IOTA Microtransactions Explained
Last Updated: 30th October 2018
A microtransaction, in the context of digital currencies, refers to any transaction that is relatively small in value; transactional value which can be as low as sending a penny. Consequently, an IOTA microtransaction is simply a low value transaction conducted on IOTA’s network, the Tangle.
Example use case of microtransactions include:
- In-game purchases
- Payment for an article read on a website
- Cup of a coffee
Because of the typically small amounts that are inherent to microtransactions, a microtransaction cannot successfully be conducted on a blockchain-based protocol because of transaction fees. Transaction fees prevent low value transactions from being executed because often, the transaction fee may exceed the value of the product or service being purchased.
For example, as of this writing, the average transaction fee on the Bitcoin network, a blockchain-based protocol, is $1.64. Therefore, the economics of paying a transaction fee of $1.64 for a $5 cup of coffee or $0.50 for an article, cannot be reconciled, thus, making microtransactions a non-starter on blockchain-based protocols.
Conversely, transaction fees are absent from the IOTA protocol because of how its underlying architecture, the Tangle, operates.
Blockchain protocols employ two incentive methods in order to make it economically worthwhile for a miner to participate in their eco-system. First, is the reward of that blockchain’s digital asset, also known as a block reward, which can then be sold. Second, upon exhaustion of that blockchain’s block rewards, transaction fees, remain the only mechanism for incentivizing a miner to participate in a blockchain’s eco-system.
Therefore, the lack of transaction fees on the Tangle network can largely be attributed to the following reasons:
- A change in transaction validation methodology
- Genesis transaction
Transaction validation methodoloy – As opposed to blockchain-based technologies which require a miner to validate a set of transactions, and thus be compensated for it in the form of a block reward and a transaction fee, the Tangle protocol requires transaction issuers to first validate two previous transactions before their own transaction can successfully be issued. Therefore, transaction issuers themselves become the miners which consequently eliminates the payment of any transaction fees.
Genesis Transaction – The genesis transaction is the first transaction conducted on the Tangle protocol and has the function of distributing all the IOTAs that is to ever exist on the network. The genesis transaction on the Tangle network is akin to the genesis block in a blockchain-based protocol. Because all the IOTAs have been distributed in the genesis transaction, and thus, do not need to be mined, as is the case with blockchain-based protocols, the possibility of a block reward is eliminated. Therefore, a key incentive no longer exists for miners to perform validation services, and thus, receive transaction fees upon the exhaustion of block rewards.
As a result of the reasons mentioned above, miners are eliminated because there no longer exists any incentive to participate in IOTA’s eco-system in that capacity. Microtransactions are therefore feasible because the economics of paying $0 in transactions fees for a $5 cup of coffee can successfully be reconciled.
To conclude, microtransactions on the IOTA protocol are low value transactions made possible due to the elimination of transaction fees. The elimination of transactions fees on the Tangle network can largely be attributed to a change in transaction validation methodology and the implementation of a genesis transaction. Consequently, two key miner incentives of a block reward and a transaction fee no longer exist.