The Bitcoin bubble is a mixed bag for blockchain and cryptocurrency enthusiasts. While the incredible increase in Bitcoin’s valuation has resulted in a huge windfall for early adopters and enhanced the recognition of blockchain technology, it has also highlighted the volatility of Bitcoin as a currency and the limitations of the underlying blockchain network.
Even the most hardened Bitcoin skeptic will usually acknowledge the significance of blockchain technology, while even the most ardent Bitcoin enthusiast will acknowledge the throughput and scalability limits inherent in the current blockchain implementation. During recent peaks in Bitcoin trading, transaction backlogs and transaction fees became excessive, even though the absolute transaction rates are miniscule when compared to the transaction rates supported by Visa and other payment processers.
The major blockchains are all pursuing innovations that will significantly improve their ability to achieve economic and scalable transaction rates. “Off-chain” transaction processing using the Bitcoin Lightning Network or Ethereum’s Raiden technology will allow small transactions to be processed independently of the main blockchain and ratified by the main chain asynchronously. Ethereum’s upcoming implementation of Proof of Stake consensus mechanism should reduce the power consumption of the Ethereum network, and both Ethereum and Bitcoin blockchains are working toward sharding mechanisms which will allow the capacity of the blockchain to be increased by partitioning the network.
However, even with all of these proposed enhancements, it is completely clear that the underlying architecture of a traditional blockchain is not well-suited to the sort of massive transactional volumes that might be required to coordinate data transfers across all the internet-connected devices in the Internet of Things (IoT).
The IOTA network was envisaged as a radical departure from the traditional blockchain architecture that might meet the requirements of IoT. The architecture was designed to allow millions of IoT devices to exchange data without fees and to automatically scale in line with the size of the IoT network.
To achieve these aims, the IOTA team discarded the traditional blockchain architecture—in which each block is cryptographically dependent on all proceeding blocks—for a directed acyclic graph (DAG)—the “Tangle”—in which each transaction validates two proceeding transactions. Rather than concentrating the consensus protocol in a small number of relatively powerful “miners,” IOTA distributes the Proof of Work calculations to all nodes of the network.
Furthermore, IOTA uses a quantum-resistant encryption scheme (Winternitz signatures) which is claimed to be immune to attacks by upcoming quantum computers.
The early enthusiasm around IOTA dropped sharply following some critical analysis by security experts and poor experiences by early adopters. IOTA’s quantum-resistant signatures are secure only if not reused, and some users lost funds when they inadvertently reused these transaction signatures.
The IOTA team also came under criticism for overemphasising the status of partnerships with Samsung, Microsoft, and others and for inconsistent explanations for weaknesses in its hashing algorithm.
Another issue is that the existing IOTA network includes centralized coordinator nodes that are used to police transactions. The IOTA team says that these nodes can be removed when the network becomes mature, but in the meantime, the existing IOTA network is not IOTA-compliant.
The ideas underlined by IOTA are incredibly exciting. If blockchain technology is to reach its full potential, we will definitely need something like IOTA. Unfortunately, for now, it looks as if IOTA is a victim of its own popularity: Its market capitalization became huge before the network became stable, leading to disappointment and disillusionment. IOTA may or may not be the “next generation” blockchain technology we need—but the ideas and aims of the project seem very worthy.