Chris Castiglione Co-founder of Adjunct Prof at Columbia University Business School.

What is IOTA? | A Definitive Guide

3 min read


What is it? A distributed ledger protocol and cryptocurrency that operates with a  directed acyclic graph (DAG) instead of a blockchain.
Inventor The IOTA Foundation
Went live June 2014
Supply Style Deflationary
Supply Cap 2,779,530,283,277,761 (2.779 x 10^15) units, 100% of which has already been distributed  
Smallest Unit 1 IOTA
Price View price

IOTA is the world’s first cryptocurrency that operates entirely without a blockchain and transaction fees. IOTA aims to revolutionize the microtransaction, and in particular, the Internet of Things industry. By removing the use of a traditional blockchain and a transaction fee system, it enables the ability to conduct many transactions. These can be infinitely small amounts between a large a number of devices.

The Problems IOTA Aims to Solve

To understand IOTA  it’s helpful to first make sure you understand Bitcoin, and specifically how Bitcoin mining and validation works:

A visualization of how Bitcoin blocks are chained, source: Bitcoin Whitepaper

In the Bitcoin blockchain, transactions are sent out by users. They are pooled together in a pool called the memory pool (mempool).  A limited number of these transactions with the highest fees attached to them in the pool are selected from the pool by miners.  Miners then validate them by bundling them into a timestamped block.  It is then published to the network, with a direct reference to the previously timestamped block. This maintains the perfect chronological order of all transactions.

This infrastructure has proven to be functional, secure, and potentially scalable over the last ten years. However, there are two fundamental problems posed here that IOTA aims to tackle:

Transaction fees

The blockchain model inherently introduces a transaction fee market. This is to incentivize mining due to the limited space in each Bitcoin block. This limited space acts as a security parameter against network attacks. It also limits the throughput of confirmed transactions onto the Bitcoin network, allowing for approximately 7 transactions every seconds at most.

Synchronous Order

All transactions are timestamped and in chronological order. For a Bitcoin node to validate a block that contains a transaction, it must first ensure the block has a reference the block immediately before it. Therefore, every node on the entire network must first receive the latest valid block before being able to validate any other transactions on the network. This synchronous nature of the blockchain limits the entrance of transactions into the network because of the previously mentioned throughput limit.

The Technology Behind IOTA

IOTA’s fundamental technology in place of the blockchain is the directed acyclic graph (DAG). The directed acyclic graph, dubbed Tangle, is an unordered graph of transactions that may all indirectly reference each other, but do not require knowledge of all possible transactions on the network. Specifically, each transaction on the network on the network refers to and validates two transactions that occurred before it.

IOTA Tangle
The tangle is best understood visually. Confirmed transactions are black, unconfirmed are grey, source: IOTA Blog

In order for a node to post a transaction to the IOTA network, the node will have to first receive and validate two other unconfirmed transactions on the network and conduct a small proof-of-work algorithm on them in order to validate them. This deems the node trustworthy as it has verified a subsection of the IOTA network, and thus allows the node’s transaction to be verified by another node in the same way.

The design of the Tangle is one without transaction fees. The ‘fee’ one pays for a transaction is the two-transaction validation it must do.

Because transactions only need a reference to just two previous ones, the network is an asynchronous one. A potentially limitless number of transactions can be posted and verified by the network, provided there is enough activity being conducted on the network.

Its interesting to note that IOTA also utilizes a technology called Winternitz signatures to cryptographically secure transactions. This technology is thought to be secure against quantum computers and their potential attacks. A trait that most other cryptocurrencies do not possess.

The IOTA Vision and Purpose: Machine Economy

    IOTA was created with the intention to facilitate the “machine economy.” Our society, now more than ever, is being increasingly powered by machines that facilitate, oversee, and conduct transactions. This paradigm is categorized as the “Internet of Things” (IoT) industry. Because the IOTA network is enabled to rapidly transact completely arbitrary amount of currency in a secure and decentralized manner without the need for users to pay for fees, machines that wish to conduct financial activity with one another on a large and rapid scale can now leverage the Tangle to do so.

IOTA and The Internet of Things
The ever-evolving industry of Internet of Things

IOTA’s incredibly large and fixed supply, at exactly 2,779,530,283,277,761 (2.779 x 10^15) units also lends itself true to its vision. The vast amount of IOTA that exists paves the way for microtransactions to occur amongst thousands of devices simultaneously. This supply was entirely mined at the conception of the IOTA network, thus making it deflationary. In a case where coins are pre-mined and then distributed according to this, there is a fair amount of controversy in regards to the degree of distribution of the coins to prevent centralization of assets. However, the IOTA Foundation claims that coins are distributed relatively equally.

IOTA’s large supply also makes it necessary to refer to the number of IOTA as MIOTA (i.e. 1 million IOTA). Exchange prices for IOTA usually list prices for a single MIOTA.


Where can you buy IOTA?

IOTA can be bought primarily on popular cryptocurrency exchanges Bitfinex and Binance. A full list of all exchanges that sell IOTA can be found here.

Where can you store IOTA?

IOTA’s use of uncommon and quantum-resistant cryptography initially resulted in difficulty in terms of wallet-usage. This is because keys can only be used to sign an address once before being rendered invalid. As such, the number of widely available public wallets is currently limited as the community attempts to build around this cryptography, with promising upcoming solutions such as the Trinity wallet.

The most common way to store IOTA at the moment is to use the official IOTA wallet. The set up of this wallet requires a small degree of but is effectively outlined in this guide.


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Chris Castiglione Co-founder of Adjunct Prof at Columbia University Business School.