IoT and cryptocurrency could enable micropayments
Cryptocurrency and IoT could support micropayments that enable organizations to share IoT data, but there are some barriers that crypto protocols must overcome first.
Over the past decade, both IoT and cryptocurrencies have developed rapidly, and there have been many exciting innovations in both domains. As the use cases for IoT expand and different entities begin to share data, cryptocurrencies could play an increasing role in IoT deployments.
Most early use cases of IoT involve relatively small deployments of sensors where data is collected and consumed by the same user or entity. Consider, for example, the deployment of an IoT system for tracking the movement of a vehicular fleet. The system might be deployed by the fleet owner, who is the sole consumer of the data and its corresponding analytics. But, as these systems scale up, such as for IoT-enabled smart cities, we will increasingly encounter scenarios where the data generated by one entity can be potentially consumed by a different one.
For example, a city may be interested in using data from a private parking lot owner to help build an app that enables citizens to find parking easily anywhere in the city. Or a video camera deployed by one entity initially for security reasons may be useful to another entity for traffic monitoring or retail analytics. In these cases, the IoT device owner might be willing to provide data in exchange for micropayments from the other prospective entity. As a digital, frictionless form of cash that can be linked with smart contracts to automate the payment process, cryptocurrencies could be an attractive enabler for such micropayments for IoT data.
Similarly, cryptocurrency-based micropayments could also enable IoT system deployers to set up automated payments for third party-owned edge computing resources. Organizations could also use cryptocurrencies to pay expert reviewers to provide honest and helpful reviews of real-time IoT data products on decentralized data marketplaces. This would help IoT data buyers steer clear of low-quality or faked data.
Yet another use case for cryptocurrencies in the context of IoT is to incentivize the deployment of a decentralized wireless network infrastructure that enables IoT devices to communicate their data inexpensively and reliably. These communities enable users to mine a native token, while providing low-power wireless hotspots for IoT applications. Other players in the market enable users to earn cryptocurrency for helping to deploy and operate base stations on a decentralized 5G wireless network.
Barriers for crypto in IoT
There are several barriers to the use of cryptocurrencies for IoT data micropayments and other IoT use cases. One is that today's blockchain protocols do not have sufficiently high transaction throughputs. As a result, they might charge high transaction fees, particularly during peak traffic conditions. This makes it prohibitively expensive to perform low-value transactions. Who would send 10 cents in micropayment over a protocol if it charges well over a dollar per transaction in fees?
This might cease to be a challenge in the future as protocols improve their throughput performance through techniques such as sharding, which enables parallel processing of transactions on a blockchain. Alternatively, it may be possible to use blockchain layer 2 scaling tools to enhance transaction throughputs and facilitate low-fee micropayments. These technological solutions to improve blockchain throughput still need some time to mature, however.
Another potential barrier is ensuring that the blockchain platforms that enable cryptocurrency payments are environmentally sustainable. The proof-of-work mechanism used in the original Bitcoin protocol -- as well as many other protocols -- is notoriously energy-hungry. It has been estimated that the annual energy consumption due to proof-of-work blockchains is comparable to the annual energy consumption of a small country. Fortunately, we do have a more sustainable, greener alternative to proof of work called proof of stake that is now being adopted widely. Ethereum recently switched to proof of stake, and it has been estimated that this has reduced its energy consumption by four orders of magnitude -- more than 10,000 times. This can eliminate the concern that the blockchain systems to power IoT data micropayments and other use cases may not be environmentally friendly.
Another concern is that, while most IoT data is communicated directly from a sensor to a data consumer via traditional TCP- or User Datagram Protocol-based transport protocols over the internet, cryptocurrencies involve their own unique peer-to-peer blockchain protocols. One way to make cryptocurrency payments that are compatible with IoT data protocols is Streaming Data Payment Protocol (SDPP), a novel application-layer protocol for IoT data payments. SDPP enables the seamless combination of a traditional TCP/IP data channel with a cryptocurrency payment channel in a unified and modular way so that different applications don't have to reinvent the wheel for themselves. However, this kind of hybrid protocol has yet to transition from a research stage to real deployments.
Beyond cryptocurrencies, there are several other ways that IoT and blockchain protocols can interact. These too are being explored both in industry and academia. A few examples include private blockchain systems that aim to enhance security for consumer IoT devices, permissioned blockchain platforms for the container logistics industry that enable the integration of IoT data inputs, and projects that have explored the use of blockchain technology and radio devices to enable authenticated proof of location for IoT devices. At the University of Southern California, we have proposed Blizzard, a consensus protocol for blockchains that enables resource-constrained mobile devices and IoT devices to validate transactions. And we have developed Trinity, a technology that uses blockchain consensus to help decentralize publish-subscribe protocols for IoT. Trinity helps reduce the possibility of centralized data censorship or tampering in IoT protocols, such as MQTT.
There are certainly synergies between IoT and cryptocurrencies. We can see that cryptocurrencies have the potential to have a positive effect in the world of IoT, particularly to enable low-friction micropayments for data and edge computation, as well as for incentivizing infrastructure deployment and product reviews for IoT data marketplaces. And there are even more potential uses of broader blockchain technologies for nonmonetary IoT use cases, such as for enhancing cybersecurity and enabling greater trust and integrity in IoT data. However, these are still early days. There are several technical and market maturity challenges that must be overcome before we see these technologies deployed more widely. These call for continued investments into research, as well as continued entrepreneurial experiments to find product-market fit.