Chris Skinner interviews IOTA Foundation founder and creator David Sønstebø, who talks about Tangle, Bitcoin, Ethereum and blockchain.

I recently joined the Advisory Board of the IOTA Foundation, which is developing a ledger system that uses a network of blocks to register transactions called Tangle. It’s blockchain-like, but more scalable and robust by using a network structure rather than a chain. Fairly complicated but, for those interested in the area, it could be a better alternative to Ethereum and Bitcoin. Here is an interview with founder and creator David Sønstebø.

David, you’ve created a thing called Tangle. Can you explain what this is in language my grandmother would understand?

The Tangle is a new kind of decentralised Distributed Ledger Technology (DLT) for settlements and data transmission. In today’s world, banks and other institutes have a ledger that’s controlled by that single entity only, meaning that you have to trust that this entity isn’t altering the ledger in any shape, way or form, which we know from numerous fraud cases unfortunately happens quite often. The centralised ledger is also very inefficient when two different entities have to share the data in their respective ledgers/databases with one another. This is the problem that technologies such as Tangle and blockchain resolve.

Why is Tangle needed when we have Ethereum and Bitcoin?

Bitcoin and Ethereum are blockchains. This means that you have a network with two parties: users and validators. In other words, you have decoupled verification of the ledger from the users of the ledger. By replacing the trusted third parties mentioned before (banks, and so on) you now have to trust the validators. In theory, blockchain validation was envisaged to be decentralised among thousands of parties by rewarding those who validate (miners) with tokens, thus the network would be hard to compromise and easy to trust. In reality, that isn’t the case.

In the Bitcoin and Ethereum blockchain, the validators verify blocks by solving very computationally intensive math. Whoever solves these cryptographic puzzles first has the highest chance of getting the tokens (mining rewards), which is the incentive that drives these validators to carry out verification of blocks in the first place. Due to the computational requirements, Application Specific Integrated Circuits (ASIC) was created. These are special chips that are made only to solve these puzzles. This invariably leads the validation of the blockchain to centralise around those who have the resources to buy these ASIC processors, and who have access to cheap electricity. Furthermore, these people again centralise further into ‘mining pools’, where they essentially combine their computational power to have the highest probability of getting the token reward.

So right now, the entire bitcoin network is essentially controlled by five mining pools, which again are very much at the mercy of their internet service providers and energy providers. Tangle, on the other hand, doesn’t decouple validation of the network from the users of the network. Instead, validation is an intrinsic property of using the network. When you send a transaction in the Tangle, you also validate two previous transactions in the network, and since everyone else is doing the same thing, what emerges is a 100% decentralised (therefore trustworthy) ledger.

What specifically are the issues that Tangle solves?

Given the aforementioned fundamental differences in architecture, the Tangle solves most of the notorious problems that has kept blockchain in the ‘theory and laboratory’ environment.

Let’s start with fees: The simplest way to think of this is to think about the validators in blockchain running their expensive equipment with high electrical bills. There is only a certain amount of transactions that fit into each block before it has to be validated. This means the validators pick the transactions that include the highest fee possible, as such micro-transactions are impossible in blockchain. In Tangle, however, since there are no blocks, thus no block size limit, as well as the validation being intrinsic to the network you don’t have to compensate anyone with fees, meaning you can do micro- or even nano-transactions. If you send 0.1 cent to someone, they receive the full 0.1 cent.

The second issue is scalability in blockchain. Since there is a finite amount of transactions that can go into a block at once, you end up with the block acting as a bottleneck. You can only get as many transactions validated as the block size allows, so if a lot of users use it all at once, you end up with a congested network that takes hours to clear transactions. In bitcoin, the number is seven transactions per second, which, compared to centralised payment processors, is absolutely nothing. In Tangle, there are no blocks. Instead, you can add a transaction whenever you want into the network and the other users of the network will validate it. No bottleneck. Therefore in principle there is no scaling limit in Tangle; the more users, the more validators.

That makes Tangle sound like a ‘blocknet’ rather than a blockchain. Why is a network structure better?

Even though transactional settlements without fees is a game changer itself, we’re equally excited about the prospects of using the Tangle to do data transmission. Because it’s a distributed ledger, it’s naturally suited to ensure tamper-proof data, since the data is distributed among the users of the network, so if someone tries to alter the data, they are automatically detected and invalidated. Blockchain could do the same in principle, but due to the fees and scaling issues mentioned before, it can’t – it would cost a fortune and clog the network permanently.

You’ve also created IOTA. Why?

IOTA is the name of the platform itself, Tangle is the name of the ledger architecture. So IOTA is to Tangle what Bitcoin/Ethereum is to blockchain.

And what do you see in the future for Tangle?

IOTA and Tangle were primarily invented to enable the internet of things, but can also be used for any kind of on-demand services. Due to there being no fees, you no longer have to make compromises and do things in intervals to avoid fees eating up the profit margins. Instead, users can pay for the exact quantity they use on the go.

READ NEXT: Can blockchain alleviate world poverty?

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by Eugenock, Shutterstock.com

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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