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Multicoin Capital - IOTA: no real product market fit, network is centralized and unstable. Critical vulnerabilities to exist in software. overwhelming evidence of serious flaws in the protocol, “we believe that IOTA is sharply overvalued at current prices.”

 

IOTA, the network behind the 11th most valuable cryptocurrency in the world by market cap (MIOTA), has no justification for its current price levels according to a detailed new report. The 12-page analysis of IOTA has been issued by a long term $100 million cryptocurrency investment firm based in Texas, Multicoin Capital.

Multicoin Capital analysts found a myriad of issues with the project, its technology and the team behind it.

Their final conclusion is that given the current state of the IOTA network, the substantial technical risk, and the overwhelming evidence of serious flaws in the protocol, “we believe that IOTA is sharply overvalued at current prices.”

We have several major concerns with the implementation of IOTA that make us highly skeptical of its lofty claims.

1. The IOTA Coordinator is Centralized
   • The IOTA network currently relies on a centralized, closed-source “Coordinator” to protect it from attacks.
   • The IOTA team has not given clear guidance on when and how this Coordinator will be removed.
2. IOTA Requires Hardware Changes to IoT Devices
   • In order for IOTA to reach its true potential, hardware changes will have to be implemented in IoT devices to allow them to transact on the IOTA network.
   • This could easily become a chicken and egg problem; IOTA can’t grow to its full potential unless these hardware changes are made, and hardware companies won’t be incentivized to add this new hardware unless IOTA becomes the standard for IoT payments and data sharing.
   • IOTA’s go-to-market strategy is dependent on its own success and there is no backup plan.
3. The Network Has Experienced Downtime
   • The IOTA network has been unusable many times, and has also experienced periods of downtime.
   • The team has had to shut off the Coordinator due to bugs or attacks, rendering the network unusable.
   • Github issues and Reddit comments show that this is a consistent problem for IOTA.
   • This reinforces the issue of IOTA’s reliance on the Coordinator. It is also highly concerning because decentralized networks are designed to never go down and to not have single points of failure.
4. Cryptography and Software Vulnerabilities
   • Perhaps most concerning are the software vulnerabilities discovered by Neha Narula and her team at the Digital Currency Initiative at the MIT Media Lab. 
   • They discovered critical vulnerabilities in IOTA’s hash function; the team built this function from scratch, violating the “golden rule of crypto” — don’t roll your own cryptography.
   • The team offered conflicting accounts of what happened before finally issuing their definitive response nearly six months later.
   • They claimed that the vulnerability was known and intentional. They called it a “copy-protection” mechanism to discourage scam copies of IOTA. They claimed the Coordinator protected against the exploit, but this is impossible to verify, as the Coordinator is closed-source.
   • In doing so, they knowingly allowed vulnerabilities to exist and violated the ethos of open-source software. The team has refused to disclose whether other known vulnerabilities exist.

Conclusion

The Directed Acyclic Graph (DAG) architecture presents an interesting, novel mechanism to organize a distributed ledger. While we don’t believe that DAGs make blockchains obsolete, they offer certain features and tradeoffs that may make them a better fit for certain kinds of decentralized applications. Like many technologies in the distributed ledger space, DAGs are in their infancy and remain largely untested. We look forward to seeing continued research into this sector in the future.

While IOTA was one of the first major projects to build a DAG instead of a blockchain, we find that the approach taken by the IOTA team presents many reasons to be highly concerned. While DAG-based systems may form an important part of the future of the crypto ecosystem, we have reservations about the DAG implementation of IOTA, as listed above.

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