A COTI Solution for IoT Payments

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COTI

5 min readMay 18, 2020

We have recently received an enquiry from a big client asking for our help with resolving an issue he came across with IoT payments. We have investigated this matter, and in this article we offer as our solution.

Today, more than ever before, we understand the importance of an Internet of Things (IoT) economy that is unbound by a third party. As IoT payment systems are growing and evolving, there is a push to reduce the amount of actors participating in each exchange and by that strengthen the security of those transactions. Blockchain, a decentralized Distributed Ledger Technology (DLT), does exactly that. In this article we will explore the Blockchain solution for IoT and its shortcomings, and will present how COTI resolves them.

What is IoT?

The Internet of Things is the network of intelligent things within which a software or a micro-sensor is embedded. With Internet connectivity, those devices perform transactions of monetary exchange for services and gather information. Since the IoT often does not require a Peer-to-Peer (P2P) or Machine-to-Peer (M2P) interaction, transactions can be performed faster. Amazon has recently opened their AmazonGo convenience stores, a shopping experience that is entirely IoT. After consumers scan the AmazonGo app on their smartphones to enter the store, the rest of the shopping experience is completely IoT. They simply pick up anything they wish to purchase and leave. Little to no P2P or M2P interaction is needed, the IoT sensors know precisely what each consumer picked up off the shelf and left with. The receipt is sent straight to the consumer’s smart device within seconds.

The Shortcomings Of the Current IoT Systems

One of the primary issues of contention with IoT environments are the business aspects of IoT: the exchange of monetary rewards for services . The lack of clarity about this matter had hindered to some extent the growth of the IoT, therefore, the platforms and protocols concerning the business aspect of IoT ought to be defined comprehensibly.

Traditional E-Business models have relied on a trusted third party, such as a bank, to act as an intermediary during transactions. This has limited the IoT’s ability to take advantage of M2M, P2P, and even M2P transactions. For business processes to be effective for IoT, they must adapt like physical objects and people and be able to integrate into IoT’s information network.

One way to overcome this issue is the use of Blockchain technologies. These technologies have a distributive nature that allow true P2P transactions without third party facilitation. Blockchains are also helpful with resolving other issues caused by third parties in IoT financial transactions, like the lack of confidentiality and other security risks. Users simply do not want their transaction history stored on hundreds of devices, particularly if it is linked to their bank account.

Fortunately, Blockchains have the ability to maintain a certain level of anonymity and allow secure and immutable transactions. The immutability of these transactions is ensured by the PoWs that protect the blocks, making it impossible to reverse the transaction history. Furthermore, these transactions are secure also since most blockchains have algorithms in place to ensure that false blocks are left unconfirmed and are rejected by the network.

Some blockchains are also capable of micropayments, which is essential for IoT because in the IoT economy, devices constantly request services, often in the form of data, from other devices. In exchange for these services, the device will require some form of payment: a payment that is small, metered, and anonymous.

Another problem with the IoT’s use of third party institutions is that it results in increased transaction fees — a very unwanted consequence of micropayments — that sometimes could be higher than the transferred amount. These fees were created by the need to reward miners for their efforts, but unfortunately, because many cryptocurrencies allow these fees to be market-based, they can become quite expensive.

Yet another one of the most problematic issues for many blockchains is transaction times. Bitcoin, which has a fixed time of ten minutes for creating new blocks, supports about 7 transactions-per-second (tps) and has been proven to perform poorly in times of high traffic. Ethereum, on the other hand, has a theoretical transaction time of 12 seconds. However, transaction times are also largely dependent on the network’s congestion levels. These cases of long transaction times can be problematic in an IoT payment system where many micro-transactions need to be completed within seconds. Related to the issue of transaction times is network scalability, for each ledger modiﬁcation is broadcasted to the global blockchain network, the network becomes unnecessarily clogged with broadcast messages and overwhelmed at times of high traffic. Network performance degrades as the number of transactions increases. Evidently, by comparing the transaction rate of Bitcoin (7 tps) to that of Visa (around 60,000 tps), it is clear that Bitcoin is in a serious disadvantage.

Although Ethereum and other blockchain platforms usually do not have scalability problems as drastic as the ones which plague Bitcoin, their performance is still largely determined by network congestion because each new transaction must be broadcast to the entire global blockchain.

COTI’s Solution — Improving Blockchain for IoT Payments

COTI’s solution for the long transaction times, high fees, and lack of scalability is using Directed Acyclic Graphs (DAG). DAGs are a newer type of DLTs, and like blockchains, it links blocks or nodes together with some form of consensus. However, unlike blockchain, these nodes are not arranged in linear chains but in directed graphs that allow them to cross-verify one another. Consensus in COTI’s DAG networks is usually reached based on the network’s state. In most cases, a user must first conﬁrm a given number of previous transactions, and only then can they create a new one. This eliminates the need for both the miners and the energy that heavy hardware requires to create the ever more-complex Hash based PoWs, all while improving the scalability of the network.

COTI’s DAG technology is the missing link to settle scalability, privacy, and reliability concerns in the Internet of Things. The COTI ledger is tamper-proof and cannot be manipulated by malicious actors because it does not exist in any single location, and no man-in-the-middle attacks can be staged because no single thread of communication can be intercepted. The decentralized, autonomous capabilities of the blockchain is making it the ideal component for becoming a fundamental element of IoT solutions.

Summary

To expand economically, IoT must rely on a financial platform that complements its elements of decentralization and gives support for M2M, P2P, and P2M communications. It also ought to be operated on a platform that is anonymous, secure, immutable, and that allows fast micro-transactions for little or no transaction fees. Hence, COTI is uniquely positioned to provide the infrastructure needed for IoT to have a sustainable payment model.