One of the major problem that we have with cryptocurrency and Blockchain, is that most people think that it is just about value and Bitcoin. If Bitcoin goes down in value, we have the headline of “The Bitcoin bubble has burst”, but cryptocurrencies are not about the value of Bitcoin, they are about the trading of trusted electronic tokens, which have some value — not just money — attached to them. This might relate to some work that we have to perform, or just the tiny transaction cost of a device entering a network. To pay a small fee for a device joining a network, for example, might be the true cost of registration, and could stop non-trusted devices joining it.
Bitcoin has thus been a victim of its own success. But our world works on tokens — we just defined these tokens as our trading currency. But cryptocurrencies allow for the most trust worthy trading of tokens, and where we can exchange for work done, goods bought, and so on. If we need to covert them back to money, we do this through an exchange, but increasingly we could actually just trade in whichever tokens we needed — and create whole ecosystems which created nominal values of things and then enacted through well defined smart contracts.
- 1st Generation. These cryptocurrencies, such as Bitcoin, Litecoin, Monero and Bitcoin Cash, basically just store and transfer value, but have suffered from poor scaling and a weak architecture. The overheads involve relatively high transaction fees and transaction times.
- 2nd Generation. These cryptocurrencies, such as Ether, Neo, and Lisk, have platforms that support decentralised applications (dApps). This generation adds coding and smart contracts, and supports logical operations. A high-level code is then translated into byte code for the Blockchain.
- 3rd Generation. These cryptocurrencies aim to create properly distributed systems, and many use DAG (Direct Acyclic Graph). A traditional Blockchain just sequentially stores transactions and which can take some time to create a consensus through the building of blocks. With DAG, each of the transactions becomes a block, and it thus speeds up the consensus mechanisms.
Many of new cryptocurrencies differ greatly from Bitcoin. Ripple, for example, is not like Bitcoin, and is used for the fast consensus on money transfers, and which can achieve rates of clearing that approach Visa and Paypal. Another interesting one is IOTA, and it has IoT devices in its sight.
IOTA and DAG
IOTA uses a method called Tangle to create a scaleable infrastructure for transactions. It is likely that the crash is due to the database for Tangle being too large for some hosts, and that they have crashed. The IOTA team are thus busy updating their system to cope with the limits, and also to support more limited devices in the future.
IOTA aims to provide a new foundation for IoT devices and M2M (Machine-to-machine) communications, and overcome many of the existing problems of blockchain. Overall it is described as the:
“Economy of the Future”
and it adds a new innovation of blockless ‘Tangle’, and which has no transactions fees and no limits on scaling. The network transaction speed then grows with new activity, and where it is built around transactions and not miners, and thus does not centralise its activities. As there are no miners, there are no conflicts of interest. As there are no fees, it can also support nano payments (extremely small transactions of crypto currency).
A bit of a tangle
The Tangle uses a DAG (Directed Acyclic Graph) for its infrastructure rather than a blockchain to store its ledger. Blockchain methods have rate limits as nodes must agree to the whole chain (and where forks and branches are discarded), The Tangle supports new branches to be created, and which will eventually merge back again. This supports a faster overall throughput, and for consensus to be built through nodes submitting their transactions, and also checking the validity of recent ones.
In his ground-breaking paper [academic paper], Sergio Demian Lerner outlined that in a DAG there were no fixed blocks, and that each transaction brings with it, its own proof of work. Within this he defined the usage of a fast cache for the most recent transactions, and where older transactions cannot be used as a reference.
Within Tangle a DAG is created and where vertices represent transactions, and edges represent approvals. The first transaction is defined as the genesis, and all the IOTA tokens are created from this. On a new transaction from a node, a new vertex is added to the DAG, along with two previous transactions which it is approving. The approval process means that the node has verified the history of the transactions and that they seem to be valid. This check is normally related to the balance on the accounts, so that there are no double-spends and there are are no bogus transactions. If a transaction is approved by large number of nodes, it is part of the consensus, and then cannot be altered. The amount of work required to create the consensus for a transactions is large, and would require the spamming of the network.
In the example in the paper, Sergio defines the DAG before a join transaction arrives and afterward (see diagram below). The system allows for two conflicting transactions to be included in the DAG-chain, as long as the second does not references the first (see figure below, with transactions 2 and 3). Each transaction then has a confirmation score. As more transactions are added onto one transaction or the other, the confirmation score will increase (a). A transaction will no children will have a score of zero. If a transaction appears twice, the one with the highest score will win. In (d) a new transaction has arrived and which conflicts with transactions 2 and 3.