The Economic Model of IOTA

I’ll try to explain the token economics of IOTA and why it will have real tangible and intrinsic value.

First, we have to understand that any currency is valuable only because others believe it’s valuable. It’s true for the dollar, Bitcoin, gold and any other storehold of wealth/medium of exchange that doesn’t provide a good or service. You can buy food with your dollars because the merchant accepts it, knowing that someone else will accept it too. He will be able to convert it at a stable rate for something else he wants. But are the holders of the dollar entitled to anything? No! The same is true for Bitcoin and gold. The point of this post is not to diminish the value of Bitcoin nor gold nor any other cryptocurrency. I too believe that they have better characteristics than the dollar or any other fiat currency, which is easily inflated.

The point of this post is to make a comparison between these currencies and IOTA. IOTA too is a currency and its value is derived from other people believing in it, but there is one key difference. When you hold Bitcoin you do not have any claim on the networks resources. When you hold IOTA, you do! Regardless of its value denominated in dollars, Bitcoin or any other currency, you will have access to a part of the networks resources! The best part is, it’s free! There are no miners, no stakers that charge a fee for processing your transactions. Transacting is free because it’s in the interest of all its participants to exchange value in a feeless, permissionless, secure, scalable and decentralized way. I’m not going to get into the technical implementations of IOTA and how all of this will be enabled. I most probably will in a future post. But all of this comes at a cost. It creates a scarce resource in IOTA by design. That scarce resource is TPS (transactions per second). It is obvious that only a limited amount of transaction can get appended to the Tangle at any one point in time. When transacting is free, everyone will want their transaction to go through. How do you pick the transactions that are added to the Tangle from the ones that will have to wait? By wait, I mean that they will be added to the tangle, but not immediately, rather in the future when they get their turn. In IOTA a concept called MANA is used to distinguish these transactions. I’ll explain the technical details about mana and how it works in a future post when I cover the technology behind IOTA. Simply for now, mana is a reputation system given to nodes for providing a good service and being honest. But who gets to allocate the mana to the nodes? The token holders do! IOTA tokens generate mana overtime and at the same time mana decays. There is a constant amount of mana as there is a constant amount of IOTA tokens (no inflation). A node with high mana will be able to issue more transaction than a node with low mana. So simply said, you will be guaranteed to issue transactions proportional to the overall mana you hold in the network.

For an example, let’s say you hold 10% of the mana (that’s a lot) and there are 1000 TPS. You will be guaranteed to have the right to issue 100 transactions every second.

If you don’t have mana and the network is congested you won’t be able to issue transactions and you’ll have to wait.

Here lies the economic model that is unique to IOTA in comparison to other cryptocurrencies.
You as a token holder, will have the ability to “rent” out your mana if you’re not using it. Someone else who wants to issue transaction, but doesn’t own IOTA tokens (or doesn’t have enough for his needs) will pay you so they can use your portion of the network resources instead of you for some period of time. The mana you rent them will decay over time and your tokens will regenerate that mana. If they still need access to the network they’ll have to rent mana again or simply buy the tokens. As long as you hold the tokens, you’ll generate mana which you can rent out and get compensated in return. This approach is similar to staking in PoS (Proof of Stake), but the difference here is that returns are real returns and in PoS the rewards are paid out by inflation (some portion may or may not come from fees, but the largest portion is from block rewards — inflation). That is the illusion of yield. You get paid by minting new tokens and increasing the overall supply (some projects claim they have deflation by burning more than they mint). In the long run people who just hold those tokens get diluted over time in the same way they get diluted by holding the dollars overtime (purchasing power of $1 is less as time passes). In IOTA this is not the case. There is no inflation 1 IOTA today will be the same % of the overall IOTA in circulation tomorrow, a year from now and hopefully a decade and so on.. People who don’t rent their mana will know that they won’t be diluted. People who rent their mana will have real returns. By real returns I mean your IOTA denominated balance will go up in proportion to the overall IOTA in circulation.

How does this work? Same way like everything in life. When a company needs office space they have 2 options. They can either buy it or rent it. Same is true in IOTA with mana. If someone wants to use the tangle but doesn’t want to own the tokens, they’ll rent mana from people who own them in the same way someone rents real estate from a landlord. People often confuse this as a fee. It is NOT a fee. It’s an allocation mechanism where people who contribute to the network by owning tokens and/or running nodes get priority over the network resources (TPS). This shouldn’t worry regular users because they most likely own tokens and thus have a share of the resources and they don’t need constantly hundreds of transactions per second. They most probably send a few transactions now and then and those transaction will remain free and won’t be delayed. This is meant for entities that will utilize IOTA in their use-cases. They’ll need a constant throughput of transactions without delay. Think of it as bandwidth which you pay every month to your internet service provider. They’ll pay token holders in the same analogy or they themselves will buy tokens and become token holders. If they do, they’ll have constant access to the tangle for free as long as they hold their tokens. So they don’t pay any fees. They’ll have the same amount of tokens and they can always sell them at wish. Of course not everyone can afford to buy enough tokens for their use-case or simply doesn’t want to for other reasons (regulatory, opportunity cost, uncertainty …) but in that case they can rent!

How is this different than paying a transaction fee in traditional blockchains?

In traditional blockchain you have to pay a fee regardless if you hold tokens or not. It’s a permanent fee and you don’t get it back. Here you have the option to own tokens and thus having a portion of the networks TPS for free, forever. Even if you take the approach of not owning tokens and renting access you’ll have fixed expenses and a reliable throughput.
In traditional blockchain you can even own tokens and not know your operational cost, because fees are dynamic. Transactions compete for the limited block space and bid. The highest bid wins, so the operational cost can’t be known in advance. In IOTA you either have 0 operational cost or you know exactly your expenses.

Is seems that you have to pay in some form to use the tangle (buying tokens/renting mana)?

No! You can earn mana without holding tokens and/or renting them from other token holders, by running a public node and being an honest participant, which other token holders will use to issue and verify transactions. You’ll gain mana and thus you will be abele to issue transactions for free without holding tokens and/or renting them from others. Also, if the network is not congested you may even get the chance to use it without holding tokens, renting mana, running a public node, but in that case you’re not guaranteed access because access is guaranteed to participants who contribute.

This is my first post I’ve ever written!
Hope you like it!
Luka