August 24, 2017
It’s often said that Bitcoin likely won’t ever be used to buy coffee. Since mid-2016 the average transaction fee has topped out at a whopping $5. The goal of Bitcoin was to build a censorship-ship free currency, this was certainly accomplished. The core developers however, in their noble pursuit, were not extremely concerned with micro-transactions as evident by current transaction fees.
The explosion of cryptocurrencies that followed Bitcoin’s introduction into the mainstream needs no introduction. From evolved digital signatures (hello Monero) to a blockchain of decentralized apps (hi Ethereum) literally hundreds of blockchain-based cryptocurrencies have hit the scene.
Blockchain, protocol & currency. Blockchain, protocol & currency. Almost every cryptocurrency you’ve encountered out in the wilderness follows this pattern. But take note, this means these iterations are all still blockchain-based transactions verified by miners. Users & miners not one & the same.
They need to connect, which takes time, & the miner requires compensation for his processing power, which costs money. It therefore follows that any cryptocurrency following this architecture innately requires transactions fees. Blockchain-based cryptocurrencies are not optimized for micro-transactions.
Frankly Bitcoin has continued to grow just fine with this apathy towards micro-transactions, so what does it matter for peer-2-peer transactions? Well, for now, minus some scalability issues (see: BCC), it really hasn’t. The majority of Bitcoin buyers today are early adopters & speculators — both parties whom are completely fine not sending 310 satoshis to the vending machine for a bag of Cheetos.
The immediate, tangible issue for blockchain-based Bitcoin, as a peer-2-peer system is fairly obvious: scalability. The more people adopt Bitcoin, the more costly it becomes to run the network. The higher transaction fees go, the less financial sense it makes to use for micro-transactions.
The real heavy, seething elephant in the room about to go on a rampage however, is the stark realization that by 2021, there will be three & a half IoT-connected machines per human(totaling ~28 billion machines).
Machine-2-Machine Economy & Distributed Ledger
Sending bitcoin from your cell phone to a vending machine. The vending machine sending the bitcoin received to the binded business bank account. The business bank account then auto-dispensing to multiple bank accounts, hardware wallets, & mobile devices.
These are all machine-to-machine transactions (m2m from now on). Together, all of these m2m transactions will make up the m2m economy. Like the Bitcoin economy, this m2m economy will require a decentralized, distributed ledger.
Now, recall the IoT outpacing personal devices stat from above. As the total volume & growth rate of IoT-connected machines increases, so does the total volume & growth rate of m2m transactions. However, of critical importance here is that the m2m economy will literally run on micro-transactions. For the m2m economy, & ultimately an IoT to take off, a distributed ledger with micro-transaction capabilitiesis necessary.
In a blockchain transaction, a user sends an output that is then verified by multiple miners in the network. In a Tangle transaction, a user sends an output & he/she immediately verifies two pending transactions before proceeding with his/her transaction. The miner & user are the same person/machine/entity in Tangle. Every transaction verifies two unverified transaction, which means the more users join the network, the faster the network becomes. One monumental step towards solving scalability issues.
Let’s break down the name : DAG (Directed Acyclic Graph). Starting with “G,” a “graph” in data structure world, is a unique structure consisting of nodes connected with edges. Directed, means the node connections in the Tangle network have a single, specific direction; if you travel from A to B you cannot travel back from B to A. Acyclic, literally translating to “non-circular,” means that if you move from node to node within the graph you’ll never encounter the same node twice. But the following is worth a thousand words of explanation:
That’s the magic of IOTA: it uses senders own computational power to verify two previous transactions. IOTA is not a blockchain-based cryptocurrency. Therefore no miners, therefore no transaction fees.
The Tangle technology that powers the IOTA financial ecosystem is ground-breaking for the following two reasons:
IOTA, today, is not concerned with competing with the human-centric Bitcoin for universal adaption. Instead, the team is taking on the slow but arduous journey to laying down the train-tracks for the impending wave of IoT machines. The IoT will undoubtedly require a decentralized, scalable transaction backbone to scale to it’s true potential — so far IOTA is well positioned to serve that function. But as usual, only time will tell.
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