The Chicken and Egg Problem

For most people loosely following crypto-currencies, IOTA seemed to come out of nowhere. They appeared with a 1 billion dollar market-cap almost overnight, and make large claims of free transactions on a decentralized tangle of interconnected machines that can settle in seconds with a throughput larger than Visa, WHOA.

I am not going to explore the merits of these claims. There is a good debate here and here This article is going to delve into the incentive structure when a crypto-product does not reward a miner/validator and how this can pose a problem with growing the network and gaining network effects.

What is IOTA's Incentive

In a blog post here Iota/someone has articulated their incentive structure as:

The incentive is, therefore: If I want to use IOTA, because the tech is incredibly helpful for my company, then I conduct a transaction and reference two other transactions per proof of work automatically. This alone is enough to provide the needed hash power because companies want to use IOTA.

The main problem with: “IOTA is great so companies will use it” is that it needs to be great BEFORE people want to use it. It’s the chicken and egg problem. This incentive only works if Iota is already useful. Why would I mine something for free if it doesn’t have any use for me right now, why would I not wait until the network is big enough and useful? This has been the same problem Ripple has had with their validators.

Ripple and Their Path to Validation

Finding people to freely validate transactions before a useful product is in place is exceedingly hard. Ripple has been at it for years and has slowly started to accumulate more validators in their quest to decentralize their own network, but they still face backlash from being seen as centralized.

How is Ripple Overcoming the Chicken and Egg Problem

By growing the network themselves and building tech that is becoming more and more useful for banks to work with. They are making it easy for banks to understand the value proposition of the tech, and more importantly they are making it easy to integrate for all the doh-doh companies out there.

Ripple has run their own validators for many years now, they invest in their own network growth, and work with banks to run additional validators. They spent years pivoting approaches and finding a go-to-market strategy that works. But, Ripple has 50 billion XRP(which is a good thing although they get a lot of hate for it) as capital and 2 seed rounds in the traditional venture capital space.

Ripple still has awhile to go before they reach critical mass, this is not an easy problem to solve, but they are actively invested in their product because all future revenue depend on it, and all their XRP they own depend on their success. Their incentives are aligned with all stakeholders of their platform. Can the same be said for IOTA?

How will IOTA Reach the Necessary Hash Power.

Iota is Not Bitcoin:

Bitcoin pays miners. Network effects were easy to reach. Early adopters were paid large quantities of BTC and this created an easy path to adoption. Incentives were aligned (at least until the fees became too high).

Iota is Not like Linux:

If the case of Ripple can attest, Iota needs a lot of governance to solve the hashing power conundrum. They need capital to market and improve their product. They need to reduce the “Ugh I need to learn this crap” effect for businesses, make it so the real cost of institutionalizing their product is much lower than the benefit, and that math is clear and well understood.

Iota Foundation owns 5% of total IOTA supply. Is that enough capital for this project? Anyone can install Linux for free and receive IMMEDIATE benefits, so the INCENTIVE to build on top of it is clear, and network effects build.

All Iota have been distributed. There is no reward for being an early adopter(post-ico). The benefit of mining now is useless. Getting the network effects is going to be a large problem. Currently one transaction took as long as 7 hours.

If any company will use this product the settlement time will need to be much lower, the company will need to see a long duration of demonstrated success with predicable settlement times. It will be interesting to see how they overcome this challenge.