Distributed Ledger Technologies (DLT) have brought about a significant transformation in today's world as pioneering innovations. When it comes to cryptocurrencies, blockchain is the first and most well-known underlying technology that comes to mind. However, there are other technologies in the DLT space that are less known but hold considerable potential. One such technology is Directed Acyclic Graph (DAG), which is emerging as the new generation of DLTs in the world of cryptocurrencies.

What is a Directed Acyclic Graph (DAG)?

A Directed Acyclic Graph (DAG) is a mathematical structure that finds application in various fields of science and technology. In a DAG, nodes (or vertices) and edges are arranged in such a way that the edges have direction, and there is no path that starts from one node and returns to the same node. This means that this type of graph has no loops or cycles and always maintains a directed, non-reversible structure.

In the context of Distributed Ledger Technology (DLT), DAG is proposed as an alternative to the traditional blockchain structure. In blockchain, transactions are placed in continuous blocks in a chain, requiring mining and sequential verification. In contrast, in DAG technology, transactions are placed as nodes in a directed acyclic graph, where each new transaction is connected to previous transactions. This connection is made in the form of directed edges, and transactions are validated simultaneously and in parallel.

Since DAG does not require mining, this structure offers several advantages, including reduced transaction costs and a smaller environmental footprint. Additionally, because transactions can be processed in parallel, the scalability of this technology is significantly greater than that of blockchain.

Graph Structure and Transactions

In DAG, each node in the graph represents a transaction. Unlike blockchain, which collects transactions into blocks and then processes them, in DAG each transaction is independently added as a node in the graph. Each new node (or transaction) must be connected to multiple previous nodes (or transactions). This connection acts as a reference, meaning that the new node verifies the previous transactions. This process is similar to the chain of block references in blockchain, but in DAG, transactions operate directly and independently of blocks.

One of the major advantages of DAG is that transactions can be processed and validated simultaneously. While in blockchain transactions must be sequentially processed and wait for block validation, in DAG multiple transactions can be processed at once. This leads to a significant increase in the network's scalability.

Every new node that sends a transaction to the network must refer to and verify previous transactions. This verification acts as a type of "proof of work" and helps prevent the creation of spam or invalid transactions.

Although DAG does not require a mining process like blockchain, it employs a simpler and more efficient form of proof of work for transaction validation, reducing energy and environmental costs.

In the DAG structure, there is no need to block transactions; instead, each transaction is directly entered into the network and placed in the graph. This eliminates the delays associated with block creation and validation, allowing the network to operate more quickly.

What is the Application of DAG Technology?

DAG (Directed Acyclic Graph) technology has been designed as an alternative to traditional blockchain to address some of its existing limitations and issues. This technology offers several applications and advantages, which are explained below:

In Bitcoin and Ethereum blockchains, transactions must be placed in blocks that are processed and verified sequentially. This process creates a limitation on the number of transactions that can be processed at any given moment. DAG technology eliminates the need for block formation, allowing multiple transactions to be processed simultaneously. This feature increases network scalability and reduces the waiting time for transaction confirmations.

In blockchain networks like Bitcoin, the mining process required to create and verify new blocks consumes a significant amount of energy and computational power. DAG technology drastically reduces energy consumption by eliminating the need for mining. This feature becomes particularly important when environmental concerns are taken into account.

Although DAG technology is still in the early stages of development and testing, it is being used in cryptocurrencies like IOTA and Nano. These currencies are highly suitable for applications such as the Internet of Things (IoT), which require processing a large number of small and simultaneous transactions. In summary, DAG technology has been introduced with the aim of improving scalability, reducing costs, and enhancing security in digital currency networks. However, it is still under development and testing and requires further improvement and stabilization before widespread adoption.

Use Cases of DAG Technology

High-Performance Transaction Processing: In DAG technology, transactions can be processed without waiting for the confirmation of previous blocks. This allows transactions to be processed faster and without time constraints. Unlike traditional blockchains that require each block to be confirmed before creating a new one, DAG allows users to send a large number of transactions simultaneously.

Energy Efficiency: One of the main issues with traditional blockchains is high energy consumption for mining. DAG significantly reduces energy usage by eliminating the need for mining. Digital currencies that utilize this technology can process transactions without excessive energy consumption.

Micro-Payments Processing: DAG technology efficiently handles micro-payments. Due to the absence of miners for transaction confirmation, processing costs are minimized. Additionally, this cost does not increase with network congestion, making the technology highly suitable for micro-payments.

Advantages of DAG

High Speed: In DAG networks, transactions are processed simultaneously without the need for block generation. This leads to faster transaction confirmations, and the number of transactions that can be processed concurrently is much higher than in traditional blockchains.

No Need for Mining: Unlike blockchains based on Proof of Work (PoW) consensus mechanisms, DAG networks do not require mining processes. This feature not only reduces costs and energy consumption but also significantly decreases carbon emissions, which is highly important from an environmental perspective.

Zero or Minimal Transaction Fees: Due to the absence of miners in DAG networks, transactions are typically processed without fees. This makes DAG extremely suitable for micropayments, where high transaction fees can render small transactions inefficient.

Scalability: DAG networks are inherently more scalable than blockchains because they do not require block generation. This feature is particularly useful in the IoT world, where a large number of devices interact with each other, allowing for the processing of a vast number of transactions.

Suitable for Micro-Payments: Owing to low transaction costs and zero fees, DAG technology is highly appropriate for micro-payments. This allows users to perform small transactions efficiently and quickly without incurring additional costs.

Lack of Maturity in Decentralization:

DAG networks may contain points that lead to network centralization. These points could allow third-party entities to gain more control over the network. Although this might be beneficial for quickly launching a network, it could create vulnerabilities in the long term, including the possibility of cyberattacks and network hacks.

Lack of Large-Scale Testing of DAG Technology:

Despite some cryptocurrencies and projects using DAG technology, it has not yet been fully tested on a large and widespread scale. This raises concerns about the performance and reliability of DAG under various conditions. It is still unclear how DAGs will perform under high pressure and widespread use and whether they can be a reliable alternative to blockchains.

Comparison of DAG and Blockchain:

Both DAG (Directed Acyclic Graph) and blockchain technologies are used as data structures for creating distributed ledgers, but there are fundamental differences in their operation and features, which have various impacts on efficiency, scalability, and security. The following is a comparison of these two technologies:

Data Structure

Blockchain: Blockchains use a sequential chain structure. Each new block is connected to the previous one, forming a chain of blocks. This structure is linear, which is why it is called a "blockchain."

DAG: In contrast, DAG is a directed acyclic graph. In this structure, each transaction can be connected in parallel to several other transactions, meaning transactions do not need to be connected linearly to each other.

Scalability and Throughput

Blockchain: Due to the linear structure and the need to sequentially confirm each block, scalability is limited, and transaction processing speed (throughput) may decrease as the number of transactions increases.

DAG: Since transactions occur in parallel, DAG can offer higher scalability and throughput. This feature makes DAG particularly suitable for systems that require processing a large number of transactions in a short time (such as the Internet of Things).

Transaction Confirmation

Blockchain: In a blockchain, each block is confirmed by miners, which usually requires significant computational power and can be time-consuming.

DAG: In DAG, transactions are confirmed by the network's users themselves. Each new transaction is connected to previous transactions for confirmation, and this process happens in parallel, reducing time and cost.

Security

Blockchain: Blockchains use Proof of Work (PoW) or Proof of Stake (PoS) algorithms to secure the network. These methods, given the blockchain's chain structure, prevent attacks.

DAG: Security in DAG is maintained differently. As the number of transactions and connections between them increases, altering a transaction becomes increasingly difficult. However, some critics argue that DAGs may be more vulnerable to specific attacks, such as Sybil attacks.

Resource Consumption

Blockchain: As the network grows and the number of blocks increases, more storage space and bandwidth are required. This can lead to increased costs and reduced efficiency.

DAG: Due to its different structure and transaction confirmation method, DAG requires fewer resources and can therefore be more economical.

Applications

Blockchain: Primarily used in cases where high security and transparency are required, such as in cryptocurrencies (like Bitcoin and Ethereum) and smart contracts.

DAG: Due to its high throughput and scalability, DAG is more suitable for applications requiring a large number of transactions, such as the Internet of Things and micro-payments.

Overall, each of these technologies has its own advantages and disadvantages, and the choice between them depends on the specific needs of a project. Blockchain is known for its higher security, while DAG is recognized for better scalability. The choice between them depends on factors such as security, efficiency, and available resources.

Which Cryptocurrency Projects Use DAG?

DAG technology has been implemented in several cryptocurrency projects, each designed with unique features and goals. Below, I will introduce three significant projects that utilize this technology:

IOTA

IOTA is one of the first projects to use DAG technology, opting for a structure called "Tangle" instead of blockchain. In this system, users must validate two other transactions in order to confirm their own. This model helps improve scalability and reduce transaction costs. IOTA is particularly suitable for both small and large payments in the IoT sector, offering fast and cost-effective transactions.

Nano

Nano uses a combination of DAG and blockchain technology, introducing a structure called "Block Lattice." In Nano, each user has a separate blockchain, allowing them to conduct transactions independently of other chains. Nano has gained popularity due to its extremely fast transactions and zero fees, making it an excellent option for quick and low-cost payments.

Obyte DAG (formerly Byteball)

Obyte utilizes DAG technology, allowing transactions to be conducted without the need for miners and high costs. Unlike some other DAG projects, transactions in Obyte do incur fees, which are considered as costs for using the network. Obyte supports smart contracts and untraceable transactions, with consensus being based on witnesses who act as validators.

Conclusion:

It cannot be definitively stated that one of these technologies is better than the other; rather, each has its own specific advantages and disadvantages, and one may be preferred over the other depending on the use case. For example, if the goal is high speed and low transaction costs, DAG technology may be more suitable. However, if the priority is high and proven security, blockchain might be the better option.

Overall, the choice between blockchain and DAG depends on the specific needs of the project, the number of users, the volume of transactions, and the importance of decentralization and security. Both technologies are still evolving, and future innovations may make the choice between them even more challenging.