IOTA Network – Part 3. Mining, Fees and Proof of Work on IOTA vs Bitcoin Continued

Mining both on the Bitcoin network and IOTA network consists of transaction verification and creation of a hash that is smaller than the target hash. Since a set of data can only have one hash with an algorithm, miners on the Bitcoin network add a number to the set of transactions. This number is known as nonce, which is short for number used once. Miners try different numbers with the goal of coming up with a winning hash. For example, if the original set is (2,3,4,5) miners can try (1,2,3,4,5), (2,3,4,5,0) and so on. Because Bitcoin is a transparent network, its blockchain (that you can examine by visiting https://blockchain.info/) contains not only records about transactions but also records about target hashes and winning hashes. For example, block #503433 had a hash equal to 0000000000000000005e65213ddd9c29fe3a4adf565f253c57aaee38e99d9be8. The miner to mine the block was BTCC Pool and the nonce for the block was 3482765719 (you can see this information here: https://blockchain.info/block/0000000000000000005e65213ddd9c29fe3a4adf565f253c57aaee38e99d9be8 ).

 

Mining rewards on the Bitcoin Network and on the Iota Network

Essentially, miners on the bitcoin network are playing a lottery trying to guess the winning nonce and be able to claim the winning block. They do so because they get a reward for adding the winning block to the blockchain. When Satoshi Nakamoto launched the network in 2009, the reward was equal to fifty bitcoins. The reward decreases by 50% every 210,000 blocks. It went from fifty bitcoins to twenty five bitcoins to 12.5 bitcoins, which is the current reward. The next estimated drop date of the bitcoin reward decrease to 6.25 bitcoins is June 6, 2020. You can see a live clock that monitors the speed at which the network is approaching the next reward drop at http://www.bitcoinblockhalf.com/

Nakamoto designed the Bitcoin network during the world financial crisis of 2008. During and after the crisis many of the governments all around the world started printing more money to bail out failed banks and companies. Nakamoto wanted to prevent the possibility of a central authority deciding to add more money to circulation, which is why he created the network the way he did, with a cap of 21 million coins (in the beginning of 2018, there have been over 16.5 million coins in circulation and almost 80% of the bitcoins that could ever exist have been mined).

While the inability of anyone to add coins to the circulation has its benefits, the fact that the mining reward is decreasing on Bitcoin network means that at a certain point miners would have to rely on user fees for the network to stay operational. User fees are already an issue for the network. Because the Bitcoin network can only process between 3 and 7 transactions per second, when the network started gaining popularity in 2017, the fees have skyrocketed. You can see the charts with the fees at https://bitinfocharts.com/comparison/bitcoin-transactionfees.html. For example, on December 22, 2017, average transaction fee on the Bitcoin network was over $40. This means that if you wanted to send pay your friend $3 for a cup of coffee, you would need to send $3 and a transaction fee of over $40 for the Bitcoin network to include your transaction into the blockchain.

Since the miners can include any transactions they choose into the blocks that they mine, when the network has a lot of transactions, miners choose the ones that include high fees, making the bitcoin network not usable for day-to-day micro transactions that most people engage in every day.

Because the IOTA network does not separate users and miners and to send funds on the network users need to confirm two transactions, the network removes the need to spend tremendous amounts of energy that Bitcoin miners are spending trying to guess the winning nonce. What is even more important is that the network does not have any transaction fees. In order to send funds, senders need to confirm transactions. All of this happens for free.

 

The history of IOTA currency

On the IOTA network, there are no transaction fees and no coin mining. All the IOTA coins that will ever exist have been created already in the amount of 2,779 times 10^15 or 2,779,530,283,277,761 coins. This amount will not increase and will not decrease. During the crowdsale, the founders have distributed all the coins to the participants of the sale. In total, the sale raised 1,337 bitcoins for the development of the network.

Later, the creators of the network have started the IOTA Foundation. The foundation was incorporated in Germany. It is a non-profit that coordinates and supports the development of the IOTA network. The organization has a board of directors, an advisory board and a supervisory board.

IOTA has also started β€œThe Big Deal,” a project that promotes the Internet of Things and the IOTA network to developers and businesses with a focus on Asia.