IOTA is a public distributed ledger that uses a directed acyclic graph (DAG) structure known as the Tangle to store transactions.^[1][2] Designed specifically for the Internet of Things (IoT), IOTA is a cryptocurrency that facilitates secure and feeless microtransactions between machines and devices.

Overview

IOTA was co-founded by David Sonstebo, Dominik Schiener, Sergey Ivancheglo, and Serguei Popov in 2015. The IOTA white paper was written by Serguei Popov and published on December 28, 2017.^[3]

According to the IOTA whitepaper :

The importance of micropayments will increase in the rapidly developing IoT industry, and paying a fee that is larger than the amount of value being transferred is not logical.

IOTA was specifically designed to eliminate transaction fees. Using Tangle technology, the network achieves consensus without imposing any transaction costs.^[4]

Characteristics

Tangle

The Tangle is IOTA's foundational technology, characterized by a Directed Acyclic Graph (DAG) structure. Unlike traditional blockchains where transactions are grouped into blocks and sequenced linearly, IOTA's transactions interlink in a web-like structure. The network employs a Proof-of-Work (PoW) mechanism for its operations.
Instead of relying on centralized mining farms to validate blocks of transactions, each user in the Tangle verifies two previous transactions with a minimal amount of computational work before sending their own transaction. This means the only 'cost' of a transaction is the small amount of electricity it takes to verify these two past transactions, eliminating the need for transaction fees set by miners. ^[5]

The Tangle's design, which lacks blocks, allows for immediate transaction validation. Transactions are processed in parallel, leading to near-instant confirmations. In this system, each new transaction confirms two preceding ones, ensuring a decentralized and scalable network.^[5][6]

Feeless Transactions

IOTA transactions incur no fees. Users can send or receive IOTA tokens without any transaction costs, making it especially suitable for microtransactions in IoT and other applications.

IOTA’s Network Resilience

The Tangle technology network is resistant to both quantum computing threats and 51% attacks (also known as double-spending attacks).

51% attack-resistant

IOTA's unique network topology necessitates three elements for a potential attack:

• Control over a significant percentage of the network hash rate.
• A complete view of the network to distribute the malicious hashing power effectively.
• Partnership with a substantial proportion of nodes to propagate the attack successfully.

Timely execution of the attack is crucial. If it's not done quickly enough, the network can easily identify the irregularity and neutralize the threat. While it's conceivable for an attacker to amass enough hash power and collaborate with many nodes, the actual topology of the Tangle network remains concealed, as connections between nodes are private. This makes a successful attack on IOTA's network improbable.

Quantum-Resistant

Using Winternitz hash-based signatures rather than elliptic curve cryptography makes IOTA resistant to quantum computing. IOTA employs hash-based functions as they offer greater security against quantum threats.

IOTA Token

The IOTA token is the native cryptocurrency of the IOTA network. It is used as a means of transferring value and as a reward for participating in the network's consensus mechanism.

MIOTA

MIOTA (Mega IOTA) is a unit of the cryptocurrency of IOTA. 1 MIOTA is equivalent to 1,000,000 IOTA. It is commonly used to represent larger amounts of IOTA in a more manageable way.^[14]

Token Distribution

1. Initial Supply: IOTA's total supply was created in the Genesis transaction. There is a total of 2.782.78 million MIOTA, which is the maximum and total supply, meaning no new IOTA tokens will ever be created.
2. No Miners: Unlike Bitcoin or Ethereum, there are no miners in IOTA's architecture. Thus, there are no mining rewards. All the tokens that exist were created in the initial Genesis transaction.
3. Founders and Developers: The IOTA founders and developers did not allocate any tokens for themselves. They also participated in the crowdsale and bought their tokens. However, the IOTA Foundation later received a significant amount of donations from the community to fund its development and operations.
4. Community Donations: After the crowdsale, the IOTA community decided to donate a portion of their holdings to endow what became the IOTA Foundation, a registered non-profit in Germany. This was done to ensure the long-term development and success of the project.
5. Distribution to Users: After the initial crowdsale, IOTA tokens became available for trading on various cryptocurrency exchanges, allowing a wider distribution among the public.

IOTA Foundation (IF)

In 2017, early IOTA token investors donated 5% of the total token supply to support ongoing development and establish the IOTA Foundation.

In 2018, the IOTA Foundation was officially chartered as a Stiftung (or foundation) in Berlin. Its primary mission is to facilitate the research, development, education, and standardization of IOTA technology. The IOTA Foundation is a board member of the International Association for Trusted Blockchain Applications (INATBA). Additionally, it's a founding member of both the Trusted IoT Alliance and the Mobility Open Blockchain Initiative (MOBI). These associations aim to encourage the integration of blockchain and distributed ledger technologies in regulatory frameworks, the IoT ecosystem, and the mobility sector.^[11]

IOTA 1.5 (Chrysalis)

Chrysalis is an upgrade for the IOTA network, also known as IOTA 1.5. The Chrysalis upgrade was divided into two phases.

Chrysalis Phase 1

Chrysalis Phase 1 was implemented on the IOTA mainnet in August 2020. This phase brought several improvements to the network, including:

• Enhanced transaction throughput and confirmation times.
• Reduced network congestion and transaction backlog.
• Improved security and reliability.
• Introduction of UTXO (Unspent Transaction Output) model for better wallet and exchange integration.
• Support for reusable addresses, which made transactions more user-friendly and reduced the chance of human errors.

Chrysalis Phase 2

Chrysalis Phase 2 was the second and final part of the upgrade, introduced to the mainnet on April 28, 2021. This phase focused on further enhancing the IOTA network with features like:

• Introduction of atomic transactions, enabling multiple transactions to be bundled together and executed atomically.
• Implementation of a new signature scheme (Ed25519) to improve security and usability.
• Improved support for hardware wallets and application interfaces.
• Removal of obsolete features to streamline the protocol.

The IOTA project's Chrysalis upgrade set the stage for the forthcoming transition to IOTA 2.0, also known as Coordicide. This transition aimed to eliminate the Coordinator - a temporary centralized component that was initially used to secure the IOTA network - and achieve full decentralization.^[12]

IOTA 2.0 (Coordicide)

Coordicide refers to the initiative to remove the Coordinator - a temporary centralized component that had been used to secure the IOTA network during its genesis. This move aimed to achieve a fully decentralized IOTA network by eliminating the Coordinator.

The Coordinator was introduced as a protective measure against potential attacks and vulnerabilities in the network's early phase. However, its existence drew criticism, with many arguing that IOTA couldn't be considered truly decentralized while dependent on this centralized entity.

Coordicide is used to achieve decentralization and security through a mechanism, IOTA 2.0 protocol, also known as IOTA 2.0 and IOTA 2.0 DevNet. This protocol introduces the concept of a decentralized distributed ledger, a new consensus mechanism, Fast Probabilistic Consensus (FPC), and a reputation system that helps validate transactions.

Coordicide introduces sharding to boost scalability. Sharding is a method wherein the Tangle is divided into smaller, more manageable segments, thereby increasing throughput.

With the implementation of Coordicide and the transition to IOTA 2.0, the IOTA network was anticipated to operate autonomously and securely, free from centralized control or coordination. This enabled it to process a greater volume of transactions, enhancing its scalability and making it apt for real-world applications on a worldwide scale.^[13]

Shimmer Network

The Shimmer network was inaugurated on September 28, 2022, serving as a platform for testing and validating forthcoming innovations within the IOTA protocol. This network replicates the IOTA protocol and operates exclusively using its native token, SMR. Any enhancements to the IOTA protocol are first trialed on the Shimmer network before being integrated into the IOTA mainnet.

Coinciding with the launch of the Shimmer network, the IOTA Stardust Tokenization Protocol upgrade was introduced. This upgrade underwent community validation and testing on the Shimmer network.

The compatibility of the Shimmer network and the Stardust upgrade framework on the IOTA protocol allows it to become scalable and useful as a multi-chain architecture. Developers can leverage these functions to build decentralized smart contracts that retain composability. Given that Shimmer operates on Tangle distributed ledger technology (DLT), transactions run on its network using its native token and NFTs are also feeless and scalable.^[15]

IOTA SDK

On July 24, 2023, the IOTA Foundation unveiled 'iota-sdk 1.0', marking the first release of its new Rust-based project. The IOTA SDK, crafted in Rust, offers a streamlined and efficient way to interface with nodes on both the Shimmer and IOTA networks, both operating under the Stardust protocol. Additionally, the SDK includes two primary modules: the client and the wallet. The IOTA SDK also boasts an enhanced version of IOTA’s CLI-wallet.

The IOTA SDK comes with 3 main crates:

• ‘types’- to implement different Tangle Improvement Proposals (TIPs).
• ‘client’- to contact nodes and build stateless blocks.
• ‘wallet’- in order to manage different user accounts, tokens, addresses, and assets.

Features

The major features of the IOTA SDK include client modules, wallet modules, and bindings.

Client Module

The client module offers low-level functions that give precise control over the interactions with Shimmer nodes. This module is stateless, ie., it doesn’t store any information about past interactions. It also provides access to the underlying API endpoints and allows advanced operations like custom message construction and direct communication with the network.

Wallet Module

The wallet module offers convenient functions for managing accounts, generating addresses, creating transactions, and interacting with the Shimmer network. It provides an easy-to-use interface that developers can use to build applications on the Shimmer network.

Unlike the client module, this module is stateful, i.e., it keeps track of past interactions. It can also optionally work with IOTA Stronghold for secure seed handling, storage, and state backup.

Bindings

The IOTA SDK comes with Python, Node.js, and WASM bindings, allowing developers to use the SDK in their liked programming language. These bindings also ensure easy integration with the ongoing projects, providing compatibility across different platforms and offering flexibility to suit the developers’ needs.^[19][20]

Controversy

Microsoft Partnership Criticism

In November 2017, there were reports suggesting IOTA had formed a partnership with several major companies, including Microsoft. However, it later emerged that this was not a direct "partnership" in the traditional sense. Instead, Microsoft and several other companies were participating in a data marketplace pilot developed by IOTA. Following the misunderstanding and the clarification, IOTA faced criticism from some quarters of the cryptocurrency community and media outlets.^[6]

Curl Controversy

IOTA uses the SHA-3 Proof of Work (PoW) cryptographic algorithm to securely store its transactions, similar in concept to Bitcoin's SHA-256 PoW, though the mechanics differ. However, unlike many traditional cryptocurrencies, nodes in the IOTA network don't receive MIOTA tokens as rewards for their efforts. This approach has raised concerns regarding the motivation for users to operate nodes in the absence of such incentives.

IOTA originally implemented a hashing function called Curl. However after vulnerabilities were pointed out by researchers from MIT and Boston University in 2017, IOTA transitioned to using other more widely-accepted hashing functions. The debate following the discovery of the vulnerability emphasized the importance of thoroughly vetting and peer-reviewing cryptographic algorithms before widespread adoption.^[2]

Trinity Wallet Hack

In February 2020, the IOTA Foundation announced a security breach affecting its official desktop wallet, Trinity. The compromise stemmed from a vulnerability in a third-party library used for QR code generation, leading to unauthorized access and theft from some users' wallets.

In response, the IOTA team promptly advised users to change their passwords and bolster their account security. Additionally, they introduced a patched version of the Trinity wallet to address the vulnerability.^[16]

E-Krona

In September 2017, Sweden's central bank, Riksbank, announced its investigation into the use of digital currencies through the E-krona project. The initiative emerged from concerns over the diminishing use of banknotes and coins in the country, especially as digital currencies and payment methods continue to evolve technologically. The project's goal is to determine whether the krona should be issued in an electronic form, termed "e-krona". Out of 33 proposals submitted to Riksbank for this purpose, only 19 organizations were chosen for dialogue. The IOTA Foundation was among these selected organizations.^[7][8]

Investments

Bosch

In December 2017, Robert Bosch Venture Capital GmbH (RBVC), the corporate venture capital company of the Bosch Group, made a significant investment in IOTA by acquiring IOTA tokens. The collaboration was aimed at elevating the technology's adoption and pushing the IOTA ecosystem forward.^[17]

ITIC

In January 2018, IOTA announced a partnership with the International Transportation Innovation Center (ITIC) to build a global alliance of smart mobility testbeds for autonomous vehicles. The partnership intended to establish a global ecosystem of smart mobility testbeds based on open-source protocols and IOTA's distributed ledger technology.^[18]

Tangle EE

The IOTA Foundation has partnered with the Eclipse Foundation to introduce IOTA's Distributed Ledger Technology (DLT) to enterprises through the Tangle EE project. This collaboration led to the establishment of a working group. On February 11, 2020, both foundations jointly launched the Tangle EE (Enterprise Edition) Working Group.

Tangle EE is tailored for enterprise users. It empowers larger organizations to develop applications atop the platform.

"The main reason why we created Tangle EE was because of the discussions that we’ve had with corporations. They really understood that we need to have a working group around IOTA to discuss the application layer, to discuss what kind of solutions we can develop broadly across industries, but also really start having more serious discussions about the protocol",Schiener said.^[10]

Tangle EE is currently overseeing two distinct Eclipse projects, both built upon IOTA technologies:

• Tangle Identity: This utilizes the Tangle to establish self-sovereign identifiers (SSI), distributed identifiers (DIDs), and verifiable credentials.
• Tangle Marketplaces: This harnesses the Tangle to construct data-driven ecosystems and other exchange-based platforms, essentially creating marketplaces.^[9]