Bitcoin has been dominating the news lately due to some incredible landmark heights it has achieved in the last few weeks. It has gained value at a rate no one could have predicted when it was established in 2008. As its value rises over $15,000 this week, discussion over factors that could affect its stability continue to mount. But Bitcoin was only the first of many cryptocurrencies to be developed.
Ethereum, Ripple, and Litecoin can all be traded using many of the same cryptocurrency wallets that enable Bitcoin transactions. Today IOTA, a new cryptocurrency designed to streamline the process for use in microtransactions, teamed up with Microsoft and Samsung on a digital marketplace and added $12 billion to its overall value -- a growth of 90%.
What is IOTA?
IOTA takes its name from the Internet of Things, a giant network of "intelligent" devices that use cloud resources to communicate with one another. Essentially, it allows users to remotely access the device from another one -- for instance, allowing your phone to interface with your refrigerator when you forget your shopping list at home.
The main purpose of IOTA is to allow consumers to use a decentralized cryptocurrency to make small payments. Because of IOTA's unique structure, it has a significant advantage in microtransactions because there is no fee to transfer them.
This advantage is created because of the structure of the IOTA market. Instead of relying on a continuous blockchain as a ledger, the system requires the sender of a transaction to perform a "proof of work" by validating two other transactions. Proof of work is a security measure that requires a sending machine to perform a difficult operation that can be verified easily by the receiving machine.
The value of having a sender validate two transactions as proof of work is that the system gets faster instead of slower the more users it has. Blockchain structures can only maintain a certain number of transactions at a time, but IOTA's Tangle structure actually gets faster the more users are transacting at the same time.
What are the advantages of IOTA over other cryptocurrencies?
David Sonstebo, co-founder of IOTA, said that the currency "resolved the three major issues of blockchain - fees, scaling limitations and centralization."
The most practical advantage from a user perspective is that IOTA's structure removes the reliance on a middleman, leaving the entire transaction fee free. Mining fees are not necessarily a deal-breaker when considering large transactions, but if you want to exchange just a few dollars or less for a service, using Bitcoin can consume large quantities of time or money due to the blockchain ledger structure. Those fees only increase over time for Bitcoin users, and it has been one of the major concerns in its value in the long-term.
Scalability is a term that has loomed over the head of Bitcoin for years and is the primary impetus for non-blockchain alternatives. The scalability of a cryptocurrency is its ability to both grow in value while shredding into smaller portions, essentially allowing more users to invest in the economy. The problem with Bitcoin is that scalability is not built into its infrastructure. Basically, there is a maximum number of requests and changes that can be made to the blockchain ledger -- IOTA deals with this problem by having scalability built in, and eventually reaching a stable point.
Bitcoin was intended to be a fully "decentralized" currency. Only the people holding Bitcoins are supposed to have any say in what it can and cannot do. Centralized currencies such as the USD or the GBP are subject to the rules of the agencies that "own" them: the states that they come from. As such, their value is tied heavily to the actions and laws of the state. Cryptocurrencies are not beholden to those rules, instead relying on exclusively the trust of the users in its value. This allows its market value to rise significantly farther than any fiat currency and protects it from being devalued when something happens to a state's economy.
However, Bitcoin's reliance on mining -- the middleman -- creates a point of weakness of centralization. Over 70% of Bitcoins are currently mined by server farms in China. If the Chinese government were to legislate and cut these farms off from the rest of the internet, it could be disastrous for the value and usability of the currency. IOTA doesn't rely on mining to produce transactions and is, therefore, a truly decentralized market, protecting it from such an event.
How to get involved
If you feel like you missed out on a Bitcoin investment but still want to get in on the cryptocurrency market, creating a wallet is actually significantly easier than you might think.
You can start by downloading the wallet from the IOTA Github page. (ALWAYS check for authentification before downloading anything on the internet!) It's a good idea to check on this website afterward so you can get the latest builds for security purposes. Remember to keep your authentification readily available when you update, though. As of November 17, approximately 4 million Bitcoins have been lost forever due to improper authentication storage.
After downloading the wallet, open it and edit your node configuration so that you can perform transactions, and then generate a seed. Again, use extreme caution here as generating and then remembering your seed is vital!
Concerns about safety and reliability
This Medium post by Neha Narula, the director of the Digital Currency Initiative at the MIT Media Lab, suggests that some vulnerabilities existed in a previous version of the cryptocurrency that have since been patched out. The vulnerability allowed a user to fake signatures on transactions and steal or delete IOTAs from a users account.
The fact that this particular attack was patched shouldn't be fundamentally reassuring. Cryptocurrencies are still undergoing growing pains involving security, reliability, and legislation. The best way to protect your investments is to study the thing you are putting your money into until you have a good enough understanding of it to justify your investment.
"Better safe than sorry" is critical advice when downloading wallets, buying cryptocurrencies or performing transactions. Make sure you're fully educated on the subject before you make any decisions with your money.