What is DAG Technology?

With cryptocurrency we are used to hearing the word blockchain on a frequent basis. The vast majority of cryptocurrencies in fact use this technology. However there are a very few select cryptos that use DAG technology. Or they have a hybrid network using DAG.

What is DAG Technology?

DAG is short for Directed Acyclic Graphs. As the name implies they are graphs on a network that keep records of events. Similarly to blockchain it is a type of distributed ledger technology (DLT).

But what does DLT even mean?

Firstly a ledger can be physical like a book or online and is used for recording account transactions or events. In this case DAG’s ledger is an online technology.

Secondly a distributed ledger is a decentralised method of maintaining a ledger. As a result it is not centralised where a few people or companies have control. Like for example banks.

Instead the network users contribute to the network and keep it going. So power and authority is shared among them. They are the many and not the few.

Although DAG is used in cryptocurrencies, it can have other applications as well. To clarify that means anything that needs a ledger to keep track of things. So although I will keep mentioning ‘transactions’ in this article you can exchange the word to mean any event.

How DAG Works

To understand how DAG works we need to understand a little bit about blockchain.

Comparing Blockchain

Blockchain works by grouping transactions together. Each individual transaction is approved by miners one at a time and placed in the block. Once a block is full the block is attached to the end of the chain.

The chain is the ledger that keeps track of the all the transactions on the network.

Blockchain
Blockchain structure

How DAG Handles Transactions

On the other hand DAG networks process each transaction individually and does not group them together. DAG networks approve transactions on the spot and instantly adds the transaction to the ledger. The network adds them in order to the ledger so it is easy to find them.

To approve transactions a DAG network uses previous transactions on the network to confirm new transactions. So instead of blockchain miners that approve transactions each transaction is peer reviewed. Similarly to your own class mates checking your assignment.

How transactions are peer approved on a DAG network

Anyone that approves a transaction gets paid for their work. The payment is minimal, but it is something to compensate you for your work.

There are 3 different ways in which transactions can happen on a DAG network. They are the building blocks of how the network is built. They are the 3 C’s:

  • Common cause
  • Chain
  • Collider
3 different types of transactions

DAG Structure

As a structure, a DAG ledger looks more like a graph. Hence why it has ‘graph’ in the name. So it has vertices (lines) where the transactions are recorded and it also has edges (or arcs). It has many branches like a tree and looks more or less like this.

DAG structure
DAG structure and how it grows

The transactions that get approved and attached on the vertices of the graph only flow in one direction. This is so that nodes do not end up referring to themselves. Otherwise it could create an infinite loop.

This would become problematic on many levels and the DAG would be useless. Hence why acyclic is part of the name because there are no closed loops aka cycles in DAG.

The DAG structure allows the network to process new transactions even when others are not completed. Additionally more than one transaction can get processed at the same time.

This makes it very efficient. Moreover since transactions are peer approved, as more users join the network it can handle more transactions. The network can scale to support an infinite amount of transactions.

DAG vs Blockchain Comparison

For us to make a direct comparison of blockchain vs DAG we have to compare layer 1 chains and graphs. Hence I am not factoring in additional layer 2 solutions that improve scalability like for example the lightning network.  

 BlockchainDAG
ScalabilityRestricted by block size and securityInfinitely scalable, according to the size of the network.
Transaction time2-60 minutesInstant, within a few seconds
Transaction costTransactions costs more when demand increases on the networkMuch lower transaction cost, perfect for micropayments.  
Energy consumptionMining is energy intensiveNo mining and more energy efficient
SecurityPoW is established and proven tech that is more secure. PoS is still unprovenLess secure since they currently have smaller networks.
Quantum resistantNoYes

Confirmations

Both DAG and blockchain networks need multiple confirmations for each transaction to get approved. Therefore there is more scrutiny and an increased level of security on both types of networks. So double spending is much less likely.

Advantages of DAG – Scalability

People point out that for a cryptocurrency to go mainstream the network needs to process thousands of transactions per second. In fact usually crypto networks are compared to Visa and how many transactions it can handle as an example.

Visa transactions per second (tps)
Visa processes on average around 1,700 tps, but sometimes it handles 4,000 tps. 

The problems is cryptocurrencies that are blockchain based are restricted by block size. This affects scalability. Consequently it impacts transaction processing times and also the cost of transactions.

Blockchains have a limit on how many transactions they can include in any given block. For example this is the case for Bitcoin and many other cryptos.

Solutions

There are a couple of solutions for blockchains to fix the problem. Firstly some cryptos like Monero do not have a fixed block size. The Monero blocks can scale up or down depending on the demand on the network. So if there is more activity the blocks will get larger.

What is blockchain Monero
Monero does not have fixed block sizes

As a result the Monero network is able to clear out a backlog of transactions more efficiently.

There is still a restriction with Monero though. Blocks cannot get larger than double the median size of the last 100 blocks. So if there is a sudden surge in demand people will still have to wait a while.

Monero still has an average processing time of 2 minutes. To clarify it is not unique for blockchain based cryptos to have a waiting time. Otherwise if the blockchain processes transactions too fast it would not reach consensus. So blockchains are purposely slower for security reasons.

However increasing block size is still not sufficient enough to handle large amounts of transactions.

Another solution is the lightning network which is a layer 2 solution for scaling blockchains.

So far the lightning network has worked well. However it is a layer 2 solution which is not on-chain.

Additional layers that are built off-chain is a sub-optimal solution. This is because users are much less interconnected so it is less efficient. As a result on-chain scaling is infinitely better.

DAG’s Have Inbuilt Scalability

DAG networks have scaling inbuilt in their core layer 1. That is to say without the need for additional layers to scale. Even if a DAG network is small it can process hundreds of transactions per second.

In fact we can compare Bitcoin’s and Ethereum’s layer 1 tps. Bitcoin processes 3+ tps, Ethereum processes 12+ tps. DAG networks are many multiples faster than blockchains.

Moreover DAG transactions are peer approved, the more people that join the network the more transactions it can handle. So as you can see DAG networks are much more efficient.

DAG’s efficiency means that over and above regular transactions it can also easily accommodate smart contracts. So the network can become a one stop shop for any financial services.

As a result a DAG is the best solution that can fix the issue of scalability in cryptocurrency.

More Advantages of DAG

Speed

DAG networks do not need to wait to fill blocks with transactions. Each transaction is processed as and when they come through. Additionally the transactions are peer approved by other network users.

As a result of these two factors it speeds up the process of approval. This enables the transactions go through instantly or fairly instantly within seconds.  

Quantum Resistant

The way DAG networks are constructed makes them quantum resistant. In fact they are a step ahead of blockchain in this respect. As Deloitte mention blockchain cryptographers are currently working on a solution for quantum computing.

On the other hand quantum computers are not something we should worry about in the near future. This is partly because quantum computers are very expensive. So it will take time to come up with computers that will manage to break the blockchain.

However the point is that DAG networks do not need any modifications to make them resistant. They already are, so no resources are needed to investigate solutions for DAG networks.

Micropayments

DAG networks are efficient with processing transactions. Because of their efficiency the transaction cost is significantly reduced vs a blockchain network.

In short that means people can use crypto DAG networks to make micropayments. Micropayments are those small day to day payments you make. Like for example when you go and buy your morning cup of coffee.

Since the transaction costs are low it makes it feasible to do this. On the other hand you are  not likely to opt to do this with a blockchain based crypto. This is because the transaction fee might end up being more expensive than the coffee itself.

Lower Energy Consumption

DAG does not have miners on the network because there are no blocks. Instead transactions are approved by other users on the network. As a result less power is required to maintain the network.

This means that DAG is more environmentally friendly. However they still consume some energy because after all the network needs power to run.

Cheaper to Maintain

DAG’s are cheaper for two reasons that are both linked to mining. Firstly because no mining means less power consumption to maintain the network.

Secondly it does not need specialised mining equipment. Not all blockchains use specialised mining equipment. However the ones that do have a large additional cost. ASIC miners are very expensive and DAG networks do not need this added expense.   

Decentralised

DAG networks are more democratic than the blockchains that require expensive mining equipment. That is to say because there is no economic barrier to entry. Anyone that has a computer can join and take part in a DAG network.

Additionally blockchain miners have the option of mining alone or join a mining pool. Miners that go at it alone have very little to no chance of winning crypto rewards. This is because they have to compete with the huge amount of hashing power from mining pools.

So miners end up joining mining pools. As a result when the pool wins a reward miners share it amongst the other miners in the mining pool.

Usually there are a small number of mining pools. This is a form of consolidation of power on the network. However this does not apply to all blockchain cryptos like for example Monero and many others.

This is because Monero is ASIC resistant. This makes it is more decentralised because all you need is a regular computer. DAG is very much the same.

Disadvantages of DAG

Security

At the moment DAG based cryptos are much less popular. Hence they have smaller networks than blockchain based cryptos. This means that at the moment a hacker can attack a DAG based crypto much more easily.

Unproven

DAG technology has been around for decades. However cryptos that use DAG have not used it for that long. Some say that DAG within crypto still needs to prove itself as a viable alternative to blockchain. However it is looking promising.

Cryptos That Use DAG

There are a small handful of cryptos that use DAG. Some examples are:

  • Dagcoin
  • Byteball
  • Dero
  • Hedera Hashgraph
  • Iota

All of the cryptos listed above use only DAG except Dero. Dero uses a hybrid system of both blockchain and DAG. As a result it has the best of both worlds. That is to say it is highly secure and has great inbuilt economic incentives from blockchain mining.

On the other hand the DAG part of the network makes it run efficiently. So it processes transactions at a rate of between 9-18 seconds.    

On top of that it is a full encrypted and private, but still a 100% auditable application platform. It is one of the best privacy coins.

Other Articles In This Section
What is an Oracle? And the benefits for smart contracts.
DAG technology. An alternative to blockchain?
Hadera Hashgraph. A network based on DAG technology.
51% attacks. When blockchains become vulnerable.

Frequently Asked Questions

What is DAG technology?

As the name implies DAGs are graphs on a network that keep records of events. Similarly to blockchain it is a type of distributed ledger technology (DLT). Read more about DAG technology.

What is DAG in crypto?

DAG is different from blockchain because it does not have blocks of transactions. Instead DAG transactions are approved individually and each is attached separately to the ledger. This makes DAG networks exceptionally fast.

What does DAG stand for?

DAG stands for Directed Acyclic Graph. It is a type of graph that only goes in one direction (directed). As a result it is it cannot loop and reference previous transactions (or events). Otherwise a string of events could end up self-referencing themselves. Hence it is acyclic.

What are the 3 types of DAG transactions?

They are:
·      Common cause
·      Chain
·      Collider

What cryptos use DAG technology?

Some examples of cryptos that use DAG technology are:
·      Dag coin
·      Byteball
·      Nano
·      Iota
·      Hedera Hashgraph
·      Dero
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