DAG is discussed as the successor to blockchain technology. But both technologies are made for different use cases.
The terms “Distributed Ledger Technology” (DLT) and “Blockchain Technology” are often used synonymously. But that’s not correct. DLT is a broader term and includes other technologies as well. The “Directed Acyclic Graph” (DAG) is another type of DLT.
Both, blockchain and DAG technologies record transactions on a digital ledger. Both can be distributed and may be decentralized. Both have a token-economic incentive mechanism. As there are many similarities, some consider blockchain and DAG as rivals, but they are quite different from each other.
Differences between blockchain and DAG technology
Before diving into technical details, let’s first consider the following analogy:
The ICO.li team consist of Ramona, Daniel and Lukas. Say, Daniel wants to tell Lukas about the latest news and communicates it via a blockchain-based system. He would have to tell Ramona, and then Ramona tells Lukas. Each person is up-to-date, but the message moves slowly to reach the final receiver (Lukas). It would be quicker if Daniel told Lukas directly, and Lukas would then update Ramona once he received the message.
Essentially, that’s the difference between blockchain and DAG technology. On a blockchain, blocks A, B and C are different blocks and for block C to receive a message from block A, block B must verify it first.
On a DAG, there are no blocks. All network participants are directly connected with each other. Thus, A can send a message directly to C, and (nearly) simultaneously update B. The data moves directly, the network is faster, cheaper, more energy efficient and more scalable, at least in theory. Take a look at this visualization of a DAG here.
Advantages of DAG technology
Scalability, low speed and high transaction costs are major issues of many blockchain networks. DAG could provide solutions.
Firstly, just two verifications are required, which drastically cuts the energy consumption. The two closest nodes verify the transactions themselves, so there is no need for miners. Without miners, transaction fees are reduced to zero and users can send data without the high costs associated to transactions on networks such as Bitcoin or Ethereum.
Secondly, DAG technology is much faster. Bitcoin transaction speed is currently at 4-7 transactions per second. Some altcoins can process up to 1000 transactions per second. But a DAG-based system can process hundreds of thousands of transactions per second.
DAG and blockchain enable different use cases
Enough about the tech-nerd stuff. Let’s get real: Why does all of this matter?
Some DAG-fanatics argue the technology will soon replace blockchain. However, both technologies are built to move different types of data-content and therefore enable different use cases.
DAG moves data quicker and more cheaply, which could enable applications that require scalability and low-value micro transactions. Thus, use cases that have so far been difficult to accomplish with blockchain technology could become possible with DAG technology.
Take for example P2P energy trading. It requires a large amount of low-value micro transactions. On blockchain networks, that’s not economically feasible, because the transaction costs are too high.
On the other hand, let’s say you wanted to transfer a large sum of money to buy a house. Speed and transaction fees are less important in this case, and security becomes the major concern. You would rather wait a day longer for your money to arrive, if that makes the transaction more secure.
The reduction in transactions volumes makes DAGs more vulnerable to attacks. To improve security, DAGs have included centralized features, such as coordinators or pre-selected validators. But that means DAGs are not truly decentralized and thus more prone to manipulation.
The bottom-line: DAGs will enable fast and scalable minimum transaction fee chains. But whether DAGs or blockchain is the superior technology depends on the application. Different use cases will make either blockchain or DAGs the better option. Both systems will co-exist, one will not replace the other.