Implications of a machine economy

The importance of feeless transactions for decentralization

With Coordicide1 coming along well, IOTA is progressing into becoming the most decentralized protocol in the crypto space and IoT. This is in part thanks to its feeless transactions, a fundamental feature for a free and fair future for both man and machine.

The text below was originally part of How to decentralize – Part II, but felt a bit contrived there. However, these two posts compliment each other, and I recommend reading them together.

The IOTA network to date has transacted $180+ billion2 in IOTA tokens, without costing a single cent in transaction fees. That’s unprecedented.

Feeless transactions IOTA compounding effect
IOTA’s feeless transactions do not have a compounding effect. But more importantly, you don’t have to pay a third party just for the privilege of paying for goods or services.

However, the importance of “feeless” goes beyond the financial benefit. What I love about the IOTA protocol is that it’s not just money. Instead it revolves around the bigger concept of value. This is where the absence of fees truly comes into play.

What’s in a name: 0-value transactions

IOTA has two basic transactions: value transactions that transfer IOTA tokens, and 0-value transactions that send data.3 In discussions I notice people underestimate the economic weight of 0-value transactions. You can forgive them disregarding its importance, because the name doesn’t help. It’s a bit of a misnomer. Perhaps we should rethink its name, because in terms of utility these “non value transactions” put a tremendous weight on the scale.

Fee-dom vs. freedom

Decentralization within cryptocurrency seems to largely focus around the consensus process. While it is an essential feature, it’s not all there is to decentralization. Another vital feature of decentralized networks to me is an absence of transaction fees. Such fees are a popular way to incentivize decentralized consensus building, and are used to support rate control and Sybil protection. IOTA does not have such transaction fees. This makes it free, except not that kind of free.

Free beyond finance

IOTA still costs energy to transact, which is not free (yet). And one way or another you need access to a communication network to be able to send your transaction, which usually costs money. You could even choose to pay someone to do parts of the transaction for you. This might sound contradictory to the idea in the previous paragraph, but I’m making this point on purpose. Not having to pay a transaction fee isn’t about the money.4 It’s about fee and free being as far apart as can be when discussing decentralized transactions.

The free mentioned above is not having to pay any third party a fee for the privilege of participating. Or even asking for permission to participate. This leaves you unrestricted from control by others. IOTA is permissionless like no other.

The economic weight of feeless transactions

Most cryptocurrency protocols aim to minimize transaction fees. While lower costs are nice to have in a monetary sense, from a usability point of view, any fee is as far away from free as you can be.5 Paying a fee to a validating party relegates you to a lesser position, creating an unnecessary hierarchy. Such power structures usually end up in rent seeking, instead of creating new wealth.

Fees as a hurdle to innovation

Even buying the tiniest amount of cryptocurrency to pay for fees adds a step to the process. Often this step is regulated to some extent too, adding complexity. If you’re paying with cryptocurrency this overhead might be insignificant. But cryptocurrency is just a subset of distributed ledger technologies (DLT). For data applications that don’t require an exchange of value, a transaction fee suddenly becomes a big hurdle.

Feeless flow of innovation

Feeless transactions enable the immutable logging of any type of data. This permits innovative solutions that wouldn’t scale in our current financial system, like micro-transactions on renewable energy grids. Other applications like selling local weather sensor data or pollution data enable a lot of new decentralized solutions too. And with machines expected to become more and more autonomous, the demand for such trustless transactions will skyrocket.

Charging a transaction fee for each of the millions or billions of transactions would all but crush these use cases. Fees are problematic whether it’s compounding costs with back and forth micro-transacting, or the issues with vendor lock-in that come with a flat fee. Data is the new oil, and it requires an infrastructure that allows the data to flow with as little restriction as possible. That means as much decentralization as possible, including the elimination of transaction fees.

Do electric sheep dream of free wifi?
Do electric sheep dream of free WiFI? For a machine economy to function properly, we need an infrastructure that allows autonomous machines to interact with as little restrictions from protocols or third parties as possible. Hat tip to ethan non sequitur.

IOTA and the data economy

IOTA is currently setting up to provide a scalable, decentralized data and value infrastructure for IoT, and in my opinion its feeless feature is one of the most underestimated ones. It’s what will make or break the decentralized data economy.6 Fee free is the bee’s knees. It can’t be beat.

(Disclaimer: I own IOTA tokens. I’m convinced that all cryptocurrencies are currently intrinsically useless. IOTA’s prospect of a secure, feeless, scalable decentralized consensus however is very enticing. Enough for me to speculate on its future value.)

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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Implications of a machine economy