The Directed Acyclic Graph or DAG, is another form of DLT. Some consider it to be a rival technology to blockchain, others an enabler. Both blockchains and DAGs record transactions on a distributed ledger, but do so in starkly different ways. We’ll briefly compare them in terms of how they work, their strengths and their weaknesses.
Blockchain is a distributed ledger, replicated by all nodes in the network. This distributed ledger forms a chain of blocks of transactions in an unalterable, chronological order. Transactions are bundled into blocks to be validated. Validated blocks are stamped and added to a chain of previously validated blocks.
By comparison, a DAG is a network of individual transactions linked to multiple other transactions. There are no blocks of transactions in DAG networks. If blockchain is a linked list, a DAG is a tree, branching out from one transaction to another, to another and so on.
In blockchain, consensus is achieved by validating transactions block by block. Various solutions exist for this, one is the ‘Proof of Work’ consensus mechanism that requires miners to race to solve a computationally strenuous problem. Successful validation may earn the miner a reward.
In a DAG, individual transactions provide validation for one another. Network users are both miners and validators, although they cannot validate their own transactions. This typically means that in a DAG there is little or no need to pay fees.
Blockchain offers transparency and immutability. It is also relatively well established, being the basis of cryptocurrencies like Bitcoin and of distributed application platforms like Ethereum. Blockchain offers solid guarantees and cost-effectiveness for transactions of medium to high value.
By scaling efficiently and avoiding or reducing fees, DAGs are well suited to high volumes of transactions, including micro transactions. DAGs also cut out the need for miners and mining equipment — meaning lower energy consumption.
As blockchain transaction volumes grow, storage and network bandwidth requirements increase. ‘Proof of Work’ can also consume large amounts of computing power and electricity. Mining may become concentrated between just a few big mining users or companies and in the case of big dips in cryptocurrency value, incentive to mine can be destroyed altogether. High transaction fees are also an issue. There are of course different consensus algorithms, but ‘the perfect’ consensus algorithm is yet to emerge (if it ever does).
A DAG has other challenges. A reduction in the volume of transactions may make it vulnerable to attacks. To mitigate against this risk DAG projects have so far included centralised features such as central co-ordinators, pre-selected validator or ‘witness’ nodes or completely private network systems. DAGs have not been able to sustain high levels of decentralization so far.
Start with your business requirements. Compare possible solutions to see what best meets your needs. Remember that you or your team will need to understand the technology chosen, customer or end-user preferences, and any requirements to cap transaction fees and run distributed applications like smart contracts. Different use cases may then make blockchain or DAGs a better option.