Implications of a machine economy

On IOTA as a currency replacement

What cryptocurrency has the highest chance of replacing traditional currencies in the future? Is it Bitcoin or some other ones?

In my opinion IOTA – Next Generation Blockchain stands a good chance. Better than Bitcoin, although I don’t believe traditional currencies will be replaced anytime soon.

Traditional currencies have certain problems, which Satoshi Nakamoto tried to solve with Bitcoin1:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

A lot of corruption comes from centralizing payments through certain hubs, with currencies that are prone to be manipulated in an untransparant way. These hubs skim value off transactions between a value creator and a buyer, with prices being higher than needed because of ‘market pricing’.

Bitcoin

Bitcoin was a good first step in peer-to-peer payments, but it has run into problems. Scalability, fees, speed, centralization and waste of resources are the main problems in my opinion.

Currently Bitcoin is limited to 20 million on chain transactions per month. That would barely be enough to let people in The Netherlands pay their salary every month. Because Bitcoin currently has reached this limit effectively there is a huge cache of unprocessed transactions from time to time: Unconfirmed Transactions (at the moment of writing 55,000, the week before more than 180,000). To get a speedy transaction fees have risen to 5 or even more than 10 dollars sometimes. While that is still cheaper than most current payment options now, it is not a viable model for the future. The limit could be changed, but that will take quite a while. You see, the community is in stale mate currently on the future direction. The increase in block size comes with several disadvantages, mainly the increased difficulty for small miners to form blocks. It is feared that this jeopardizes the decentralization in the future. Whether for or against any development, what is clear is that Bitcoin core will not likely change very soon. Some forks that try to solve this have appeared, but it is arguable if this will solve the problems, since the limited scalability is a function of the blockchain.

Now, there are solutions in the second layer, but they come with problems. The lighting network is a proposed solution for lighting fast and cheap payments. The problems however are on boarding (remember the monthly limit of 20 million) and decentralization. This article explains it better than I can: Mathematical Proof That the Lightning Network Cannot Be a Decentralized Bitcoin Scaling Solution.

On top af that, Bitcoin uses more energy than most countries: Bitcoin Energy Consumption Index – Digiconomist. At the time of writing it uses more than Oman, but the graph shows a consistent growth in energy consumption. The hashing power fueled by this energy makes for a very safe currency, but I think we already waste our resources too much as it is.

IOTA

IOTA2What If You Could Have Bitcoin Without The Problems Of A Blockchain? IOTA May Be The Solution.[/note] on the other hand is designed with energy efficiency in mind, because it is made for the Internet of Things3. Low powered devices with limited resources that are estimated to be all around as as soon as 2020, anywhere from 10 to 50 billion of them, depending on who you believe. The project4 is an open-source protocol facilitating machine-to-Machine interactions, including secure data transfer, fee-less real-time micro-payments, and the collection and dissemination of sensor-based and other types of ‘oracle’ and other data. What sets itself apart from 99% of current cryptocurrencies is that it’s underlying database is a directed acyclic graph (DAG)5 , and not a blockchain. The DAG has as one of its defining features that it gets faster with more transactions, as opposed to a blockchain, where every transaction has to be put in a block on a single continuous chain. With a DAG more transactions means your transaction gets confirmed faster, and the consensus is built faster too, without the problem of competition for a spot in the current block.

The brilliant thing IOTA does, is stop the separation between user and miner (in cryptocurrency), or consumer/seller and payment validator (in traditional currencies). In order to place a transaction on the Tangle (a DAG describes as a block chain without blocks or chains), you have to validate two previous transactions first. This ‘pay it forward idea’ implies that no third party has to be paid to check the validity of the transaction. This means IOTA is fee less. If you transfer 1 IOTA, the other party receives 1 IOTA. The implications of this are far-reaching. Not only will this make micro transactions on IoT possible – in small payments the transaction costs are larger than the actual transaction – I think it will solve a lot of inequality issues. It will to some extent prevent third parties of skimming value off other people work, accumulating vast wealth, while not being part of the creation process. It should also bring banking to billions of people who are currently not interesting enough for such services. This is stuff for an answer of its own, but a big part of it is no third parties skimming of a few percent of each transaction for doing not too much.

As a currency IOTA ticks nearly all boxes:

Source @Mistywind

Source: IOTA is divisible, fungible, durable , portable, uniform and limited in supply.

A critique of cryptocurrency In general is that it is still not applicable in the real world. This is true even for IOTA. IOTA isn’t even finished right now, but is nearing completion. But even so, working real world proofs of concept are already appearing, like a Charge Station running fully on IOTA, and IOTA only. Things are evolving quickly, and big companies like Bosch (one of the biggest automotive parts producer in the world) are partnering with IOTA. With this in mind, acceptability should be a matter of time.

That brings another great point: the IOTA Foundation. The IOTA protocol is backed by a strictly regulated German non-profit6. Germany has some of the strictest rules regarding non-profits. The founders choose Germany as their base for this specific reason. Not because it is easy, but because it is hard 7. They really want to prove that IOTA is legit, in contrast to some projects that might not pass the smell test. Their ambitions are high, but I have trust in their intentions to deliver a truly elegant solution.

Some problems that will have to be overcome are compliance with current law. I expect countries will not be too happy with a currency taking over their financial control. I however think that cryptocurrencies will not overtake fiat soon. Taxes will long be paid in local fiat, as will a lot of other stuff. The transition from cash to cheques to card payments took decades, and cash still exists. My guess is that cryptocurrency will work alongside fiat, with the current value being calculated back to that fiat. It will likely be topped up just before use, and thus act like a transaction medium as opposed to a storage of wealth.

A positive note on acceptance is that a lot of countries are looking into cryptocurrency to see how it can benefit them, and institutions like the IMF see a path ahead for cryptocurrency – IMF Head: Cryptocurrency Could Be the Future. Really.

TL;DR

Bitcoin is a cryptocurrency that solves a lot of problems with traditional currencies, but also comes with some fundamental problems, mainly scalability, fees, speed, resources and centralization.

IOTA is a true moonshot, in its core directed at a market that is in it’s infancy (IoT), solving problems that do not really exist yet (payments between machines). But, if the technology works out as intended, it will solve a lot of other problems too, both with IoT, as well as with current society. As such it will likely replace traditional currencies to some extent, maybe even a large extent.

About the author

Bas van Sambeek

Communications strategist, specialized in the positioning of high tech products. I help innovative start-ups and fast growing companies in high tech industries clarify their story through positioning and storytelling.

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By Bas van Sambeek
Implications of a machine economy