IOTA: Rebased for Decentralization and Programmability

Introduction

IOTA is the self-described “next generation data and value exchange”—a distributed ledger helping build the “Internet of Everything.” The IOTA network has no blocks, miners, or fees so that users can enjoy fee-less transactions and tamper-proof data transfers.

It has been approximately nine years since IOTA was launched to become the trusted infrastructure to digitize the global economy, build a better blockchain without miners, and end wasteful energy consumption and exorbitant fees. Since its inception, IOTA has been driven by a vision to create a connected world without digital barriers, empowering everyone to participate in and benefit from the global economy.

This article will cover IOTA’s main features, such as “The Tangle,” what makes IOTA unique, and its journey towards decentralization and programmability. It will conclude with its exciting new Rebased proposal.

IOTA and Distributed Ledger Technology

IOTA is a distributed ledger technology (DLT) that empowers individuals to control their private data, run tamper-proof programs, and engage in asset ownership and trading without intermediaries.

DLTs maintain a ledger of token ownership across multiple independent nodes and require consensus across the network to agree on the ledger's state. IOTA’s network has demonstrated resilience against attacks. However, its unique approach is what sets it apart from other protocols.

From the start, IOTA’s mission has been to research new alternatives instead of iterating on the only available existing flawed concepts of the day. Built on a scalable parallelized ledger, IOTA’s commitment to real-world adoption projects differentiates it from other Layer 1s. When a user sends a transaction on IOTA, they validate two different transactions, which allows IOTA to overcome the cost and scalability issues associated with blockchain technology. It further distinguishes itself from traditional cryptocurrencies by requiring no fees for transaction processing.

$IOTA Token

The $IOTA token is the medium of value on the mainnet. As mentioned, there are no fees with the base token, so $IOTA tokens are transferred 1-to-1 without intermediaries (miners or validators) taking a cut. In other words, the amount deducted from the sender's wallet is the same as the amount added to the recipient’s. Whether a user sends a penny or a million dollars, what is sent is what’s received without the sender having to calculate fees.

Furthermore, IOTA transactions are fast. Finality on a blockchain is the point when a transaction becomes irreversible. To reach finality on IOTA, the block containing the transaction must first be confirmed by a super-majority of the validator committee (blocks that remain unconfirmed are later removed). The transaction confirmation process takes a couple of seconds, whereas reaching the last step of finality takes about a minute.

IOTA Foundation

The IOTA Foundation is a non-profit organization based in Germany, Switzerland, and the UAE. It ensures that the protocol continuously evolves through further research and development efforts. The Foundation has been instrumental in realizing IOTA’s vision by becoming a trusted partner for governments and other institutions desiring to partner with the protocol.

It is composed of a 140-person team. The IOTA Foundation is also one of the most experienced and academically respected research and development organizations, helping to advance both the theoretical and practical aspects of blockchain protocols.

IOTA has worked closely with governments, large enterprises, and other institutions on new blockchain-based applications fueling novel use cases across various industries such as trade, logistics, energy, and finance. Some use cases have evolved into products and ecosystems poised to bring millions of users, transactions, and tokenized assets to the IOTA mainnet.

Unsurprisingly, industry and government partners choose to work with IOTA because of their technical innovations and the Foundation’s long-standing reputation as a trustworthy R&D organization.

IOTA and the Tangle

The Tangle is IOTA's network. It is a scalable distributed ledger designed to support frictionless value and data transfer. The Tangle records the exchange of data and value in an immutable fashion, ensuring its trustworthiness. It is a structure where new transactions validate previous ones.

This structure contrasts with the typical. In blockchain-based systems, transactions are usually grouped into blocks and linked, creating a natural bottleneck. However, IOTA bypasses limiting bottlenecks by utilizing the Tangle, which allows for a more efficient and scalable network while eliminating the need for centralized validation.

Directed Acyclic Graph

The Tangle forms a Directed Acyclic Graph (DAG) structure of blocks, which is a replicated data structure across a network of nodes. It allows user’s transactions to be added in parallel. The Tangle eliminates intermediaries and offers a highly performant ledger and consensus solution. Its low resource requirements are designed for devices to participate in a low-energy network.

Public Networks on IOTA

IOTA consists of two main public networks: IOTA Mainnet and Shimmer.

1. IOTA Mainnet

The IOTA Mainnet is the production-level network that manages $IOTA tokens and runs the Stardust protocol version.

2. Shimmer

This is the staging network for testing and deploying the protocol’s latest updates. The Shimmer network is where developers can validate improvements and new features before implementing them on the IOTA mainnet.

The Shimmer Network and SMR

Shimmer is the production-grade staging network where new changes are introduced and evaluated before going to the IOTA mainnet. Shimmer runs the Stardust protocol version to enable tokenization. The Shimmer EVM also runs on the Shimmer network. It is a Layer-2 solution that provides smart contract programming on top of the Layer 1.

Unlike other staging networks, Shimmer has a token called SMR. The SMR token is traded on major exchanges, giving the network real monetary value, which is beneficial for testing upcoming protocol changes.

SMR is similar to the $IOTA token in that it also acts as a medium for value exchange. Further, it has no inflation, nor is it subject to any fees. However, SMR is only distributed to those who stake $IOTA tokens on the mainnet during the Shimmer staking periods.

IOTA’s Path to Decentralization

With the introduction of the Tangle in 2015 (the first DAG-based distributed ledger protocol), challenging research and engineering efforts began to define a new protocol that would be completely decentralized, fee-less for token holders, and offer a leaderless consensus mechanism for those desiring to participate in validating the network.

IOTA’s path to becoming decentralized involved removing the "Coordinator," a central node that assisted in validating transactions. In 2023, with the Stardust protocol upgrade, a distributed validator committee replaced the Coordinator.

IOTA’s Journey to Programmability

As important as decentralization is, it doesn’t automatically enable adoption—that is the role of programmability. That is why IOTA started prioritizing programmability in 2021. In 2022, IOTA also created an internal team to assess the technical feasibility of integrating smart contracts into the Layer 1.

By deploying an EVM, IOTA could begin to compete in Web3, bootstrapping an ecosystem of new dApps, liquidity, and users on IOTA. Without Layer-1 smart contracts, IOTA’s utility and usage would be limited to token transfers. Thus, value creation would mainly be enabled through the ledger’s programmability, offering new use cases, applications, and utility.

This initial work concluded in February 2023 with deliverables such as recommendations and different options on how to proceed. However, the official launch of the IOTA EVM in May 2024 successfully concluded the integration of EVM-based smart contracts.

IOTA 2.0

The IOTA team has worked for years on the protocol, publishing numerous research documents in the process. The team wrote the node software from scratch, and after several iterations, they delivered a fully functional IOTA 2.0 testnet in April 2024.

IOTA 2.0 realized its goal of creating a fully decentralized protocol by removing the Coordinator and creating a leaderless consensus protocol. However, the work didn’t stop there. IOTA 2.0 only signaled an intermediate step to bigger things to come.

Enter the Move Virtual Machine

Today’s blockchain users don’t focus much on the underlying infrastructure; they just want it to work. With much of the technological building blocks having become commoditized, smaller transaction fees, faster confirmation times, and greater decentralization have become negligible differences for the end user.

Creating novel technologies isn’t a standalone solution for projects to differentiate themselves and succeed. Building ecosystems and applications that drive utility and greater adoption is essential.

Thus, when assessing the options, IOTA derived great inspiration from Sui. With significant investment by Meta, Sui has delivered one of the most promising new smart contract paradigms with the Move programming language. After considering its features, architecture, safety, and future potential, the Move Virtual Machine (MoveVM) emerged as the most applicable solution for IOTA’s DAG ledger.

Considering the various similarities between the protocols, the team concluded that the Sui team’s MoveVM was the most promising for IOTA, so they decided to join the Move ecosystem and advance its adoption in Web3.

Becoming Part of the Move Ecosystem

After the internal recommendation, the team worked on porting the Sui MoveVM to IOTA, which helped them better understand the protocol's intricacies. The work concluded in December 2023 when the team completed a functional prototype.

The smart contract team also began working with the IOTA 2.0 core team on the requirements for bringing MoveVM to the IOTA 2.0 protocol. The initial assessment claimed that, while technically feasible, the implementation would require a multi-year effort to guarantee a safe protocol going to the mainnet.

More importantly, this path would require two consecutive breaking protocol changes: first, for IOTA 2.0, and second, for the Layer-1 Move upgrade. Such frequent breaking updates would prove to be a major obstacle to IOTA's growth of its ecosystem and goals for real-world adoption.

So, instead of undergoing a multi-year effort to adapt MoveVM to IOTA 2.0, the team chose to rebase the Layer 1 to maintain IOTA’s vision and accelerate adoption. In other words, instead of spending several years to deliver on its promise, IOTA decided to deliver a scalable and programmable network in a drastically shortened time frame.

Choosing IOTA Rebased

The IOTA Foundation wants to accelerate IOTA’s adoption by rebasing the Layer 1 on its new protocol, “IOTA Rebased.” It only recently proposed IOTA Rebased, which is a major shift away from its plans for IOTA 2.0 to leverage its established DLT technology. The rebase would adopt the MoveVM and transition IOTA from a UTXO to an object-based ledger model for enhanced programmability.

IOTA Rebased will have Move-based smart contracts on the Layer 1, introducing a new application paradigm.

Introducing IOTA Rebased

The proposal to rebase the Layer 1 introduces full decentralization, Layer-1 programmability with MoveVM and EVM support, $IOTA staking, and faster transaction per second (TPS) scalability.

This upgrade promises a quicker path to a new mainnet than what the IOTA 2.0 plan could deliver. While the outcome still depends on a governance vote to decide whether to adopt this protocol or continue with the current network, the community appears to be in agreement. Once approved, the new mainnet would launch after passing the testnet phase and security audits, unlocking advanced programmability to accelerate ecosystem growth and better meet industry demands.

[Governance] 🗳️ The counting phase is ongoing. Currently, 98% of voters support the #IOTA Rebased Proposal on adopting a new L1 protocol that introduces Move-based #SmartContracts. You still have until Dec 17th to vote, head over here to find out how: https://t.co/5tby6mWFfb pic.twitter.com/uEUVf6i5St

— IOTA (@iota) December 11, 2024

IOTA Rebased combines the best tried-and-true tested innovations in DLT. The ledger would be an object-based DAG that runs on a Delegated Proof of Stake (DPoS) consensus algorithm called “Mysticeti.” It will also offer better, more sustainable tokenomics to guarantee a long-term viable economic model.

While this protocol will have fees, they are decreased to a negligible level, which users can recoup through staking and other yield opportunities. Key features include a fee-burning mechanism similar to Ethereum and staking rewards for network validators and delegators.

Reduced Time to Market

IOTA Rebased significantly shortens “time to market” to introduce full decentralization and programmability to IOTA. The Foundation believes this direction can help IOTA create significant value for its ecosystem and token holders. It helps them leap forward and focus on what matters most—growing adoption and increasing token utility.

With IOTA Rebased, the team leverages its unique relationships with global enterprises, governments, and regulators and ten years of experience operating and building in the blockchain marketplace. It allows the opportunity to scale up adoption efforts and support the ecosystem in building a new wave of applications to drive more value to IOTA.

What’s Possible with IOTA Rebased

Below are some examples of what’s possible with IOTA Rebased:

Digitizing the transport of goods and taking the next steps to tokenize physical and financial assets (like invoices) to create a trade finance ecosystem on IOTA is an example of how to unlock huge opportunities for commercial traders while bringing real assets and value on-chain to IOTA.

IOTA is also working with Realize to tokenize yield-bearing assets and make them accessible to any global investor. While building a tokenized assets marketplace on the EVM is already possible, the Realize team wants to build a DEX. This fully decentralized on-chain order book requires the IOTA Layer 1 to perform several thousand TPS and be fully programmable.

Additionally, the team is tokenizing Digital Product Passports with NFTs. These passports will be used as certificates, proof of origin, and collateral for collateral-backed lending platforms. But this undertaking requires Layer-1 programmability.

Furthermore, IOTA is working to onboard stablecoins that are minted natively on its network. This also requires programmability on the Layer 1 so that stablecoin operators can mint and burn them.

Introducing staking will support the creation of Liquid Staking Tokens (LSTs). LSTs will further fuel ecosystem growth by allowing $IOTA tokens to secure the Layer-1 network and use them as collateral within DeFi.

It’s obvious from the above examples to see why IOTA is pushing so hard for a Layer-1 programmability.

The Shimmer Network

IOTA Rebased reduces Shimmer’s role as a staging network to redundancy. Moreover, the proposal allows Shimmer to differentiate itself from IOTA and take a more unique role in the ecosystem. Once IOTA Rebased is approved, the Shimmer network will no longer operate as a staging network.

Further Improvements

IOTA Rebased would also allow the IOTA Foundation to introduce significant new features and improvements later. Many of the lessons learned from building IOTA 2.0 will be applied to the new protocol. The team is already working on subsequent improvements that will further set IOTA apart in the Web3 ecosystem. These enhancements include:

1. Consensus Mechanism

An improved consensus algorithm that delivers enhanced security and efficiency is on the table. The IOTA Layer-1 DAG is decentralized through a DPOS consensus mechanism with 150 validator slots. Switching to the Mysticeti protocol for consensus to achieve low latency, upwards of 50k+ TPS, and less than sub-second finality is another game changer.

2. Fees

An introduction of local fee markets to help optimize network economics and UX—very low transaction fees with a fee-burn mechanism that leads to a flexible supply.

3. Sponsored Transactions

These transactions allow application operators to offer fee-less transactions to their users. Sponsored transactions abstract away transaction fees (possibly to the point of becoming fee-less) to significantly improve UX.

4. Gas Fee Calculations

A reimagined approach to gas fee calculations to provide more fair and predictable transaction costs is in order.

5. Validators

An enhanced validator committee selection algorithm will help further decentralize the network.

6. Multi-VM

Supporting the EVM (and possibly other VMs) natively on the Layer-1 will help transition to a multi-VM ledger. By combining the EVM and the MoveVM, IOTA would empower builders to create entirely new applications. Programmability on Layer 1 opens the potential for limitless new applications that introduce new utilities such as ZK verification.

7. Staking

Token holders can earn staking rewards in $IOTA through staking and delegation. Staking rewards would yield 10-15% APY based on an initial target inflation of 6-7% annually.

IOTA Rebased Conclusion

To sum up, IOTA is proposing to rebase the Layer 1 to make it the best network for users and builders immediately instead of piling into a multi-year effort to adapt IOTA 2.0 to MoveVM. IOTA Rebased would quickly alter the Layer 1 and deliver decentralization and Move-based Layer 1 smart contracts.

IOTA Rebased has already been launched on testnet to let the community try it out. After adequate testing, IOTA Rebased can go directly to the mainnet.

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