When we talk about cryptocurrencies, we almost always think about the blockchain technology behind them. However, not all cryptocurrencies are created equal, and not all of them depend on blockchain. Let’s take a look at DAG technology and the alternatives it offers.
What is DAG technology?
Distributed Ledger Technology (DLT) doesn’t only refer to blockchains. It includes DAG technology as well. Both DAG and blockchain record transactions on a distributed ledger, but they do so in very different ways. DAG technology allows cryptocurrencies to be blockchain-free and is potentially a viable alternative to blockchain.
DAG stands for Directed Acyclic Graph, which should clear up all your doubts if you happen to be a computer scientist. For the less technically minded, if you think of a blockchain as a sort of linked chain of blocks, then DAG would be more like a tree, with several branches linking one transaction to another.
Look no further than popular cryptocurrencies IOTA, DagCoin, and ByteBall for examples of cryptocurrencies created with DAG technology, which was first proposed in a white paper by Sergio Demian Lerner in 2015.
DAG technology, unlike blockchain, has no miners or blocks. In fact, users have to confirm each other’s transactions through a process that confirms previous transactions with new transactions.
The benefits of DAG technology
One of the obvious benefits of DAG technology is that there are no blocks. So, unlike cryptocurrencies on blockchains like Bitcoin or Ethereum, there is no block size issue. This means that the scaling problems proving to be stumbling blocks (excuse the pun) for major coins don’t exist with DAG.
Moreover, rather than being dependent on mining farms to confirm transactions through the Proof of Work consensus, DAG simply uses the transaction itself to confirm a new transaction.
Just like blockchain technology, DAG technology is a distributed, peer-to-peer ledger. But since it does not face the same scaling issues or dependence on electricity for mining as blockchain, it could solve some of the issues surrounding blockchains.
Current issues with blockchain technology
Speed
DAG technology is faster than blockchain and solves its speed issues by confirming based on a transaction to transaction basis, rather than block to block. This has the obvious advantage of not having to wait for miners to process large blocks of transactions. It can bring down transaction costs as well.
Centralised mining
There’s also the ongoing oligopoly issue with centralised mining. Since individual mining has long ceased to be profitable or even possible, miners must join mining pools to be in with a chance of winning a block reward.
This leads to the majority of the hash power being concentrated in just a few places. China, for example, has already amassed some 73% of the Bitcoin hash rate.
Centralised mining goes against the principles of Bitcoin, and DAG technology aims to resolve this since there are no miners on a DAG network.
Sustainability of cryptographic puzzles
Cryptocurrencies rely on cryptographic puzzles that are hard to crack with existing hardware. However, in the long run, it’s possible that these puzzles become obsolete as hardware advances. DAG technology does not rely on these puzzles to confirm transactions, which means that there is no sustainability issue.
High transaction fees
Cryptocurrency is often touted as a way forward for financial inclusion by allowing for microtransactions. However, high transaction fees can eradicate this possibility. Currencies like IOTA which use a DAG technology called Tangle enable zero transaction fees which make micropayments possible.
Scalability
DAG technology is infinitely more scalable, as previously discussed. By enabling near zero user fees, it can handle a very high volume of transactions, unlike current blockchains. In fact, the more transactions on the DAG network the better, as they are validated faster with new transactions confirming previous ones.
Energy consumption
DAG has no need for miners or mining equipment, which resolves the issue of excessive energy consumption which is harmful to the environment.
The downside of DAG technology
If blockchain technology is in its infancy, DAG technology is still wearing nappies. There’s plenty of teething trouble surrounding it, too. Since it works best when there is a high volume of transactions, a reduction in transaction volume can make it vulnerable to attack. This means that it’s not as secure as blockchain technology.
In order to address these possible attacks, most DAG cryptocurrencies have had to implement centralised features, such as “witness nodes”, or central coordinators, or even a completely private network system. So far, DAG cannot sustain decentralisation in its purest form.
The takeaway
DAG technology offers an alternative to blockchain, but they both have their own issues. While DAG is indisputably faster and more scalable, it is less secure. There are also far fewer developers and cryptocurrencies working with DAG.
As both technologies mature and implement necessary improvements, it will be interesting to see whether one reigns over the other, or if the technologies can complement and not compete.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.