What Is IOTA and How Does It Work?

Ask any technology enthusiast about the next hot thing after artificial intelligence (AI) and the answer will likely be the Internet of Things (IoT). IoT technology is gaining prominence, with our lives increasingly intertwined by high-tech devices like wearables and health monitoring gadgets. Blockchain is one of the key technologies aiming to facilitate machine-to-machine and human-to-machine interactions in IoT.

However, standard blockchain technology struggles with the monumental volume of microtransactions required for IoT data exchanges. One project that eloquently tackles the technical limitations of blockchain in order to enable these decentralized, tamperproof IoT applications is IOTA (IOTA).

Using a cost-free and extremely scalable alternative to blockchain called directed acyclic graph (DAG), IOTA enables a vast array of IoT use cases. Having launched its mainnet, now referred to as IOTA 1.0, in 2016, the project has recently announced plans for a significant upgrade: IOTA 2.0. The new version will further improve the platform's decentralization and network consensus properties, and introduce smart contracts and tangible rewards for network participants.

Things are definitely on the move for the project. In late November 2023, IOTA announced the launch of a $100 million IOTA Ecosystem DLT Foundation, with headquarters in Abu Dhabi, UAE. The news has put the crypto world's attention back on the project and led to a sharp spike in IOTA’s price. The industry is once again talking IOTA and IoT.

Key Takeaways:

• IOTA (IOTA) is a distributed ledger technology (DLT) network that facilitates a wide range of IoT applications in cost-free and scalable ways.

• The IOTA platform is based on DAG technology, a distributed network whose block linkage architecture differs from that of a blockchain.

• Already the second highest-capped crypto within the IoT category, the IOTA token will likely receive a significant boost with the planned launch of the platform's major upgrade, IOTA 2.0.

What Is IOTA?

IOTA (IOTA) is a distributed ledger technology (DLT) network designed to enable IoT use cases in an efficient, highly scalable and cost-free fashion. It was developed and launched by the IOTA Foundation, a Berlin-based technology startup.

Using directed acyclic graph (DAG) technology, IOTA aims to facilitate machine-to-machine and human-to-machine interactions and data exchanges. DAG architecture shares some similarities with a traditional blockchain network but introduces key distinctions that contribute to enhanced scalability and faster transaction confirmation speeds as compared to conventional blockchains.

IoT applications are now extensively used in the business world and by individuals from all walks of life. These applications rely on high-volume micro-data exchanges that require swift, reliable, secure and scalable technological support channels. The list of data requirements for a robust IoT application can be extensive, and Web 2.0 platforms aren’t optimized to handle the more advanced cases in this area.

With the introduction of blockchain technology, it was hoped that a new optimal platform for IoT solutions had finally arrived. Unfortunately, a typical blockchain, with its relatively slow transaction processing, sequential block production and gas fees for every data transfer is even less suitable for IoT than centralized systems.

IOTA Use Cases

IOTA, whose DAG network features free transactions, virtually limitless scalability and no block mining, arrived on the scene in 2016 with the promise of becoming the world’s ultimate IoT platform. Thanks to its unique features, IOTA efficiently handles extremely high-volume exchanges of even the tiniest bits of data.

The platform’s technology has opened up a variety of IoT-based use cases, such as:

• Data exchanges between parties in complex supply chains. Entities along a supply chain can use IOTA to track deliveries and receive notifications from sensors and other devices as goods travel along the chain.

• Smart City management. This is now a major use case, as many tech-friendly localities worldwide strive to integrate smart city initiatives. IOTA can be used to facilitate secure and efficient communication between devices for traffic control, waste management, public utility management, pollution measurement and countless other services that come within the scope of smart city management. Taipei, a major East Asian business center, has already partnered with IOTA to explore solutions within this niche.

• Healthcare monitoring and tracking. IOTA can support secure and transparent sharing of healthcare data, ensuring the integrity of medical records and facilitating machine-to-machine transactions for healthcare devices.

• Between-device micropayments. The IOTA platform also enables micro-transactions between IoT devices, a critical use case if IoT technology is ever to become as pervasive in our lives as its proponents predict.

How Does IOTA Work?

IOTA’s DAG-based network is called the Tangle. In the next section, we’ll delve into the differences between this network and a blockchain. However, for now, let’s review its general working mechanism.

The IOTA network is divided into three layers — Application, Communication and Network.

The underlying Network layer is a peer-to-peer data exchange between IOTA's nodes — transaction blocks and packets of information used by the protocol, necessary for the chain's functionality. At the Communication layer, these blocks are connected to each other, an essential step in forming a DAG chain's immutable record of transactions.

The contents of the blocks, which include data essential for the operation of decentralized apps (DApps), are then processed by the Application layer. The final consensus on the blocks eligible for inclusion in the tamperproof ledger of records is also handled by this layer.

Block Validation on IOTA

In the current version of the platform, IOTA 1.0, the final block validation is entrusted to a single node — the Coordinator. This is the most trusted entity on the network and has the ultimate say in confirming or rejecting a block. The reliance on a single node, even if highly trusted, to finalize transactions has often been cited as IOTA's Achilles' heel. How can you call a platform decentralized if its ultimate state is dependent upon a single party? IOTA has always maintained that this is a temporary step, and the upcoming IOTA 2.0 will feature a much more decentralized validation mechanism.

In IOTA 2.0, block validation will be performed by a group of nodes known as the Validator Committee. Any node on the network can apply to become a committee member. Based on the staking procedure, a select number of nodes are then chosen to be included in the validator group. At regular intervals, the selection process is restarted.

This procedure will allow IOTA to become a truly decentralized network. While the current trust-based system with a single Coordinator is essentially a variation of the proof of authority (PoA) model, IOTA 2.0, with its Validator Committee, operates under a delegated proof of stake (DPoS) algorithm. Additionally, nodes that don’t wish to directly participate in block validation will be able to delegate their IOTA stakes to a willing candidate validator.

How Does IOTA Differ From Blockchain?

IOTA's network, the Tangle, is a typical DAG, a form of DLT with significant architectural differences from a blockchain. In a blockchain, transaction blocks are linked sequentially, with each block dependent upon the previous transactions. The validity of each block is established in part by its link to an already confirmed block preceding it.

In a DAG network, blocks aren't processed or formed in the same sequential order as on a blockchain. Each block on the IOTA Tangle is connected to multiple preceding blocks, with the overall network looking like an interconnected mesh of blocks. This enables parallel processing and allows multiple transactions to be processed simultaneously, speeding up transactions.

A block’s validity, and therefore its eligibility to be immutably recorded in the ledger, is established by the other blocks to which it has established linkage. If a block contains a conflicting transaction, e.g., an attempt at double spending, the other blocks will reject it, thus keeping the ledger secure.

IOTA's DAG-based, non-sequential block formation is one of the key reasons the platform can achieve much higher scalability levels than a traditional blockchain. There’s also no mining procedure to form the blocks, as each validated block is used to confirm multiple other blocks without requiring miners. This allows IOTA to offer an environment without transaction fees.

IOTA Tokens

IOTA

The platform's native crypto token is IOTA. Until recently, the token's ticker was MIOTA. Following a major upgrade (Stardust) of the network in October 2023, the cryptocurrency was rebranded to IOTA. Currently, IOTA's key function is limited to value storage and transfers. With the IOTA token, users can also purchase services and products, e.g., IoT datasets.

The much-anticipated upgrade to IOTA 2.0 will expand IOTA's functions. With the introduction of PoS-style block validation, IOTA will be used for staking and delegation of staking. However, the staking rewards will be paid out not in IOTA but in a different resource, Mana, that we’ll touch upon in the section below. IOTA token holders will also hold governance power over the platform.

When the IOTA token was launched under the MIOTA banner in 2017, its initial supply was nearly 2.8 billion (2,779,530,283). Following the October Stardust upgrade and rebranding to IOTA, the token's supply was boosted to 4.6 billion. A significant proportion of the additional supply is time-vested, and will be gradually released over a four-year period. This is expected to lead to around 12% annual inflation for IOTA for the following four years.

Despite the temporary inflation, it should be noted that IOTA is a deflationary, supply-capped crypto. Only the 4.6 billion IOTA minted will ever exist.

The image below details IOTA’s distribution, both for the existing and newly minted supply.

Mana

Mana, another critical concept that will be introduced in IOTA 2.0, will be paid out to validators and those delegating their stakes as a reward for block validation activity. IOTA has described Mana as a "resource," and has persistently avoided calling it a crypto token or coin. Rather, Mana is described as something akin to loyalty points.

To participate in staking, network users will still need to use IOTA tokens. The right to validate blocks will depend upon IOTA holdings. In order to delegate your stake, you’ll need to use IOTA. However, the actual rewards will be distributed in the Mana resource. 

How IOTA is going to manage Mana within the platform without some form of tokenization remains to be seen — that is, unless Mana will indeed be represented as a crypto token and the entire "resource" branding is nothing more than a marketing exercise to avoid calling a spade a spade (or in this case, calling a token a token). 

As a loyalty point-like resource, Mana will be used to access various services on the IOTA platform, such as powering smart contracts and DeFi apps.

Shimmer (SMR)

Shimmer (SMR) is a Layer 1 network launched in September 2022 by IOTA to serve as a testing and staging environment for future IOTA-destined applications. Since IOTA 2.0 is expected to have smart contract functionality, the thorough pretesting of DApps, including their possible vulnerabilities, is a critical job entrusted to the Shimmer network.

Shimmer’s key architecture mirrors that of IOTA in that it’s also a DAG platform. Its native crypto, SMR, is used to enable DApps and run transactions on the network.

IOTA Crypto Price Prediction

As of Dec 15, 2023, the IOTA token is trading at around $0.30, a jump of over 70% from $0.173 on Nov 29, 2023. The token’s current price is 94.3% lower than its all-time high of $5.25 on Dec 19, 2017, and 269.4% higher than its ATL of $0.0816 on Mar 13, 2020.

The long-term outlook for IOTA is mostly bullish, with some slight price differences among various leading price prediction portals. For instance, PricePrediction estimates that IOTA will trade at $0.377 by 2025 and rise to $2.54 by 2030. DigitalCoinPrice is relatively more bullish on the token, forecasting it will hit $1.08 by 2025 and $3.15 by 2030.

Is IOTA a Good Investment?

You may consider adding IOTA to your crypto investment portfolio for the following reasons:

1. IOTA is among the leading IoT projects in the crypto world, with its token holding the confident second position by market cap in this niche. As IoT technology and solutions become more widely used, the IOTA token will likely benefit significantly from these developments.

2. IOTA recently announced the launch of the IOTA Ecosystem DLT Foundation, with headquarters in the UAE’s capital, Abu Dhabi. The foundation has received $100 million backing in IOTA tokens, which opens up the lucrative Middle Eastern market for IOTA and its IoT use cases. News of the foundation’s launch has already led to a substantial 70%+ spike in the IOTA token’s price, and the crypto may still ride the wave of the enthusiasm for a while.

3. The planned launch of IOTA 2.0 will be a pivotal event for IOTA technology. A host of new functions — properly decentralized consensus, staking, Mana rewards and smart contracts — will likely provide a long-term boost for the IOTA token. If IOTA 2.0 takes off in a big way, the project’s industry partnerships, such as the one with the Taipei City Administration, can grow significantly, a crucial long-term growth driver for the token.

Where to Buy the IOTA Crypto Token

The IOTA token is available on Bybit via the IOTAUSDT Perpetual contract. A USDT Perpetual contract allows traders to open both long and short positions using USDT as the margin with no expiration dates. If you don’t have an account with Bybit, you can easily register for one and trade hundreds of cryptocurrencies, both in the Spot and Derivatives markets.

Closing Thoughts

Over the next few years, IoT applications and use cases are likely to experience explosive growth. The IOTA platform, particularly in its new reincarnation as IOTA 2.0, will be among the first projects to benefit from this nearly certain development.

As internet-enabled devices and machines in homes, streets, public buildings and businesses become more interconnected and exchange data with each other, IOTA will be a leading enabler for all of this communication.

While the IOTA token might experience shorter-term fluctuations — and the current price rally is likely one of them — the true value of this cryptocurrency lies within a long-term perspective. IOTA is a token that can't escape glory once your coffee maker or fridge becomes as integral to your Wi-Fi network as your laptop or Smart TV.

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