IOTA Network – Part 2. Mining, Fees and Proof of Work on IOTA vs Bitcoin

The IOTA network has zero fees and infinite scalability because in order to send funds on the network, a user must confirm two transactions. Because IOTA uses Tangle instead of blockchain, it can process transactions in a parallel manner and not sequentially the way blockchain networks do.

As the Tangle becomes bigger and the number of transactions on the network increases, IOTA will actually be becoming faster and more secure because it will approach network critical mass.

The scalability and confirmation issues do not exist on the IOTA network. On blockchain networks, miners and transaction participants are separate entities. On a blockchain network, when someone sends a transaction, miners can choose which transactions they add to the blocks that they mine. Because the network is free, decentralized and transparent, the miners do not have to include any transactions into the blocks that they create.

This is why transactions on the Bitcoin network can include a fee.


Fees on the Bitcoin network

The vision of Satoshi Nakamoto, the creator of the Bitcoin network, was that eventually the network would become so popular that miners will be getting their rewards from fees and not from the newly mined bitcoins. This is critically important for the success of the Bitcoin network as the network can only have 21 million bitcoins. The network will create them by 2140. However, the majority of the coins, about 99% of them, will be in circulation by year 2030. The bitcoin network creates a block of bitcoin blockchain every 10 minutes or so. You can see the entire history of all bitcoin blockchain blocks, including all the transactions, the fees for the transactions and the rewards miners got for mining the blocks here:


Mining blocks on the blockchain network

Miners on the Bitcoin blockchain gather transactions from the network and compile them into blocks. For a transaction to be valid on the bitcoin network, it needs to have at least six confirmations (a confirmation is when there’s a record of a transaction in at least one block of the blockchain network). Because compiling transactions into blocks is a trivial task for modern computers, the Bitcoin blockchain implemented the concept of proof of work. This concept means that a machine needs to perform some calculations in order for work to be deemed as valid. Initially, the concept was introduces to protect computer networks from spammers and abuse. Hal Finney was the person who applied the concept of proof of work to electronic financial transactions. Finney was also the receiver of the first transaction on the Bitcoin network. Finney has died in 2014 in Phoenix, Arizona. His body is being cryonically preserved by the Alcor Life Extension Foundation.


Proof of work: Bitcoin vs Iota

Proof of work implementation works in the same way with Bitcoin and Iota. To understand how it works, you need to understand the term “hash.”

A hash is a short string of data. A set of data can only have one hash when one cryptographic algorithm is used (the Bitcoin network uses SHA-256, an algorithm created by the National Security Agency). This means that ashes for different sets of data would be completely different even when the sets look very similar. For example, set (1,1,3,5) could have a hash of 11111234234234 and a set (1,1,3,4) could have a hash 99923333344434. Hashes play a critical part in cryptographic security because when two people have a hash for the same set of data, they can make sure that they are talking about the same data without having to look at the actual data. With a hash, a person can verify the data without dealing with it directly. While this is not important for the example above because the sets are very small, using a hash to verify data can save a lot of time and resources when a set of data is large because a hash even for a big set of data is going to be small and much more manageable than the set itself. Miners on the Bitcoin network and Iota network prove their work by coming up with a hash for the block they create that is smaller than the hash for the previous block.

Finding a hash that is smaller can be extremely difficult depending on how much smaller it has to be. This is why the Bitcoin network has a “difficulty parameter.” The more miners the network has, the higher the difficulty. This means that even if the network has a lot of miners, it will still be creating blocks on the blockchain in about 10 minutes.

The difference between Bitcoin and Iota is that the difficulty parameter on the Iota network is much lower compared to the Bitcoin network.