Token Economics

This article is a translation of the German IOTA Beginner’s Guide by Schmucklos.

Is the IOTA token even needed?

There are people who claim that the main innovation is the “Tangle” and that the IOTA token is useless. I will list a few of my thoughts regarding this in the following.

Token economics – Uses, benefits and value of the Token

The value of the IOTA token is based on people who believe in it, but there is a crucial difference from other cryptocurrencies. For example, those who own Bitcoin are not entitled to the resources of the Bitcoin network, but those who own IOTA tokens have guaranteed access to a portion of the network’s resources, regardless of its value in dollars, Bitcoin, or any other currency. In IOTA, there are no miners and no stakers who can charge a fee for processing transactions. Transactions are free because it is in the interest of all participants to exchange value in a feeless, permission-free, secure, scalable, and decentralized manner.

To ensure all of this there is a scarce resource called Mana in the IOTA network as of IOTA 2.0. It is best thought of as a tool that is used for various tasks in the network, such as defending against Sybil attacks or tools like FPC, autopeering, and congestion control. Mana can be thought of as a parallel reputation token to the IOTA token, which is held by addresses in proportion to the IOTA tokens. This is called pending Mana, which is pledged to the executing node in value transactions. When a certain amount of IOTA tokens is transferred from one address to another, an executing node selected by the issuer is rewarded with Mana, giving that node “trust”. The amount of Mana this node receives is proportional to the amount of IOTA tokens sent in the transaction.

One of the purposes of Mana is to give the nodes participating in the network a ranking / reputation, which makes it possible to distinguish honest working nodes with a secured history from new nodes (identities) that have just joined the network and, if necessary, to give the nodes preference in processing transactions if the network is close to its processing capacity. Most aspects of the new protocol (voting, peering, rate control, etc.) will therefore favor nodes with high Mana over nodes that cannot prove their honest work on the network. So even if an attacker manages to create 100 fake identities, his “opinion” will not be taken into account, because his reputation (Mana) will put him behind all honest working nodes in the network for a while, thus preventing identity forgery and sybil attacks, among others.

For fullnodes, this means that unless the inbox is empty, each node processes messages at a rate specified in the protocol. This rate determines the maximum throughput. If the network is close to its processing capabilities, someone who wants to do a lot of data transactions in a short time will need Mana for the executing node to be favored over other transactions (possibly spam). This can best be compared to buying higher bandwidth from an Internet service provider. If you don’t have Mana and the network is congested, you can’t issue transactions and have to wait. Herein lies the economic model, which is unique compared to other cryptocurrencies.

How does it work? Just like everything in life. When a company needs office space, they have two options. They can either buy or rent the space. The same is true for IOTA with Mana. If someone wants to use the Tangle but doesn’t want to own the tokens, they will have to rent Mana from other people, the same way someone rents a property from a landlord. Some people often confuse this with a fee. It is NOT a fee. It is an allocation mechanism where people who contribute to the network by owning tokens and / or running nodes get priority in network resources.

In traditional blockchains, you have to pay a fee whether you hold tokens or not. It’s a permanent fee and you don’t get it back. In IOTA, you have the option of owning tokens and thus have a right to a portion of the network TPS. Even if you choose the approach of not owning tokens and renting access, you have fixed predictable costs and reliable throughput.

In traditional blockchain, you can own tokens and not know your operating costs because the fees are dynamic. Transactions compete for limited block space and outbid each other on fees to be considered in a prompt manner. So operating costs are not known in advance. With IOTA, you either have 0 operational cost or you know exactly your rental payments and can calculate reliably.

The Mana concept is similar to staking (Proof of Stake). The difference is that you don’t lock / stake tokens to earn from them and the returns are real returns (rental income). With PoS, the rewards are paid out through inflation (some may or may not come from fees, but most is from block rewards – inflation). This is the illusion of return. Payment is made by minting new tokens and thereby increasing the total supply.

Mana is pledged to a node ID. It can be acquired in three ways:

  • Hold Tokens: Node operators can buy tokens and pledge the Mana generated by these tokens to their own node.
  • Rent (Mana-as-a-Service): Mana can be acquired in exchange for rental payments from other token holders. This can be done with IOTA tokens or cash (as with Amazon Cloud Credits).
  • Value transaction processing: A node can process payments in exchange for the Mana pledged in those payments (tokens).

Summary of Key Points:

  • The only way to gain Mana is to convince a token holder to pledge it to you. In this sense, Mana is a delegated proof of token ownership.
  • Those who hold IOTA tokens are entitled to a portion of network resources, regardless of their value. This is very important for safety-critical industrial and real-time applications whose information must pass through the Tangle in a timely manner.
  • Renting (Mana-as-a-Service): Mana can be purchased in exchange for rental payments from other token holders. This can be done with IOTA tokens or cash (as with Amazon Cloud Credits).
  • There are currently two separate types of Mana. These are called access Mana and consensus Mana. While access Mana can be lent / leased, there is no reason to do so for consensus Mana.
  • Value transactions always bring their own Mana for processing by the nodes, so there are generally no restrictions here.
  • It will still be possible to send data transactions without Mana. Mana will only be used in times of congestion to give more priority to nodes that have more Mana to ensure a minimum guaranteed bandwidth in the infrastructure. Mana will not be a requirement to send transactions for a long time, because currently even systems with FPGAs cannot spam that many TPSs to push the network to the edge of its processing capabilities. In the future, Sharding will also significantly increase network capacity and solve the problem of theoretically possible congestion.
  • For security in business use cases, suggestions have been made (transactions despite congestion) to run your own nodes, hold the token and also use it.
  • Those who do not own their own node and IOTA tokens may have to pay to use other people’s nodes if the network is busy and many transactions are to be made in a short time.
  • Those who own IOTA tokens can rent out Mana and generate a kind of passive income.
  • If a company does not want to have anything to do with cryptocurrencies, Mana can also be purchased with cash from a service provider.

Other applications that require the IOTA token:

Digital assets

Digital assets (Colored Coins) are tokens for specific purposes, which can represent real world assets on the basis of IOTA (on Top) in a tamper-proof way. Basically they remain “normal” IOTA tokens but in a certain context or in a specially created app they can mean different things and may have a higher value.

> Without the IOTA token there are no digital assets.

Digital assets can only be based on value objects (smallest unit = 1 i) because you cannot own message objects. For a possible conversion, an existing regular IOTA token (1 i) would get an additional identification (transaction hash / hash ID) when sent by the creator, which identifies it as a token with a special meaning (asset).

Smart Contracts

IOTA Smart Contracts (SC) use the logic of UTXO-Digital Asset. To create a SC 1 new Digital Asset has to be created and sent to the address of the SC. This sending transaction becomes the origin transaction (Genesis) of the SC. No additional fees or similar will be charged for this process. This created Digital Asset, which represents the SC will remain at the address of the SC for the duration of the SC so it is property of the SC.

To send a request to the SC, 1 Digital Asset must also be created in this request transaction and sent to the address of the SC. This request coin is always sent to the SC and remains the property of the SC (at its address). This only temporary Digital Asset will be converted back into the original IOTA token when the request is processed (settled, confirmed) and remains in the SC. Since the original transaction usually includes an initialization request to create a SC at least 2 IOTA Tokens are required to create a SC.

> Without the IOTA-Token or Digital Asset there will be no Smart Contracts.

Fees are necessary. They are an incentive to induce nodes to execute the SC code. With this solution, the entire network is not forced to execute every SC code (as with ETH). Instead only a relatively small group of nodes is specifically selected to execute a certain SC and, if necessary, rewarded accordingly.

However, if there are other incentives to execute the SC code a fee is not required. An already sufficient incentive could for example be the registration of the SC state changes on the Tangle itself. An example would be the aggregation of Oracle raw data for further processing. Another example would be if a consortium of competing actors wants to have an honest audit trail that none of them can influence. Their incentive to perform a SC would be to keep an eye on everyone else.

Micro payments

The absence of miners makes IOTA transactions completely charge-free transactions. Send 1 MIOTA = receive 1 MIOTA . This enables real micro payments for the machine-to-machine economy so that payment for small quantities or consumption-based payments can be implemented.

> No micro payments without the IOTA token.

Accounting

In discussions, there was always the suggestion that you could combine individual micro-transactions and then pay monthly, for example as with a subscription. If one would try this as a company it would require the creation of an accounting system that is able to handle millions of data-Tx.

These need to be…

  1. evaluated (because they can all have completely different prices).
  2. assigned (thousands of data tx would have to be assigned to the respective user).
  3. calculated (for each user a final invoice would have to be made and possibly be charged with their data-tex if you are a user yourself).
  4. check (that the payments have actually been made).

That would result in…

  1. an immense staff body
  2. a high risk of errors
  3. a high demand for IT and office equipment for the personnel in question
  4. thus high and hardly calculable costs.

Conclusion: Completely unnecessary effort of resources and personnel, which the protocol provides free of charge and fully automated with the help of IOTA Smart Contracts, IOTA streams etc.

Btw.: All companies have to document and tax value transactions. So all data transactions have to be recorded in blockchains for accounting purposes. With IOTA, not only the fees for data transactions are eliminated but also the associated accounting including Tx storage (up to 10 years) for the majority of all transactions.

Chain of events

Only with a system in which data transactions can be linked directly to value transactions the complete event chain of the data trade can be correctly traced. The IOTA token reflects the (potential) value generated by the data transaction. Therefore, it would make no sense at all if only the IOTA data transactions were used but the payment of this data takes place outside the IOTA protocol.

Payment in the same system is very advantageous for all parties involved, for example, if it is done in a digital decentralized marketplace. Let’s take a look at the current process for placing an order. As a rule, an order always starts a series of events that are based on each other. This could look like this: Order > Verification > Confirmation > Payment > Check receipt of payment > Processing and shipping. This process can of course be solved individually or partially automated but basically this chain of events is always the same.

The IOTA technology with the digital marketplaces enables a free, secure and trustless linking of unknown business partners. The technology offers a very cost effective or even free possibility to link the chain of events of an order in a single system at the correct time. If one were to outsource individual events, e.g. external payment without IOTA, it would be an additional effort to enter this individual event back into the event chain of the marketplace at the correct time. This would cause additional costs compared to the pure IOTA solution and the IOTA solution would therefore have competitive advantages.

Cross-country and cross-company exchange medium

If you want to map cross-country and cross-company processes, trade or logistics between machines these transactions can take place without much delay and without having to agree on a trading currency etc. The only requirement is that machines have direct access to a stock exchange either directly or via a financial service provider to make conversions. This could be, for example, the house bank of a company, which keeps the Fiat accounts anyway. If the bank charges a small margin for this autonomous conversion job this is absolutely legitimate. A machine could autonomously submit a conversion order to the bank at any time and then have its IOTA tokens available to send them across the national border. In this case, the higher volatility is completely neglected and a machine would not have to keep tokens in its wallet permanently.

> IOTA is an open, free of charge, not centralized and ultra-fast clearing system!

BTC

For years, the BTC experts have been saying that you can pay for everything with BTC. Among other things, this would bring all the disadvantages of BTC into decentralized trading such as incalculable transaction costs, long confirmation times, inaccurate timestamps and high energy costs. The IOTA token, which is firmly integrated into the protocol, was created to eliminate all these shortcomings and to enable real micro-transactions between machines. In addition, a BTC timestamp with an accuracy of 2 hours is completely unsuitable for the machine economy where transactions may occur every second. For example, the payment at an e-charging station could be done via IOTA Streams. For this purpose, a private IOTA Streams channel is opened between the vehicle and the e-charging point to establish a data stream. Payment is made per data point in micro transactions and payment stops as soon as no more power is received. This does not work with an external coin like BTC.

Sources:

https://medium.com/coinmonks/the-value-of-zero-1ff17a4b733f

Original source

https://iota-einsteiger-guide.de/wird-der-token-benoetigt.html

Last Updated on 16. February 2021