Blockchain solutions to IoT payment challenges

In today’s world, a multitude of processes and transactions are being handled by machines — easing our lives in a wide array of scenarios from smartphones to autonomous vehicles. As technology continues to advance, we have begun to witness situations were machines develop the need to communicate, as well as transact, with each other in order to effectively fulfill the functions they were created for.

Carsten Stoecker, General Manager at Spherity GmbH, explains: “Machines will develop their own ways (protocols) to communicate and discover services they need and exchange physical and digital value among each other.” Spherity is a platform that seeks to safely connect the physical, biological and digital spheres by creating secure identities that are able to function as digital twins.

In a blog post, Stoecker states that a machine requires certain things to meet its basic physiological needs. For instance, a machine needs energy, computing power and, in most cases, connectivity, to function. In many cases, other machines are used to fulfill these needs through a variety of media.

“Many of these physiological needs are fulfilled by a liquid stream of a supply medium: electricity, gas or liquid fluid, usage based connectivity, real-time data streams, time-based access to a physical service, a digital API or digital asset or usage based insurance services.”

Liquid Supply Medium Exchanges

This constant back and forth facilitates the proper functioning of the involved machines. “A machine is giving either another supply medium or digital assets back in return for such a supply medium. This type of a continuous transaction among at least two or more machines is called a Liquid Supply Medium Exchange.”

Liquid supply medium exchange (LSME) is applicable to interactions between machines, and to those that occur between humans and machines  as well as within and between hybrid teams composed of machines and humans.

Existing financial processing unfit for purpose

The existing financial system is inadequate when it comes to supporting this LSME process. In order to transfer fiat currencies through traditional financial services, certain conditions must be met. These conditions prove to be inflexible and time-consuming.

In addition, the process more often than not requires intermediaries, leading to higher processing fees. Furthermore, the privacy of all parties involved is essentially non-existent as the traditional financial system requires a significant amount of information in order to process any transaction.

Due to the fact that LSME transactions typically involve a continuous stream of micro-payments that need to be processed almost instantaneously, traditional payment systems are most likely unable to cost-effectively and efficiently facilitate the process.

“In the new world where machines are continuously transacting physical and digital values, a peer-to-peer (P2P) token streaming system is required. The adoption of today’s discrete payment methods and Third Party Intermediary (TPI) Services will not work to automate micro-transactions among billions of machines (and with humans).”

For a payment method to adequately facilitate the LSME process, it must possess certain qualities. The system must be able to uphold transaction privacy while facilitating direct P2P transactions among entities that are strangers to each other. It should also be cheap and easy to deploy while ensuring minimal credit risk.

Moreover, the system must possess a scalable transaction layer capable of growing proportionately with the number of transactions, automated service discovery for ease of use as well as proven cryptographic primitives and protocols for ensured security.

Using the scenario of an electric vehicle being charged via a charging station, Stoecker outlines the various ways blockchain technology can be applied to sufficiently service the LSME process.

Discrete LSME payments enabled by the blockchain

Referencing Ethereum’s smart contract platform as an existing way in which blockchain tech is being utilized to facilitate LSME, Stoecker introduces another discrete payment method that can function in a somewhat similar manner.

This payment method involves the creation of a Trusted Execution Environment (TEE). The TEE is to be deployed in combination with smart contract logic as well the privacy-centric cryptocurrency Zcash. The TEE is lodged on the blockchain where it acquires a Zcash wallet that is used to hold funds in escrow. “The off-chain business logic is then releasing the escrow payment to the two parties based on authenticated oracle data from the charging pole about the value of the physical transaction.”

While smart contracts are in use in specific scenarios, they are not yet scalable and are costly due to the gas fees required for public networks like Ethereum.

P2P token streaming method

Machine-to-machine token streaming is a viable alternative to discrete escrow payments on the blockchain. The P2P token streaming method involves the continuous and simultaneous exchange of different media by two different entities. In the case of the electric vehicle and the charging station, the vehicle releases micro-tokens when it receives a micro-energy packet from the station. When the station stops releasing energy, the vehicle stops sending tokens too.

On the Raiden Network, it is possible for participating nodes to stream tokens directly to each other. The Raiden network currently supports uni-directional payments but is working on making multi-directional transactions a possibility. Payments on this network are instant because they do not require confirmations from the main blockchain. In addition, it is possible to enable zero fees for micro-transactions.

Similarly, Bitcoin’s Lightning Network can also be used to facilitate LSME. However, the Lightning Network is limited to BTC only while the Raiden network supports Ether as well as ERC20 tokens. Moreover, the Lightning Network uses a complex combination of protocols to store tokens while Raiden utilizes a smart contract. This makes Raiden’s method much easier to use and maintain, Stoecker argues.

The IOTA foundation has also introduced the IOTA Flash Channels. These are bi-directional off-Tangle payment channels that facilitate instant transactions. While the IOTA Flash Channels have yet to be sufficiently tested, they seem to be a promising solution for the future of LSME payments. Companies such as slock.it, Energy Web Foundation, as well as Motionwerk GmbH, are further researching and exploring P2P direct token payments.

It remains to be seen how the future of LSME payments will look. However, with the current speed of innovation, it is clear it will involve P2P token streaming. “P2P token streaming will drive significant innovation for the 4th industrial revolution while enabling an efficient supply medium exchange among machines and humans,” Stoecker says.