This IOTA guide will be a bit technical and I will try to explain every terminology as smooth as possible. For the full technical information about the currency and project, read the IOTA whitepaper. If you want to learn how to buy IOTA and get a comprehensive glimpse of what IOTA is, click here to read our shorter IOTA guide, where I talk about the ways you can do this, other points of view and a less technical guide overall. IOTA’s project is pretty ambitious and you will learn why in this IOTA Guide.
The Internet of Things (IoT) and machine economy
Machine economy means that in the future, machines will trade resources and services automatically between them, without third party involvement. In the future, more and more devices will be connected to the internet. Almost all physical devices like cars, fridges, ovens, light bulbs, the AC and more will be connected to the internet and will emit data. Your smart fridge will sense which products are missing and which need to be ordered, without your involvement. You will control the lighting and the climate of your house through your smartphone, which will also save on your electricity bills. Smart homes will be common in the future.
All of these devices will produce data and the internet network, between these devices is called the Internet of Things. The technology is already being adopted and it’s expected that the following years millions of devices will be interconnected. The Internet of Things is fairly new and has flaws that need to be addressed like security and scalability, but it’s expected that it will be a multi-billion dollar industry. As the Internet of Things keep expanding, the need of interoperability and resource sharing will become a necessity. IOTA aims to fix these problems and to be the center of this machine economy.
IOTA Guide: Quick Summary of IOTA
IOTA is a revolutionary new generation public distributed ledger that utilizes at its core an invention, called the “Tangle”. The Tangle is a new data structure (ledger) based on a Directed Acyclic Graph (DAG), which stores all transaction data of the IOTA network. This DAG is based on a graph without any cycles. Instead of a single branch, DAG has multiple. As such it has no Blocks, no miners and leads to a completely decentralized and self-regulating peer-to-peer network, that makes consensus an everyday part of the process.
Because of this infrastructure, you can already tell that IOTA works and is quite differently, compared to Blockchain cryptocurrencies. If you are new to Blockchain technology and want to learn about it so you can compare different technologies, read our detailed Ethereum guide. There you can learn the backbone of cryptocurrencies – Blockchain Technology.
The major difference is how IOTA achieves consensus and how transactions are made. As mentioned previously, there are no miners. This means that each participant in the network that wants to make a transaction has to actively participate in the consensus of the network by approving two past transactions. This validation of two past transactions ensures that the whole network achieves consensus on the current state of approved transactions. This enables variety of unique features that are only seen in IOTA for now. Proof of Work is used to prevent denial of service and spam attacks. The puzzle used by IOTA is Hashcash.
Another thing you can transfer is data through IOTA’s network. All data is fully authenticated and tamper proof, making attacks impossible. This makes possible for devices to establish a secure connection. IOTA is the missing puzzle peace for the Machine Economy to fully emerge and reach its desired potential. IOTA can be the public backbone for the Internet of Things (IoT) that enables true interoperability between all devices.
IOTA Guide: IOTA has a range of features that are uniquely enabled due to its architecture:
- Scalability: IOTA can achieve high transaction throughput thanks to parallelized validation of transactions with no limit as to the number of transactions that can be confirmed in a certain interval.
- No transaction Fees: Thanks to its structure, IOTA has no transaction fees, because there are no miners for the consensus.
- Decentralized: IOTA has no miners. Every participant in the network needs to actively participate in the consensus, if he wants to make a transaction. This means that IOTA is one of the most decentralized cryptocurrencies for now.
- Quantum-immunity: IOTA utilizes a newly designed trinary hash function called “Curl” which is quantum immune. This is incredibly important and what makes IOTA a next generation cryptocurrency. Quantum computers are in their earliest stage of development, but when they come, they will be a great threat to security. Quantum computers can solve the encryption that secures the flow of internet data and blockchain encryption. If most cryptocurrencies don’t adapt fast enough, they will be in big trouble. If you want to read more on the subject, read “Why are quantum computers the biggest threat to cryptocurrencies”.
The IOTA Currency and mining
The currency that is sold on exchanges is called MIOTA and it stands for Millions of IOTAs or Mega IOTA. As I mentioned above, all IOTAs have been already created and there is no mining. The purpose of mining in blockchain cryptocurrencies is that without miners the system will not work. Miners are responsible for transaction verification, settlement, consensus and moving forward via proof of work.
In IOTA, transactions are verified by the whole network, removing the need for miners, excess electricity and most importantly – fees. A single IOTA is too small of currency and that’s why exchanges and coinmarketcap have packaged a million IOTAs in a single IOTA cryptocurrency. So when you buy an IOTA, you actually buy one million IOTAs. Being this small, the IOTA cryptocurrency allows for easy micro transactions, without the fear of fees, because there are no. In the future, your fridge could possibly order you beer or food automatically and it could pay for them in IOTA.
All MIOTAs that will ever exist have already been created with the genesis transaction, meaning that the total supply will always stay the same. So there is no way to mine more IOTAs and when you do Proof of Work you only verify other transactions. The total number of IOTA in circulation is 2 779 530 283 MIOTAs which is 2 779 530 283 277 761 IOTAs. IOTA is specially designed for machines. That’s why this high circulation number is perfect and will allow for nano and micro transactions to move smoothly through the network. Also the no-fee structure will allow for automated tiny micro transactions to be made and be part of every day.
IOTA’s trinary-based structure
The unique data structure, being utilized in IOTA is trinary-based. The hashes, addresses and seeds are all trinary-based. This means that the strings of codes can only consist of characters of the latin alphabet and the number 9. Because of the way it works, a single hash can consist of 81-trytes (characters). Sometimes it can be 90-trytes including a 9-tryte checksum. The algorithm used is the Markov Chain Monte Carlo (MCMC) and it’s so complex that it provides the IOTA’s quantum security feature.
IOTA Seeds and Accounts
Seeds are the starting point of everything. To create an account with private keys and addresses you need a secure seed. The seed consists of 81-trytes and needs to be securely stored. It could be less than 81-trytes, but it is not recommended. The seed is your unique access key to your funds and account, and needs to be secure. Also addresses are generated from private keys.
In IOTA there are 3 security levels. Every level determines the number of rounds for hashing, which means that you can have three different accounts on a single seed. The 81-trytes is the lowest level of security. The second level is with 162-trytes and 243-trytes for the third. Level 3 is the most secure of them all and it is recommended for exchanges. Switching security levels is easily done with the client’s library.
IOTA Private keys
Private keys are derived from tryte-encoded seeds and are extracted from a seed’s key index. From the private key you can generate an address. The key index starts at 0 and can be incremented to get a new private key and address. You can generate private keys addresses securely through the browser or an offline computer. This is because all libraries provide all security-sensitive functions.
IOTA uses Winternitz signatures. Those signatures are for a one time use and you should never reuse an address after you have spent from it. Continuous reuse of the private keys can lead to a loss of funds. Also if you use the same private key over and over, you give alleged attackers the chance to forge your signature, thus being able to steal funds from the account. The most important thing to remember from this IOTA Guide is to never reuse private keys and addresses. In case of waiting for a transaction to confirm, always reattach it and never respend from it.
Transactions and bundles
As i said before in this IOTA Guide, having no miners allows for a no-fee structure. But the process of making this transaction is quite different than any other blockchain out there. Unconfirmed transactions are known as tips and in order to make a transaction, you need to verify two more.
- Signing the transaction input with your private key. Can be done offline.
- MCMC is used to randomly select two tips which will be referenced by your transaction.
- Proof of Work is done so the transaction can be accepted by the network. After this you wait for your transaction to be verified.
IOTA uses an account-like infrastructure. This means that there are addresses which you have to spend in order to transfer MIOTAs. A transaction in IOTA consists of 2673 trytes if encoded. The core client encodes all the data inside of a transaction into trytes and stores it in a string of code (of trytes). In order to read the data, the transaction must be decoded / encoded with the client’s library functions. The transactions are used to transfer value or to transfer data on the Tangle.
Currently IOTA can do up to 1500 transactions per second. But because of the incredible way the system is build the more transactions are made, the more the network can handle so the scalability is endless. Transfers in IOTA are bundles of inputs and outputs. A transaction can contain multiple inputs and outputs. These bundles are atomic transfers, which means that either all transactions will be accepted from the network or none will. A typical bundle consists of 4 transactions.
- Output from the recipient of the transaction.
- First bundle entry that spends the address’s input and contains the first part of the signature.
- Second part of the signature.
- If something remains it will be send to the remainders address.
The bundles are identified by the number’s hash and also by the trunkTransaction. They are two transactions that are referenced and validated through the transaction. This means that past tail transactions are referenced in the trunk transactions with indexes. This makes possible to go down the full bundle of transactions from just a tail transaction by going down the trunk one.
The team behind IOTA
All of the founders are in the crypto sphere since 2010. Some are responsible for NxT, the first full proof of stake blockchain with decentralized asset transactions. IOTA is run by a non-profit organization with headquarters in Berlin. The team is developing the project since 2015 and say, that IOTA is developed out of necessity for solutions. They want to bring value first, not chase profits. Since the beginning the team is growing, with more and more experienced members joining the cause.
IOTA Guide: Final thoughts
As we can see from this IOTA Guide, the IOTA project is pretty ambitious. It is one of the most innovative projects in the crypto world and it is focused towards another innovative future industry, the Internet of Things. It sure looks like IOTA is thinking ahead of its time and wants to revolutionize a lot of industries in the future. The technology is in its early stage of its development, but the potential they are showing is pretty exciting. The network is running smoothly and is making progress. The team is also growing with experienced new people and the whole team is pretty ambitious towards achieving their goal of creating a futuristic technology. If you liked this IOTA Guide and want to learn more, click our Guides section to learn about other interesting topics.
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Author: Peio Purlev”