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Hello & Happy Sunday,

here is Just The Metrics - your newsletter with the latest updates from the Cryptoverse, Crypto Metrics, L1 Comparisons, and all about Cardano.

This week we will dig into IOTA and answer the questions:

Is IOTA a Solid L1?

We are going to expand our quantitative assessment and start looking into some qualitative criteria from now on.

Curious?

Ok, let's dig in!

An Fundamental Analysis based on the Blockchain Trilemma

The Background

The Team

• The value transfer protocol IOTA (yep, this is what IOTA calls itself, instead if Blockchain) named after the smallest letter of the Greek alphabet, was created in 2015 by David Sønstebø, Dominik Schiener, Sergey Ivancheglo, and Serguei Popov.

• In 2018, the IOTA Foundation was chartered in Berlin.

The ICO

• IOTA completed a token sale and distributed 999.99 million IOTA in 2015, raising a total of 1,337 Bitcoin, equivalent to $434,000 at the time.

• The supply was later changed to 2.78 billion IOTA.

• 5% of the funds from the IOTA's token offering were later donated to the IOTA Foundation.

The Consensus Mechanism

• IOTA aims to provide distributed ledger technology for the internet-of-things (IoT) space where small connected devices regularly share data.

• The goal of the project is to allow these devices to conduct micropayment transactions between themselves and potentially to securely transfer data.

• Because these devices are generally specialized to be low power and application-specific, IOTA does not use a traditional consensus mechanism like proof-of-work or proof-of-stake, nor does it use a blockchain structure. (more on that in the Decentralisation section below)

It becomes obvious that IOTA differs from other Blockchains we have discussed so far in the newsletter:

1. IOTA is much more focused on Business-to-Business and Industry applications to build a standard for machine-to-machine payments. Whereas other cryptocurrencies mainly focus on Business-to-(End)Customer interactions.

2. The second obvious difference is the technology: IOTA is not based on a blockchain but they use the so-called tangle as a consensus protocol.

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So, once we have understood the general setup, let's look at our well-known Assessment Framework comparing IOTA to Cardano and their performance in the 3 dimensions of the Blockchain Trilemma.

So here is the Blockchain Trilemma as Assessment Framework

Let's take a look at certain metrics of IOTA that determine its degree of

• Decentralization

• Scalability &

• Security

General Decentralization Metrics:

Initial Token Distribution:

• IOTA has a very decentralized initial token distribution with almost 100% being distributed through a public sale.

The number of individual staked wallets & staking ratio:

• There is no staking available for IOTA, in the sense of participating in a network.

Permissioned vs Permissionless Mode (Yes/No):

• IOTA is a permissionless network.

The total number of active validator nodes/relay nodes/stake pools:

• Unlike other cryptocurrencies, IOTA is built on a distributed ledger technology that’s somewhat different from the blockchain.

• IOTA uses a proprietary technology called the Tangle as a consensus algorithm.

• Technically speaking, Tangle is a direct acyclic graph (DAG) consensus algorithm.

• With this method, IOTA does not use miners to validate transactions, instead, nodes that issue a new transaction on the network must approve two previous transactions.

• Transactions can therefore be issued without fees, facilitating micro transactions.

• The network currently achieves consensus through a coordinator node, operated by the IOTA Foundation.

• As the coordinator is a single point of failure, the network is currently centralized.

• The goal is to operate the network without a coordinator in the future, using a two-stage network update: Chrysalis and Coordicide.

• The Chrysalis update went live on April 2021.

• Coordicide is currently developed, to create a distributed network that no longer relies on the coordinator for consensus.

• A go-live date is not available. You will find it in the "Later" Section of the Roadmap.

Factors Enabling Decentralization:

Size of a full node: 

The IOTA Tangle works 3 different types of nodes:

• Full Nodes (Hornet, Bee): These nodes store several transactions in their local database. The node owner decides how many transactions should be retained apart from the absolute minimum required to maintain ledger consistency (basically “token balances”).

• Permanodes (Chronicle): A permanode is always connected to a full node and stores all transactions received by the full node. It can store large quantities of data and is at the same time optimized for read access: While it takes a very long time to query.

• Smart Contracts Nodes (Wasp): These nodes are part of one or multiple parallel blockchains anchored to the IOTA Tangle. They execute smart contracts in a configurable virtual machine and can be set up publicly as well as privately.

Minimum hardware & connectivity requirements for running a validator node/relay nodes/stake pool:

• CPU: 4 cores or 4 vCPU

• Memory: 8 GB RAM

• Storage: SSD storage

• A public IP address

IOTA relies on validator nodes with modest requirements.

General Security Metrics:

Cost of 51% attacks:

• IOTA currently relies on a centralized coordinator node to achieve consensus, so a 51% attack is impossible.

Vulnerability to denial-of-service (DoS) and distributed denial-of-service (DDoS) attacks:

IOTA has a medium to high vulnerability to such attacks:

• IOTA has seen several network outages due to bugs in the coordinator and DDoS attacks. Early in the seed generator scam, a DDoS network attack distracted IOTA admins, leaving initial thefts undetected.

Propagation network types (a peer-to-peer propagation network or a relay propagation)

• Due to Trangle, IOTA is neither a peer-to-peer nor a relay network. The Tangle is a "chaotic" network with a large number of connections.

Factors Enabling Security:

Full Node/Partial Node Ratio:

• The three different history modes of an IOTA node allow for a high Full node/partial node ratio.

Client Diversity:

• IOTA has client implementations in Java and Go.

General Scalability Metrics:

Transaction throughput:

• Currently, the IOTA mainnet (IOTA 1.5 Chrysalis) allows for ~1,000 feeless data and value transactions per second (tps).

Transaction latency & finality time:

• The current IOTA mainnet has a latency time of approx. 8 sec.

Active Layer 2s (rollups/state channels):

• IOTA has currently no active L2s.

Factors Enabling Scalability:

Status of data availability that enables rollups:

• IOTAs scaling model is not a rollup-centric one like Cardano. Instead, it is conducting research on sharding solutions, in which messages are delivered to only a subset of network nodes, reducing redundancy to build a high-performance network.

So what does now the overall verdict look like:

Decentralization: Low

Security: Low to medium

Scalability: Low to medium

IOTA promises to achieve the same benefits that blockchain-based DLTs bring — decentralization, distribution, immutability, and trust — but remove the downsides of wasted resources associated with mining as well as transaction costs.

Currently, IOTA is far away from these promises.

IOTA still (also with the 1.5 Chrysalis update) relies on the central coordinator node as the single source of consensus in the network which leads to totally centralized networks.

This also goes along with the high risks of attacking this central coordinator. Additionally, the heterogeneous devices with varying levels of low computational power also add insecurity to the tangle itself.

Theoretically, the structure of IOTA is a good starting point for scaling the network. Time will show how they implement that.

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.