IOTA Doomsday: Wallet Compromised, Network Turned Off Via Centralized Kill Switch, While the Co-founders Fight Over 65 Million Coins Stolen from Early Investors

February 14, 2020 / by Crypto.IQ

The War On Shitcoins Episode 20: IOTA (MIOTA). The war on shitcoins is a Crypto.IQ series that targets and shoots down cryptocurrencies that are not worth investing in either due to being scams, having serious design flaws, being centralized, or in general just being worthless copies of other cryptocurrencies. There are thousands of shitcoins that are detrimental to the crypto space and Crypto.IQ intends to expose all of them. The crypto space needs an exorcism, and we are happy to provide it.

Despite having solid potential, IOTA appears to be having a complete meltdown, with a convergence of negative factors such as their native wallet being compromised, the network being shut down with a centralized kill switch, and the Co-Founders fighting with each other over 65 million IOTA that were apparently taken from early investors who supposedly did not claim their coins, as will be deep dived in this article.

IOTA is one of the more unique cryptocurrencies since it is the top cryptocurrency that uses Directed Acyclic Graph (DAG) technology. Essentially, IOTA transactions can be sent by referencing two previous transactions with a low-intensity Proof of Work (PoW) that can be done on any computer. This is unlike Bitcoin (BTC) which requires a complete copy of the entire blockchain history in order to send a transaction, as well as a global network of powerful mining machines to confirm transactions.

This makes IOTA ideal for storing data, particularly large real-time datasets that are generated by internet of things (IoT) devices such as weather stations, traffic flow monitors, etc. Indeed, IOTA is where the blockchain, crypto, and IoT sectors overlap, and the combinations of these technologies have the potential to produce powerful and useful results. This is why IOTA had a $1 billion market cap as recently as early February.

However, recent events have revealed that IOTA is extremely centralized, and as of this writing, the IOTA network has been down for nearly two days after the IOTA Foundation flipped its centralized kill switch called the coordinator.

All IOTA transactions must be referenced by the coordinator in order to be confirmed. The reasoning behind the coordinator’s existence is that an attacker who controls a majority of hashrate on the IOTA network could double-spend and split the network, so the coordinator is a failsafe to stop that sort of scenario.

However, the coordinator causes the IOTA network to be completely centralized. The IOTA Foundation could stop the network completely like the current situation, give certain transactions priority, ignore certain transactions, and the coordinator is a centralized point of failure since if it is taken over or stops working the entire IOTA network would stop functioning.

Therefore, the IOTA network is unacceptably centralized. The IOTA Foundation publicly announced how the coordinator would be removed in late 2018 in order to achieve decentralization, but that obviously never happened since it is not the year 2020 and the coordinator has just been used to literally turn off the IOTA network.

The reason that the IOTA Foundation chose to hit the coordinator kill switch is that their native wallet software, the Trinity wallet, has been compromised. Details continue to be sparse, but what is known at this point is that wallet seeds had been stolen, resulting in the theft of at least $1.6 million of IOTA.

Basically, IOTA’s wallet software appears to be cryptographically insecure, and the IOTA Foundation turned off the entire network so that the attacker couldn’t drain any additional wallets.

Notably, just over two months ago the IOTA network was shut down via the coordinator due to a possible attack. Collectively these incidents make it seem like IOTA is plagued with problems.

The fact that IOTA’s coordinator can be used to shut down the network, ignore certain transactions, and represents a single point of failure is exacerbated by the infighting between IOTA Co-Founders David Sonstebo and Sergey Ivancheglo aka Come-from-Beyond (CFB).

CFB claims that the IOTA Foundation owes him 25 million IOTA, worth approximately $8 million. Sonstebo replied with a long letter that sidesteps the money issue and talks about how he and CFB disagreed on a solution to get rid of the coordinator. Sonstebo alleges that it is CFB’s fault that the coordinator was not removed, because CFB had completely different plans to get rid of the coordinator and sharply rejected the IOTA Foundation’s plans.

Zooming out, it seems the fight over removing the coordinator and turning IOTA into a decentralized cryptocurrency is what has caused mayhem within the IOTA Foundation, and the only thing that is known for sure is that the individuals in control of IOTA have failed to give up their centralized power.

Ultimately, it was revealed that the IOTA Co-Founders were fighting over 65 million IOTA, worth over $20 million, that early IOTA investors failed to claim. Basically these are other people’s tokens, the IOTA Co-Founders took them after an arbitrary amount of time passed and the investors didn’t claim their tokens, and now the tokens are worth a ton of money so the Co-Founders are fighting each other over it.

The IOTA community is apparently quite upset over this because 5% of the IOTA supply has already been donated to the IOTA Foundation, and it was not disclosed that the IOTA Co-Founders took 65 million IOTA on top of that.

Beyond that, the main problem with the IOTA Co-Founders fighting each other is that the IOTA network can be centrally controlled via the coordinator, and it is not out of the realm of possibility that something could go wrong if the people who developed the network are battling each other.

This is just speculation, but the IOTA wallet hack and network shutdown are occurring less than two weeks after an all-out battle between the Co-Founders broke out publicly, and it seems possible that this is not a coincidence.

Regardless of what is going on between the Co-Founders, IOTA’s coordinator mechanism causes the network to be overly centralized, both in the sense that it is a single point of failure and that the IOTA Foundation can shut down the network and ignore specific transactions at will. Further, the IOTA Trinity wallet apparently lacks cryptographic security.

Due to this unreasonable degree of centralization and risk, crypto investors should probably avoid IOTA, at least until the coordinator is removed and the network becomes decentralized if that ever happens.