Chapter 1IOTA as scalable DLT

IOTA’s goal is to establish a DLT for the Internet of Things (IoT). The following characteristics are fundamental to this vision:

  • Scalable. Process a substantial number of transactions per second across a large network of nodes, with fast confirmation times.
  • Lightweight. Low-power devices should be able to directly participate in the network.
  • Feeless. Sending transactions should not require payment of network fees.

Traditional DLTs have limiting factors that make them unsuitable for attaining IOTA’s goal.

  1. The blockchain data structure. The inherent limitation on the speed of blockchain networks is commonly referred to as the “blockchain bottleneck.” In blockchain, there is only one site where new transactions can be attached — the end of the chain. The resulting negative effect on network throughput is demonstrated in this simple visual:

In contrast, the core data structure in IOTA is highly scalable. This is made possible with one simple rule: each transaction references and approves two existing transactions. This rule defines IOTA’s underlying data structure — the Tangle — which, in mathematical terms, is known as a directed acyclic graph (DAG).

Rather than being limited by a single site for attaching new transactions, DAGs offer multiple sites where transactions can be attached. Users can continue to attach new transactions on various parts of the Tangle without waiting for other transactions to confirm:

  1. The consensus mechanism. In Blockchain, Nakamoto consensus splits the network into miners and users. Miners consume large amounts of computing power completing the Proof-of-Work (PoW) required to chain the blocks together. Miners are incentivized by the fees users are willing to pay to have their transaction included in a block. This fee-based incentive structure would be a significant barrier in a machine-to-machine economy, in which micropayment values between machines may be lower than the fees incurred.

In IOTA there is no distinction between miners and users. All nodes can participate in consensus. This means that an IOTA node has a completely different role than a Bitcoin miner. IOTA nodes only perform basic operations that do not require much computational power (e.g. storing the ledger, validating transactions). Users can set up a node with minimal cost and actively participate in network consensus, and thereby bolster the security of the network.

The definition of a consensus layer — describing how nodes agree on which transactions are trustworthy — is at the core of IOTA. In the current IOTA implementation, nodes trust transactions which are referenced and approved by milestones, issued by the Coordinator. The use of this centralized “finality device” has been necessary to provide security during the network’s infancy.

The solution to Coordicide will ensure that the network remains feeless, while preserving decentralisation and security, and promoting unprecedented scalability.

Blockchain bottleneckAs more transactions are issued, the block rate and size become a bottleneck in the system. It can no longer include all incoming transactions promptly. Attempts to speed up block rates will introduce more orphan blocks (blocks being left behind) and reduce the security of the blockchain.
TransactionA message that transfers funds or information between two nodes. A transaction is referred to as “solid” if its entire history is known.
ConsensusAgreement on a specific datum or value in distributed multi-agent systems, in the presence of faulty processes.
Nakamoto consensusNamed after the originator of Bitcoin, Satoshi Nakamoto, Nakamoto consensus describes the replacement of voting/communication between known agents with a cryptographic puzzle (Proof-of-Work). Completing the puzzle determines which agent is the next to act.
Proof-of-WorkData which is difficult (costly, time-consuming) to produce but easy for others to verify.
MilestonesMilestones are transactions signed and issued by the Coordinator. Their main goal is to help the Tangle to grow healthily and to guarantee finality. When milestones directly or indirectly approve a transaction in the Tangle, nodes mark the state of that transaction and its entire history as confirmed.
FinalityThe property that once a transaction is completed there is no way to revert or alter it. This is the moment when the parties involved in a transfer can consider the deal done. Finality can be deterministic or probabilistic.