The new research and development center of IOTA, one of the world's leading digital currencies, with a market value of some $6.5 billion, is located within Toi Lab, a technological toys development space in Tel Aviv. It was set up by architect Eyal Yona Segev, founder of the local Bitcoin Embassy, which is located not far away. The work room of the IOTA team is surrounded by dozens of toys, which at first glance look like tiny robots.
"We looked for a place to operate in, and in the end settled on Toi Lab, because there's a deep connection between technological toys and cryptocurrencies," IOTA CTO Alon Elmaliah told "Globes". Elmaliah heads the local R&D center, which began operating in January. Alongside Elmaliah are Clara Shikhelman and Alon Gal, who are working on IOTA's technological research, and Tsvi Sabo and Gal Rogozinski, who are in charge of software development. Elmaliah says they are recruiting additional people, and hope that the team will shortly number ten employees.
The visit to the new R&D center is a rare opportunity to peek into innards of the cryptocurrency industry and to get to know the people behind it. In contrast to the anonymity of the developer of bitcoin, who, nine years after the currency began, still hides behind the nom de guerre "Satoshi Nakamoto", the IOTA Foundation proudly presents its core developers, operating in Israel and in other countries, and the founders of the technology who manage its activity from Berlin.
Yes, IOTA is a foundation, registered in Berlin since November last year as non-profit organization, and active in promoting adoption of the IOTA software and digital currency protocol, development of which was begun three years ago by the four founders: David Sønstebø from Norway, who serves as CEO of the foundation; Dominik Schiener from Germany; Sergey Ivancheglo from Belarus; and Dr. Serguei Popov, from Russia. The four met when they worked on development of blockchain platforms.
Bitcoin, the oldest cryptocurrency and the largest by value, is still the undisputed king of the market, with a value of $180 billion, and countless mentions in the media and on social networks. In the past year, however, Bitcoin's share of the market has steadily fallen, with a new cryptocurrency being created practically every day. Today, Bitcoin accounts for about a third of the market, which compares with 85% at the beginning of 2017.
IOTA, with a current market value of nearly $6.5 billion, is positioned at number 11 in the market, with a share of just 1%. It is one of the pretenders to the Bitcoin throne. It is, however, an unusual cryptocurrency, offering an alternative to the blockchain technology on which almost all other cryptocurrencies are based. Instead of blockchain, IOTAS is based on a new data structure called Tangle. Tangle is represented by a directed acyclic graph instead of a chain of blocks, such that each payment executed on it is a small block in itself. With Tangle, there is no mining process, and to establish consensus between participants on the network, each transfer confirms two previous transfers. The absence of miners makes it possible to transfer IOTA without a fee and more rapidly. In addition, the system does not require massive computing power like blockchain, and it can therefore operate on any computer.
Unlike Bitcoin, which was creative as an alternative to the fiat currencies customary around the world, IOTA is described as a token of services and products (utility token), intended for use in the Internet of Things (IoT) economy. "Every IoT product has producers, suppliers, service providers, sellers, and customers, and it currently requires many agreements between all the players in the market for them to be able to share information between them. IOTA wants to create a uniform protocol for all these players," says Elmaliah. Because of the speed and small size of the transactions in IOTA, "IOTA's protocol suits every machine," he explains. "Our goal is to generate a revolution in the industry."
Digital currency technology is still at its initial stages of development, and despite the media interest in these currencies, they have a small number of users. The IoT industry, on the other hand - a network of things, devices or components that can communicate with one another and exchange information via software and sensors installed in them - has already passed the early adopter stage and is developing rapidly. According to a report from research firm Gartner, in 2017, 8.4 billion products were used globally that were connected to IoT, 30% more than in 2016, and the number is expected to reach 20 billion by 2020.
"The automotive industry is ripe for our technology"
The IOTA protocol went onto the web in mid-2016, and since then the foundation has collaborated in trial projects with major companies, among them Deutsche Telekom, Bosch, and data services company Accenture. The other week, the foundation received substantial reinforcement when the Chief Digital Officer of Volkswagen, Johann Jungwirth, joined its supervisory board. Earlier, Dr. Hongquan Jiang, a partner in Robert Bosch Venture Capital, joined the advisory board of the IOTA Foundation. These appointments should strengthen IOTA's ties with the high-tech and automotive industries.
"IOTA's solutions can be especially suitable for companies that manage large infrastructures, such as power and water companies, which hook up their networks to smart sensors," says Elmaliah. "Furthermore, the automotive industry is very ripe for use of our technology. IOTA has therefore been in contact in the past two years with Bosch, which among other things manufactures spare parts and automotive systems." Elmaliah says that IOTA's system is in advanced trials in the automotive and infrastructures sectors in Germany. He also mentions contacts with mobile telephone makers in East Asia on using the platform.
In late 2017, as global interest in IOTA grew, criticism of IOTA in the cryptocurrency community grew as well. Criticism that attracted special attention came from Vitalik Buterin, co-founder of Ethereum, a blockchain platform that facilitates the creation and use of smart contracts. The cryptocurrency associated with it, Ether, has a value of $110 billion, putting it second after Bitcoin. "I strongly disagree with many of IOTA's technical decisions, and find some of their behavior deeply egregious to the point where it goes beyond mere negligence," Buterin wrote.
How do you respond to criticism of IOTA within the cryptocurrency community?
Elmaliah: "Some of the criticism of IOTA has a point, and some of it doesn't, but you have to take into account that there's a complex economic and business aspect to this story, and a race is taking place between the various cryptocurrencies that exist. We'd like to see much more cooperation with other currencies."
Asked by "Globes" whether the foundation's management or its founders are able to interfere in the approval of IOTA transactions or in trading in the currency, they answered at IOTA: "At the current stage of development, the system has a coordinator who helps to protect the fledgling network from attacks, like a training wheel for the system, until usage of it grows sufficiently that it won’t be needed anymore. If there's a structural problem that can be patched on the system, the foundation, together with those active on the network, can propose a change that will fix the problem and protect the participants' money. This change has to be agreed to by the active users, in that they choose to update the software version they run. There's also a technical question of in what situations it's possible to fix and in what situations not, and how the community should decide."
$500,000 raised in issuing the currency
"IOTA is the only non-profit organization in Germany which has its capital entirely based on cryptocurrencies, and that works in this field under full regulation," says Elmaliah. "The object of the foundation is to promote IOTA in the world as a free, open source program. The foundation itself currently holds 5% of all IOTA coins." At IOTA's present market value, the foundation's holding is worth $350,000.
Elmaliah says that IOTA's founders came to the project after accumulating experience in blockchain development. Some of them previously worked on development of the Nxt digital currency, but that project found difficulty in taking off, because of the lack of an established backer and because not enough money was raised for development. It was therefore important for the IOTA founders to set up a foundation that would manage the project. A year ago, they approached all holders of the currency and asked for a donation of coins to the foundation, which is how it reached a holding of 5% of the coins.
IOTA's ICO (initial coin offering) took place in 2015. All its coins were issued in exchange for 1,337 Bitcoins. Elmaliah says that the offering was carried out without PR fanfare, and almost all the investors in it were technology people and people active in the cryptocurrency community. The founders had no preferential rights in the offering, and none of them bought more than 0.8% of the total number of coins. At that time, the offering gave IOTA a total value of $500,000. Today, the market value is estimated at $6.5 billion (630,000 Bitcoins).
Asked whether the supply of IOTA coins might be expanded through a further offering, Sønstebø said, "We have no way whatsoever of increasing the supply of coins or of producing new coins. That can be ascertained by examining IOTA's open code. We also have no authority to do so."
Trading in the coins is units of MIOTA, each of which is worth a million IOTA. It is currently traded on digital currency exchanges at an average of $2.2 per MIOTA (about 0.0002 Bitcions per MIOTA). The total supply of IOTA coins issued at the end of 2015 was 2.78 billion MIOTA. For the sake of comparison, the maximum supply of Bitcoins, mining of which is expected to end in 2040, is 21 million. Elmaliah explains that the capital raised in the ICO was used to build the IOTA system. In the following year the system was developed and tested in its beta version, and in 2016 trading in IOTA took place only "over the counter", that is, directly between buyers and sellers. In June 2017, trading was for the first time made possible in the currency on the digital currency exchanges. On the opening day of trading, IOTA reached a value of $1.5 billion, a record amount for a digital currency on the day following listing for trading.
Today, IOTA is traded on seven such trading arenas/exchanges, mainly on Bitfinex and Binance. In the second half of 2017, the price of the coin soared almost 500%, from $0.60 per MIOTA on the first day of trading to $3.60 at the end of the year. Since the beginning of 2018, however, IOTA has shed about 30% of its value, according to the CoinMarketCap website. In November 2017, the price of the currency reached $1 per MIOTA for the first time; in December it jumped to a peak of $5; and now it is around $2.2.
How is it possible to base a payments system on such a volatile currency?
Elmaliah: "The volatility is certainly an obstacle to adoption of the currency, and that's a challenge that faces all digital currencies today. The foundation is therefore talking to banks about creating a tool that will facilitate quick conversion of fiat currencies, such as euros or dollars, to IOTA."
"An exciting concept'
Until a year ago, Elmaliah (30) was an engineer at Intel, where he worked on semiconductor development. "The work at Intel connects to my current work in that it concerns the challenges of a large and very complex system," he says. "In 2016, I started to become interested in cryptocurrencies. When I read about IOTA, the technological concept and the idea that the system did not use blockchain excited me."
Elmaliah started working at IOTA after he finished his studies in electronics and computer science. "At first, I worked voluntarily from home. I wrote code for IOTA and donated it to them. After a few months, one of the founders approached me via Skype and offered me a full-time job."
After IOTA completed the long process of becoming registered as a non-profit organization in Germany, Elmaliah was tasked with setting up an R&D center for it in Israel. "The foundation is managed from Berlin," he says, "but the IOTA team is scattered all over the world. The foundation seeks to sign up the best brains in mathematics, cybersecurity, and cryptography, and it decided to set up an R&D center here because of the quality of Israeli cybersecurity developers.
"Our research people work in two fields: theoretical mathematical research on Tangle technology, examining things like growth, transactions, and attacks on the system; and simulation research, designed to examine the effects of different parameters on the system. Our development team works on P2P systems, and also on the IOTA beta version."
Clara Shikhelman recently joined the IOTA R&D center as a research scientist. Shikhelman, 29, is doing a doctorate in mathematics at Tel Aviv University, and specializes in graph theory and combinatorics. "I feel that the work here gives me an opportunity to have an effect on the lives of very many people, through solving complex mathematical problems," she says.
How did you get to IOTA?
Shikhelman: "My partner and I became interested in cryptocurrencies. We went to a meeting at the Bitcoin Embassy in Tel Aviv, where we met Alon and heard from him about IOTA. The technology interested me. Tangle offers a very elegant mathematical solution."
What's the advantage of Tangle over blockchain?
"The main problem with blockchain is scalability - the ability of the system to grow in response to growth in the quantity of work. It therefore makes no sense to use blockchain for large numbers of transfers of small sums, such as are required in IoT, for example. Blockchain can be compared to a road with one lane, which can easily become jammed with traffic. Tangle, on the other hand, is like a multi-lane highway, on which traffic can stream more easily."
Who currently uses IOTA's platform?
Elmaliah: "The foundation set up the Data Marketplace venture in collaboration with about 40 enterprises around the world. Together with them we created usage scenarios for testing IOTA's platform."
The list of participants in the venture includes large electronics companies like Fujitsu and Philips, accounting firm EY, and French telecommunications company Orange. The venture's website presents on a map of the world the locations of sensors via which data are transferred to the participants. "The Data Marketplace is a place in which anyone who has a device that gathers data can sell that data stream," Elmaliah explains. "If an enterprise wants to provide a global weather forecasting service, it can buy the information in this marketplace from sensors around the world."
How do you see IOTA developing in the next few years?
"Our goal for the coming years is to create an ecosystem in which projects will be developed around IOTA. Over the next year I should like to see projects at the proof of concept stage running on IOTA's main network, and also to see our network coping successfully with the challenges of growth. A far as the speed of work is concerned, today our network is capable of carrying out 1.5 transactions a second on average (90 a minute), and we want to reach a capacity of 1,000 transactions a second, with the system working stably."
For the sake of comparison, credit card company Visa is currently capable of handling 24,000 transactions per second, while Bitcoin's blockchain platform can process just seven transactions per second, and Etherium about 20.
"I think that within one to two years we'll see a great deal of active research in areas connected to IOTA, both on the mathematical and the application side," adds Shikhelman. "I hope that this platform will succeed in interesting many more people. Already today, I'm sometimes surprised to find people talking to me about IOTA with great enthusiasm, without them knowing that I work at the foundation."
Published by Globes [online], Israel business news - www.globes-online.com - on February 6, 2018
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