Directed Acyclic Graph (DAG) is an alternative to the traditional blockchain, which aims to improve the speed, scalability, and cost issues of blockchain technology and can be categorized as a distributed ledger technology (DLT).
DAG is also a system that records transactions on a digital ledger. And as DLT is distributed and decentralized, both solve the same purpose. Both are exceedingly competing technologies when it comes to their application. The main difference between both technologies being the structure in which the data is stored on these platforms.
The DAG model is seen as a possible solution to the current decentralization issue in crypto. With this model, miners will not have to compete for new blocks to add to the chain. Whereas a blockchain system looks like a chain, DAG’s system looks more like a graph. The DAG model is currently seen in the industry as a possible substitute for blockchains in the future due to its efficiency in data storage and processing of online transactions.
How Does a DAG Work?
In a DAG-based cryptocurrency, each vertex in the structure represents a transaction. There's no notion of blocks here, nor is mining required to extend the database. So, instead of gathering transactions into blocks, each transaction is built on top of another. Still, there's a small Proof-of-Work operation that's done when a node submits a transaction.
This ensures that the network isn't being spammed and also validates previous transactions. Since each node can have more than one parent root, the model allows for more transactions to be validated simultaneously. This is because users do not have to wait for transactions to complete before processing a new one.
This has to be mentioned that in a directed acyclic graph, each new transaction has to reference previous transactions before getting accepted into the network. This is no different from how blocks on a blockchain also reference previous blocks. The rationale behind this is that a transaction can only be successfully confirmed when it is referenced by another transaction, and so on.
In a DAG, each vertex represents a transaction. There are no blocks, so mining is also not required. Transactions are built on top of one another instead of gathering them into blocks. Then, as previously mentioned, proof-of-work tasks are done whenever a node submits a transaction, to validate prior transactions and avoid spam. By principle, new transactions are built on top of older ones in a DAG-based cryptocurrency. The main difference with blockchain is that in a DAG, multiple transactions can be referenced, instead of just one at a time.
How DAG Differs from DLT?
The network offered by DAG gives faster transaction speeds, better scalability, and lesser energy consumption on the network grid. On the other hand, the DLT-based blockchain is somehow slower in transactions, enables a high cost of transactions over the network, and also takes more time. Unlike Bitcoin, whose TPS varies somewhere between four to seven, and Ethereum sits at 30, DAG-based protocols can handle a TPS rate into the several thousand.
Uses of DAG
• It seeks to improve security and usability as well.
• High transaction speeds unencumbered by block creation.
• No miners mean no transaction fees as well.
• Less energy consumption and environmental benefits compared to mining.
Role of DAG in Blockchain
As mentioned above, the DAG model seeks to improve common issues with blockchain technology such as cost, speed, and scalability. Technically, both technologies record transactions on a digital ledger and work towards the same goal. The differentiating factor between the two of them is mainly the structure each model uses to store data.
Pros and Cons of DAG
Pros of DAG
Speed: Anyone can broadcast and have their transactions processed at any time. There's no limit on the number of transactions that users submit, provided they confirm older ones as they do.
No mining: DAGs don't use PoW consensus algorithms. Their carbon footprint is thus a fraction of that of cryptocurrencies that rely on mining to secure their blockchain network.
No transaction fees: Users don’t need to pay fees to broadcast their transactions. Some require that a small fee is paid to special kinds of nodes. Low fees (or better, zero fees) are enticing for micropayments, as their purpose is defeated with significant network fees.
No scalability issues: DAGs can process many more transactions per second than traditional blockchain networks. Many proponents believe this will make them valuable in the Internet of Things (IoT) use cases, where all kinds of machines will interact with each other.
Cons of DAG
Not entirely decentralized: Protocols that rely on DAGs have various elements of centralization. For some, it's supposedly a short-term solution to bootstrap the network, but it remains to be seen whether DAGs can thrive without the intervention of third parties. If not, they open themselves up to attack vectors that could eventually cripple their networks.
Not tested at scale: Though DAG-based cryptocurrencies have been around for a few years, they have a long way to go before seeing widespread use. As such, it's difficult to predict what incentives users might have to exploit the system in the future.
Each model has its strengths and weaknesses, and either one can be more applicable depending on your requirements. DAGs are certainly an interesting technology for building cryptocurrency networks.