What's the difference between blockchain based currencies like Bitcoin and tangle based currency like IOTA?
Popular cryptocurrencies like Bitcoin and Ethereum are based on what we call the Blockchain Technology. It is one of the most exciting and easily misunderstood innovation of ours. On the other hand we have IOTA which is based on the Tangle. To understand the difference, lets get acquainted with the basics of blockchain:
Centralized Network: In a centralized network, all data is stored in a general/central ledger. This ledger work as the central repository for data transferred from all sub-ledgers. Databases in banks are centralized as one can find the account details of every customer stored in the central database. Such networks are vulnerable as a successful attack on the central database could disrupt the whole network.
Distributed Network: In a distributed network, all participants have their own copy of the ledger as opposed to centralized storage. Depending on the efficiency of the network, a change in any one of the ledgers is reflected across all copies after a defined time period.
Blockchain: Simply put, a blockchain is a cryptographically secured distributed data storage network. As the name suggests, information in a blockchain is added, stored and transferred in the form of discrete blocks.
Cryptocurrencies based on Blockchain
Bitcoin and many other cryptocurrencies employ the blockchain to create a peer-to-peer electronic cash system which allow payments to be sent directly from one party to another without going through a financial institution. There are two distinct participants in this system:
- Those who issue transactions: People who possess the cryptocurrency and use it for transactions.
- Those who process transactions: Computers which process cryptographic puzzles to facilitate transactions. The network of computers timestamp transactions by hashing them into an ongoing chain of transactions known as the blockchain. Transactions cannot be processed in their absence.
It is quite obvious that processing transactions in such systems require the expense of energy. The cost is borne by the people who issue the transactions, albeit it is much lower than what conventional banks charge. Consequently, if people were to issue transactions in denominations lower than this fee, they would end up paying more than the amount they send.
IOTA
Unlike a typical blockchain based cryptocurrency, IOTA is built on the Tangle, a Directed Acylic Graph (DAG). The creators claim that the technology is faster, cheaper and more secure. IOTA has been specifically designed to facilitate micro-transactions between machines linked by Internet Of Things (IOT).
There are no transaction costs involved in this ecosystem.
Directed Acylic Graph (DAG): A DAG is a directed graph which consists of a finite number of vertices and edges. Each vertex directs to another through an edge.
However, none of the paths follow a consistent loop. Say if we were to start at a defined vertex v then irrespective of the path chosen, we can never come back to the same vertex. Tangle, the technology behind IOTA is based on this architecture.
The Tangle
The tangle is a DAG where each vertex is represented by a transaction, also known as a site. These transactions are issued by individual participants in the network. They are termed as nodes.
When a transaction arrives in the network, it must approve two transactions that have been generated previously. The edges of the DAG represent those approvals. For a transaction to go through, a user must verify and approve two prior transactions. If any transaction violates the tangle’s history, it is disapproved.
The Verdict
In a Tangle based network, the system does away with the compilation of information in blocks. As there is no third party approval, participants have to pay zero transaction fee. Despite its advantages, the Tangle is a recent development in the crypto world and still requires a lot of tinkering before it sees widespread adoption. As a currency IOTA is yet to find practical applications.