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What is IOTA? How Does It Work?

Learn everything you need to know about IOTA, what it is, how it works, its different use cases, and more.

Posted March 18, 2021

Illustration of a guy holding the IOTA logo
Illustration of a guy holding the IOTA logo

IOTA is a recognized network and cryptocurrency project based on DAG technology. It aims to be the bridge that unites all the IoT devices in the world under a high speed, scalability, and security network.

Listed on almost every big cryptocurrency exchange out there, its IOTA token is being traded throughout the entire crypto community around the world. That being said, what is IOTA and how does it work exactly?

We’ll be discussing IOTA in detail in this article, along with reasons why you should consider adding it to your portfolio.

What is IOTA?

The IOTA protocol and its cryptocurrency are some of the projects that seek to bring Distributed Ledger Technology (DLT) to a totally new field: the Internet of Things (IoT).

To achieve this, IOTA has developed a unique technology that seeks to develop the full potential for these devices that little by little begin to have greater relevance in our daily lives.

So we have IOTA, it is a DLT protocol that, together with a cryptocurrency, seeks to develop highly scalable solutions that allow IoT devices to be interconnected in a secure and decentralised network.

Of course, this vision does not give up other utilities of cryptocurrencies, such as financial transactions, but its focus is not merely to decentralise financial networks.

IOTA is highly unique in how it works and is often referred to as the “third-generation” of cryptocurrencies. Where most cryptocurrencies are based on a blockchain, IOTA works on something called a tangle.

Other notable points of interest regarding IOTA:

  • No fees.
  • Super fast response time.
  • Highly scalable.
  • Can be run offline.

This might sound like a relatively boring distinction, but it results in some impressive differences and features that other cryptocurrencies struggle to provide.

  • IOTA (MIOTA) launched in June 2016
  • As a cryptocurrency, IOTA is unique in that it does not require a blockchain to operate.
  • IOTA facilitates payments and Internet of Things applications, via a system of machine to machine (M2M) transactions.

Sounds pretty good, right?

To understand how IOTA manages to do all these things, let’s start by looking at the infrastructure that IOTA is built on – the Tangle.

New to cryptocurrencies? Start with our crypto 101 guide.

How does IOTA work?

IOTA is not a blockchain as we are used to seeing in the crypto world. Rather, it is something else entirely, as it runs on a DAG system.

To put a clear contrast between blockchain and DAG systems, blockchain is a chain of blocks of transactions or information, while in a DAG system, there are no such blocks in the distributed ledger.

Illustration of a graph with the IOTA logo.

But what do all these technicalities mean? To find out the answer, let’s start deconstructing IOTA and then know how it works.

Tangle

So, if you’ve read up a bit on Bitcoin and other cryptocurrencies, you’ll know that they work on a blockchain. A blockchain is, quite simply, a chain made up of digital blocks.

Each block records transactions that people make to each other. And as it’s a chain, it has to be built in a linear fashion, one block after the next. This means that there is a limit to how fast the network can process transactions.

IOTA, however, is entirely different. It runs on a tangle, not a chain. And as you might imagine, this means things don’t have to be ordered and structured. Each block can link into any other block, it doesn’t have to wait in a queue to be the next block in the chain.

The birth of IOTA gives rise to Tangle, a protocol that moves away from the concept of blockchain to embrace a new and little-known technology, the DAGs or Directed Acyclic Graphs.

This curious construction allows IOTA to be built on a new network scheme that is radically different from the blockchain system and technology.

If you don’t know it, a DAG is a graph where we can locate different nodes (known as vertices) that are related to each other by strings. These strings are directed, that is, they have only one specific direction.

But the most important thing about DAGs is that if you start to go through it from point A, you will be able to go through the entire graph until you reach point B, without repeating the same path and, most importantly, without returning in any way to point A.

What is blockchain? Click here to read more on blockchain technology.

The illustration of Tangle protocol by IOTA Documentation
The illustration of Tangle protocol by IOTA Documentation

Simply put, a DAG can be organized in such a way that its operation is equivalent to the blockchain. That is, moving in one direction and without the ability to go back to make changes or alterations in the data. Surprising isn’t it? We can see then that a DAG works like a blockchain, only in a somewhat unique way.

DAGS also offers several advantages and Tangle knows how to use them. For example, thanks to Tangle and its construction on a DAG, there are no blocks in IOTA. So that essential information unit compaction that we see on the blockchain is completely gone in this project.

Without blocks, there is no blockchain and this already tells us how completely different IOTA works. The changes do not end by discarding blocks, as the miners and their role in the network is unnecessary.

So, we have an understanding that Tangle creates a structure in which there are no blocks or miners. But then, how does the network work? How do you process and validate the transactions and that this is safe?

The answer is very simple, Tangle uses the DAG, to turn it into an improved version of the blockchain. This structure (the DAG) allows Tangle to build two new concepts:

  • Sites that are nothing more than transactions represented in the DAG.
  • The nodes, which are the issuers and validators of each transaction.

Thus, the sites are part of the graph that forms the Tangle (part of the DAG), which contains one or some transactions that relate to each other. The nodes are all IOTA eligible users to issue transactions, and at the same time, validate two previous transactions on the network.

How can IOTA have no fees?

Typical cryptocurrencies have blockchain network fees, which are the fees you must pay to get your transaction included in the blockchain. Fees can change from day to day but can get quite expensive.

For example, Bitcoin fees can get up to $80 per transaction when there’s lots of traffic on the network.

IOTA
IOTA incurs zero fees due to its inherent design of verifying other blocks on the network. Image source.

For IOTA, the tangle innovation removes the need for fees. Instead of having to pay someone (eg a miner) to verify your transaction and include it in the chain, each block in the IOTA tangle verifies two other blocks, fully removing the need for mining.

Use cases for IOTA

We’ve learned that IOTA is super fast, can handle any number of transactions at once, and that it has no fees and can even go offline. Those are some pretty powerful features!

With these, IOTA might help us unlock whole new micro-economies, which would never have been feasible without IOTA’s tech.

Image showcasing physical IOTA coins on black background

For example, NIWA might be interested in buying data from your home weather station at one-millionth of a cent per data point – currently, that’s too ridiculous an amount for anyone to bother about, but with free-of-charge super fast transactions, it might make sense.

And then your weather station could use that IOTA to buy power off your solar panel, which is also making IOTA from drones that are re-charging at it… the possibilities are endless!

And if this is starting to sound like IOTA could be a currency for the Internet of Things (IoT), that’s exactly what IOTA (a.k.a. Internet of Things Application) is intended for.

Other use cases

Let’s say you own a Fujitsu heat pump, and Fujitsu as a company would like to see how their heat pumps are performing after they have been purchased by a customer.

There are many bite-sized bits of data that Fujitsu would like to acquire, such as peak usage times, fan speeds, fan temperatures and what temperatures are prefered in certain geolocations around the globe.

Each Heatpump has a little computer chip that gathers all this data that Fitjitsu wants from its customers, but the transaction fees and speeds are too slow to get this in real-time with fiat money.

This is where IOTA comes in, as you could create an IOTA wallet, and have your Fujitsu heat pump automatically send you IOTA for every single little droplet of data that they harvest, in real-time with no fees.

IOTA could be used to provide usage data from Tesla's electric vehicles such as battery status, traffic data, etc
IOTA could be used to provide usage data from Tesla’s electric vehicles such as battery status, traffic data, etc. Image source.

Another example of how IOTA could be utilised would be if you were to own a Tesla smart car, and Tesla wants to know how their battery is performing, how congested traffic is, average daily commute times, whether there is a pothole on that street you’re about to drive down, how loud you like your music, how many times the car is driven each day, how humid the weather is and so forth.

Clearly, all of this data has value, but it’s worth so little that it’s not worth being traded with fiat due to the high transaction fees.

The use case for IOTA is that your Telsa could pay out IOTA in tiny doses every time that your car automatically generates data. You could make money for just being!

Considerations for investing in IOTA

Now that you have a general idea of the real-world use cases for IOTA, what are some more compelling reasons for you to invest in IOTA?

  • In the IOTA network, there are no transaction fees, which means that each transaction is free. Spam is avoided by simply leaving it free, spam in IOTA unlike in Bitcoin, helps to strengthen the network because it helps to validate your transactions faster.
  • The network has no intermediaries. No entity manages the payments and no miner confirms the transactions.
  • It is highly scalable. It could be said that the scalability of a DAG is much better than that of a blockchain. This is because in blockchain the blocks tend to act as a bottleneck, causing a queue of transactions to form when they fill up that must pay higher commissions to the miners so that they include their transactions in the next block. In IOTA there are no blocks, all transactions are incorporated into the network, thus achieving lower latency and better scalability.
  • Tolerance to partitioning. Unlike systems based on the blockchain, where fragmentation of the network causes the appearance of another chain incompatible with the original (hard fork); in IOTA the fragmentation of the network is possible, allowing a part of the network to be separated from the main one and later rejoin it.
  • It offers a good level of decentralization, although at the moment it is clouded by the existence of the Coordinator.
When Internet of Things meets Blockchain Technology
When Internet of Things meets Blockchain Technology. Source: Wikimedia Commons

Mainstream support and applications

Mainstream technology companies consistently support IOTA. These include Volkswagen, Microsoft, Jaguar, Land Rover, Fujitsu, Samsung, and several others. This is thanks to the fact that the IOTA network can be used to run IOTA applications, as well as process machine-to-machine (M2M) transactions.

  • Masked Authenticated Messaging (MAM) can be used to send encrypted messages & RSS feeds over the IOTA distributed ledger
  • IOTA is already being used by CognIOTA to allow users to rent idle CPU power from other network users in real time
  • Deutsche Telekom, Bosch, and Microsoft are already using IOTA technology to monetize big data

How to Buy IOTA

You have plenty of options online to buy and/or exchange IOTA tokens around the world, although it is always recommended to do it with a legit local exchange platform to ensure the safety of your deposits and future transactions.

Here at Easy Crypto we make it for anyone to buy and sell cryptocurrencies, including IOTA. Browse our diverse collection of coins and tokens ranging from DeFi, stablecoins, NFT tokens, and more.

Checkout the video guide on our YouTube channel to learn more!

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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.

Last updated September 1, 2022

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