Many know the word blockchain, for some of them, it’s just a buzzword, on the other side some of them truly understand the concept. Blockchains do have limitations which we are not all aware of. Besides a blockchain, there is another possibility to store data decentralized and tamper-resistant, namely a Tangle. This articles focuses on the clarification of a Tangle and how the IOTA project makes use of this. A Tangle is not a new phenomenon, it’s a mathematical principle which has been applied to many use cases.
Blockchain has some disadvantages worth your attention. What about scalability? Do a quick search on scalability problems with blockchains and you will find many articles discussing this. Ethereum had large problems around the end of June when the ICO market exploded. People were investing like crazy in ICOs. This resulted in a congestion of the Ethereum network. One excited investor included a $2,220 transaction fee in order to secure his investment in the BAT ICO. The brings us to the second issue of high transaction fees.
As a blockchain grows over time, nodes will need more and more storage capacity and a higher bandwidth (volume increases) to keep up-to-date with the transactions added to the ledger. This has the potential to become very costly, keeping in mind that internet speed will increase and storage cost will decrease over time. Other elements include: no data privacy as many blockchains are public and unwanted centralization because of the miners.
What is a Tangle?
A Tangle is a Directed Acyclic Graph or DAG. In general, it all comes down to some kind of web, consisting of nodes connected to each other with edges. An edge is basically a connection between nodes with a specific direction. It is not possible to traverse it in the opposite direction. Acyclic means that it’s not possible to encounter the same node for the second time when moving from node to node by following the edges. In other words, it is non-circular.
One of the differences lays in the data structure. Instead of adding blocks sequentially to a chain, Tangle uses it’s Direct Acyclic Graph (or web). So, validation is parallelized which results in higher throughput.
A Tangle works in depth. This means that every node consists of multiple layers of transactions. When a transaction is registered in a node, it first has to verify two other transactions before his transaction will be verified. Those two transactions are chosen according to an algorithm. The node has to check if the two transactions are not conflicting. For a node to issue a valid transaction, it must solve a cryptographic puzzle similar to those in the Bitcoin network (Proof of Work). Just two verifications are needed to verify a transaction. This gives the benefit of a drastic decrease in unnecessary verification. Besides that, miners are eliminated as well. You may think this is not a good thing, but it is! The only incentive for miners is the reward they get when they’ve mined a block. This can result in conflicting visions and goals between miners and token holders. Within a DAG, the nodes itself become the ‘miners’. This process is also much more lightweight because you only have to verify transactions for the two closest nodes. As miners are eliminated and we validate transactions ourselves, transaction fees are reduced to zero. Added to that, the power of some blockchains is more centralized than you might have thought. Miners form large mining pools to reduce variation of the mining reward. In case of Bitcoin, it is possible that the ledger becomes so large, that only few servers can host and verify it (e.g. Chinese mining farms). A Tangle tackles this problem of unwanted centralization.
IOTA and Tangle
According to IOTA, Tangle has a bright future because it can tackle some problems related to blockchains. Blockchains are robust and complex frameworks, involving multiple actors, which is not ideal for machine-to-machine payments on a smaller scale. The IOTA token is designed to work as a micro-transaction token for the world of connected devices. It is seen as the missing puzzle for the ‘Machine Economy’ to fully emerge and reach its desired potential. Beyond that, IOTA uses the Winternitz one-time signature schema which makes the Tangle quantum resistant… Although, they claim this.
Possible limitation of a Tangle
There is no incentive for the nodes, so, why should we use IOTA and what about hash power? If the hash power drops to a low rate, it is vulnerable for attacks. I think we don’t need to fear for this to happen. IOTA is not only designed for people, but merely for machines. Added to that, you don’t need to pay a transaction fee, you just give some hash power to validate two other transactions. IOTA has the power to enable new markets and business models. Companies will have to rely on this system and will provide sufficient hash power. Humans are economical creatures, even there is no incentive, they can still benefit from using IOTA. We call this an implicit incentive. For example Bitcoin uses an explicit incentive (mining reward).
A Tangle can solve many problems blockchains are facing right now: bandwidth, storage cost, centralization, scalability, … A Tangle in the case of IOTA provides a system that allows micro-payments between humans and devices. IOTA has the capabilities to create new markets and business models based on this technology. Some specialists say it is the missing puzzle for the ‘Machine Economy’ allowing micro-payments between devices (IoT). However we agree that the lack of an incentive can be a problem, but I believe that this is just a small hurdle that can be easily tackled.