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Why the Breakthrough of Blockchains May Be “Blockchainless”

June 26, 2017 Alexander Renz, Director, New Mobility Lab

Blockchains, or more generally, Distributed Ledger Technologies have a huge role to play in the future of mobility. With the advent of connected autonomous vehicles as well as the rise of electric mobility and shared usage models, Distributed Ledger Technologies and the future of mobility is a perfect match.

It is no surprise that the New Mobility ecosystem – automotive players, mobility service providers, insurance companies, telecommunications providers and smart city leaders – are exploring blockchain technologies. Many leading players are starting to embrace the key concepts of blockchains in order to solve real world problems related to identity management for people and machines, data control and integrity, information sharing, as well as trusted connectivity and cyber security.

However, it appears that blockchain technologies have not been able to move beyond proof of concepts. Production deployments have been limited to ‘private” or ‘consortium-based’, rather than public blockchains. There are many reasons that help to explain this statement. For one, the concept of blockchain technologies is still relatively new. Along with this, the notion of distributed peer-to-peer architectures and new business models is challenging conventional thinking. The main reason, however, is much simpler: Blockchain technologies have inherent limitations.

These limitations include lack of real-time validation of transactions, and the scalability issues that are inherent in the architecture. Related to this issue are transaction fees and the concentration of mining power.

The notion of blocks being generated through the consensus process makes real-time validation and scalability hard to achieve. In fact, it is inherent in the architecture. Transactions and the consensus process are sequential. Tens, if not hundreds of thousands of unconfirmed transactions in the case of Bitcoin introduce serious limitations for use cases. Furthermore, the concept of mining and the need for stakers to achieve consensus and create blocks introduces transaction costs. As complexity grows an increasing amount of energy and computational power is needed. Bitcoin’s mean transaction fees have already risen above $1. Even worse, transaction costs are difficult to predict and therefore undermine business models in the Internet of Things. In a world of micro-transactions the question arises, “who is going to pay for it?”

Why a Blockchainless Approach Might be the Future

With the IOTA protocol, an interesting new approach to distributed ledger technologies is emerging that does not rely on traditional blockchain approaches. The 4 co-founders behind IOTA – David Sonstebo, Dominik Schiener, Sergey Invancheglo and Serguei Popov – have been part of the “Blockchain 2.0” revolution and made major contributions to the space. For instance, Sergey Invancheglo invented proof of stake. As part of many projects they have experienced the inherent limitations of traditional blockchains and have conceived a new approach to distributed ledgers. The idea of IOTA was born in 2015.

The main innovation behind IOTA is that it is a “Blockchain without the Blocks and the Chain”. The Tangle is a new distributed ledger architecture based on a Directed Acyclic Graph (DAG) that shares the same underlying principles and the key benefits of blockchains, just without their inherent limitations. Let me explain how.

Rather than rely on the creation of blocks that are chained together, in the Tangle, a single transaction references two past transactions.

The process involves 3 simple steps:

1. Signing: The transaction inputs are signed with your private keys.

2. Tip Selection: Markov Chain Monte Carlo (MCMC) is used to randomly select two tips that represent unconfirmed transactions, which will be referenced by your transaction.

3. Proof of Work: In order to have your transaction accepted by the network, you have to do some proof of work.

Once these 3 steps are completed, the transaction will be broadcasted to the network. Another network participant will come along, choose the transaction in the tip selection process and validate it.

IOTA validates transactions without the need for miners and the associated cost of creating consensus. Instead of relying on a small subset of the network (miners / stakers), IOTA relies on the entire network of active participants to approve and validate transactions. Consensus is no longer decoupled from transactions, but rather an intrinsic part of the process. This allows IOTA to scale without any transactions fees.

The benefits of this approach are apparent. IOTA achieves a step change in performance and scalability, which makes it particularly suitable for the Internet of Things with ultimately billions of connected things. Given that there is no such thing as ‘always on’ connectivity in the real world, the Tangle also supports offline transactions through partitioning. This allows clusters of IoT devices, such as cars and trucks, to branch off and still make transactions using P2P communication protocols.

Since the transaction posting and consensus is parallelized, the network is inherently growing and scaling with the number of transactions. With the more transactions are being made, the Tangle becomes even more secure and efficient.

The creation of IOTA formed the backbone of the Internet of Things and the Machine-to-Machine (M2M) Economy: a world where scalability is a must, and where transaction fees are prohibitive to making business models work.

The fact that IOTA does not introduce transaction fees makes it uniquely suited to IoT and M2M where a large number of micro- or even nano-transactions can be expected. The IOTA team envisions a future in which machines trade resources such as computation, electricity, storage, bandwidth, data and much more without the involvement of any third party. IOTA opens the doors to an Internet of Things that is not only secure and scalable, but makes business models in the M2M economy practical. It sets the industry on a path where it can move beyond proof of concepts and instead to real deployments.

If you look up “IOTA” in the dictionary, you will find it is “something very small.”. If you “don’t care one IOTA about something”, it means you don’t even care about it one little bit.

IOTA is a blockchainless approach to distributed ledgers. Should you care about it? Given its huge potential to become the backbone of the Internet of Things, I predict that IOTA will turn into something very big. We should not only care about IOTA. We should all get involved and use this revolutionary technology to shape our collective future.

Click here to view a short introductory video, “Welcome to IOTA Universe”.