer staging network, setting it apart from conventional test networks. SMR tokens are traded on major exchanges, injecting tangible monetary value. This approach serves as a powerful incentive for actively testing and validating upcoming protocol changes within the Shimmer network before deploying them onto the mainnet.

The final word

Looking ahead, IOTA is moving towards scalability enhancements, with the goal of scaling the IOTA Tangle through sharding. Whether you're a seasoned crypto enthusiast, a business navigating the potential of decentralized systems, or a newcomer to this evolving space, IOTA presents compelling opportunities in digital autonomy and decentralization for all.

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