Blockchain design is evolving to power the new 'economy of things'

Just as there's an array of protocols appearing to connect IoT devices, so will there be blockchains designed to facilitate transactions in the machine to machine economy.

Estimates vary but we can expect to see tens of billions of connected devices within the next five years or so. There are many questions and challenges; how much data will these devices create and who owns it, how to know your machine (KYM), and who will handle transactions and profit from them.

Tom Fuerstner, founder of Riddle&Code which has created a tagging and token system that acts like micro Blockchain processor, said: "Electronic devices and algorithms and bots and protocols are new stakeholders in the society process, so we have to have contracts with them. This must be defined."

Riddle&Code has developed a system that goes beyond simply anchoring on a blockchain to prove existence or provenance. This focus has informed a new understanding of identity, which can be applied to the IoT space, and can be called know your machine (KYM).

"IoT is very problematic because it creates so much data and the people who use the IoT don't own the data. They don't even have access most of the time to the aggregated data. They go into the cloud or they go to a service and so on. You don't know who is dealing with your IoT. So we need some kind of, let's say, Roman Law next version for the relationship between humans and things, between humans and smart things."

The Riddle&Code solution uses NFC technology combined with a "crypto-chip" to define who is allowed to read transferred data. Fuerstner said: "All of the protocols have one big issue; this is the initial key exchange between interconnected IoT devices. The moment of exchange of key is most of the time not secure, or even if you use something like Diffie–Hellman, you have a moment where a master key has to be written to the devices, or be sent to the devices.

"This is something we can end right away because when you produce the device, you use our tech and the security is already written into it, and we can pre-configure it. We can use NFC pairing to exchange secret keys to connect and disconnect the system.

"So when you bring in a new component, you just have to hold them together. They exchange by NFC their data, and the pairing has happened in a way which is quite uncompromisable."

"If you take this data and you send them a centreless service, and they are there encrypted, only you with your token, which belongs by contract to a specific group of devices, can define who has access to this data or who can read this data, or who can do a value-added operational services on this data."

Another interesting and completely new approach to the blockchain comes from IOTA which introduces 'Tangle', a blockless distributed ledger that makes it possible to transfer value without any fees. Unlike traditional blockchain design, consensus is no-longer decoupled but instead an intrinsic part of the system, a decentralised peer-to-peer network better suited to a world of micro/nano-transactions.

David Sønstebø, founder IOTA, said: "Whereas in the now 'old' blockchain approach you have blocks that is confirmed by miners/stakers, which require compensation for their confirmation work, in IOTA the users are the verifiers, so when a user sends a transaction he also verifies two previous transactions of other users.

"This means that there is no need to compensate this person for his verification work, because the incentive to verify previous transactions is to be able to use the network yourself. So in brief IOTA is a completely decentralised and self-sustaining ledger.

Sønstebø said the Tangle scales a lot better than regular blockchains and is also suited to areas with unstable or scarce infrastructure. He pointed out that cloud services really just huge data centers whose locations are usually determined by where electricity is cheap enough to run their racks of machines. Then they find their way to our computers via the vast network of fiber-optic and copper wires dug down into the ground to reach our routers.

"Clouds only exist at the center of the network. Additionally due to the laws of physics there are very real delays that occur along these long stretches from the datacenter to the machines, not to mention congestion of the network."

Sønstebø proposes a "fog/mist" of smaller datacenters/smartgrids/network gateways distributed everywhere to provide bandwidth, storage, analytics, electricity in close vicinity to the devices themselves, sometimes even embed within them.

"For this to work there needs to be a trustless way for these devices to trade with each other; which is where IOTA's Tangle shines with its lightweight, modular and flexible architecture and zero fees.

"These aspects pave the way for what we call 'Economy of Things' or 'Machine Economy' which will largely take place at this edge of the network, where transaction sizes are generally too small for prohibitive fees to be part of the equation.

"As IoT keep expanding, limitations and bottlenecks are becoming very evident and we believe the best way to solve it is to enable mutually beneficial collaboration between the different parties in IoT," he said.

He said there is currently little incentive for devices of different companies to share their technological resources such as electricity, data, bandwidth, storage, and computational power, as there has been no way for machines to represent the value and exchange it in a trustless fashion.

"IOTA enables true on-demand type machine to machine transactions in the edge/fog of the network. So now for instance suddenly a solar panel can sell its electricity to a Fog computational station that is selling its analytics services to sensor owners, creating a brand new Economy-of-Things.

"Now that the fees are gone and the technology to operate in this edge exists, I believe we will see completely new business to business models specialising in micro-transactions," said Sønstebø.