“The Internet of Things promises to bring every object, consumer and activity into the digital realm.”
Paul Daugherty, CTO of Accenture
The 60-second start-up team will be covering a different sector a week, in line with our goal of exploring transformative technologies. This week, we will be discussing a decentralised method of data storage otherwise known as the Blockchain, with its’ various applications.
IOTA, created in 2016 by a pioneering group of futurists, positions itself as a cryptocurrency (digital asset using cryptography to perform key functions such as securing and verifying transactions) that is designed to support the Internet of Things.
The Internet of Things, or IoT, is the rapidly growing network of connected objects that can collect and exchange data using embedded sensors.
We are starting to see examples of the IoT in our everyday life:
- Smart homes, which users can control with their voices. Amazon Echo is the leader in this field- you can play music, get sports scores or order an Uber all through the voice assistant ‘Alexa.’
- Wearables. One of the most popular are FitBits, which wirelessly sync with computers and smartphones to transmit your fitness data.
- Smart cities, which may use information from cars to solve issues like traffic congestion. Barcelona has recently introduced several IoT initiatives, such as smart parking!
PROBLEM + SOLUTION:
Everyday, 24/7, systems are collecting data. Information on finances, health, the environment, consumer trends and pretty much everything else is gathered by companies all over the world.
Most of the time, this information sits in databases and does not make money for its’ owners. If we can develop better channels for data sharing, we can better connect companies in the present, and devices in the future.
This is exactly what IOTA is aiming to achieve- to act as a cryptocurrency providing secure communications and payments between machines on the Internet of Things.
In the future driverless cars may exchange information about traffic or hazards on the road, empty fridges may communicate with local supermarkets and Alexa will be able to tell your Nespresso machine to make you a macchiato. Data is a commodity that comes at a price, and the IOTA network will allow machines to pay small amounts for data with a secure, real-time, frictionless transaction.
THE TECHNOLOGY: (this is quite complex)
If Bitcoin, the first application of the Blockchain, represented a movement from horses to steam-powered vehicles for networked data storage, IOTA would probably be the world’s first sports car.
Interestingly, IOTA is not built using a blockchain system. The crucial difference lies in the verification process; unlike with bitcoin, where ‘miners’ verify transactions by completing solving mathematical algorithms, Iota uses a type of ‘directed acrylic graph’ known colloquially as ‘Tangle,’ where each transaction verifies two other transactions.
The consequences of this change on the operations and performance of the system are remarkable:
- Transaction speed– by additionally simplifying the digital ‘signatures’ required for verification, the IOTA team have produced a near real-time transaction system, that will become faster as more transactions occur thanks to the verification process.
- Decentralisation of control– in the Bitcoin system, 8 mining pools account for 75% of the mined bitcoin, which has led to a localisation of hashing power. IOTA prevents this potentially troublesome power accumulation.
There are a number of other ways in which IOTA fundamentally differs from Bitcoin and traditional cryptocurrencies:
- No transaction fees, unlike the extortionate bitcoin!
- No minimum payment threshold means micropayments are possible.
- Partition tolerance– IOTA nodes can continue to operate without being connected to the main Tangle.
- Low hardware requirements– reduced processing of complex transactions. Simple devices will be able to pay each other!
- IOTA carries out data pruning to prevent data overload, due to systems storing all previous transactions unnecessarily.
Arguably the most important difference for the long-term is the quantum resistant cryptography system featured in IOTA- the advent of quantum computing will result in computing systems that are 17 million times more efficient at bitcoin mining, leading to a huge power shift. IOTA mining does not require verification of as many blocks (38 compared to 268) which only gives quantum computers an 81x advantage, thus avoiding a dangerous centralisation of power.
However, although the IOTA Tangle system seems like an incredible forward leap in terms of distributed ledger technology, it is worth noting that questions remain unanswered regarding this technology:
- Without a mining system, how will new Iota be generated to replace those that are lost e.g. due to equipment failure or lost accounts?
- What are the logistics of having a data marketplace with a currency with a constantly changing price? Will the prices of products also constantly change?
MARKET AND COMPETITORS:
IOTA has the potential to be truly transformative– by enabling companies to explore new business to business models by making every technological resource a potential service, to be traded on an open market in real time, with no fees.
The entire market size for the IoT was estimated to be $900m in 2015 but is set to grow to $3.7bn in 2020 at a 32.6% combined annual growth rate. General Electric believes that in the next 15 years, the market value could top $60 trillion.
As an important enabler for interactions and transactions between companies, IOTA has significant potential to become central to the success of the IoT in the future.
So far IOTA has launched a public marketplace for data, allowing connected devices to securely buy and transfer data across the globe. The types of data available include environmental measurements, agricultural data and anonymised healthcare data from wearables.
The IOTA foundation is a non-profit organisation based in Germany. The organisation is funded by selling off IOTA to institutional investors and venture capital firms. It is likely that, as with Ripple, the founders of the technology hold the vast majority of the available cryptocurrency.
Many argue that the long-term value of cryptocurrencies reflects supply and demand characteristics which depend on consumer sentiment regarding their intrinsic utility; Bitcoin was the start of the ‘new money’ revolution, Ethereum brought smart contracts and Ripple allowed convenient international payments. IOTA’s IoT support functionality means the value of the cryptocurrency is likely to grow in the future.
Since its’ inception, the value of IOTA has grown from a fraction of a dollar to $4/IOTA, but liquidity remains a slight issue; it is only listed on a few cryptocurrency exchanges, many of which have a minimum deposit requirement, so this is something we can expect to see change as the foundation and technology expand geographically.
DRIVERS OF GROWTH:
- Hot market– There is investor exuberance and wild speculation in this inflated market, making it a good time to fundraise.
- Technology– excellent underlying technological base, supported by experienced computer scientists.
- Partnerships– Deutsche Telekom, Microsoft, Fujitsu have all supported IOTA’s projects.
- International reach- IOTA has Berlin, Oslo, Chicago offices and is continuing to grow.
- Other uses– IOTA has been used as a payment system for SatoshiPay and recently partnered with REUNITE, the world’s largest missing person database, so they could use IOTA technology to reunite families during/after conflicts.
INHIBITORS OF GROWTH:
- Infrastructure– the company themselves admit that the lack of human resources is a significant challenge, and the on-boarding of new developers is arduous.
- Integration – producing compatible systems such as wallets will take time and investment.
- Product risk– Significant testing is required before Uber bets the security of its’ multi-billion dollar self-driving car fleet on a new technology.
- Still in development– In August, MIT and Boston University researchers reported they discovered a serious vulnerability in a novel cryptographic technique IOTA was using. The foundation was quick to patch this mistake but more problems are to be expected with this new technology.
- Timing– With the IoT in its’ infancy, commercial use will be limited for the next few years.
Company finances: ★★★★★
Competitive advantage: ★★★★★
Likelihood of success: ★★★
Final investor rating: ★★★★
1) This blog has been created using public information about IOTA.
2) This is an opinion piece intended only for educational purposes, not as professional investment advice.
3) I can declare no conflicts of interest in the publication of this article.