Directed Acyclic Graph (DAG) vs. Blockchain: Best Alternatives to Blockchain Technology

Are DAGs a better way to build distributed ledgers?

Hand grabbing onto blockchain in front of two hands pressing buttons on a network.
Created by Kornelija Poderskytė from DailyCoin

The directed acyclic graph (DAG) vs. blockchain debate brings new life to the cryptocurrency industry. Ever since Satoshi Nakamoto first published the Bitcoin (BTC) white paper, distributed ledger technology (DLT) has exploded in popularity. Many crypto enthusiasts don’t know blockchain systems aren’t the only decentralized network.

While they have plenty of similarities, DAG-based networks like Hedera Hashgraph (HBAR) and IOTA (MIOTA) work slightly differently from traditional blockchains like Ethereum (ETH).

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What is a directed acyclic graph? Are DAG networks truly better equipped to handle real-world use cases?

This article will explore the basics of DAG technology and how it stacks up against blockchain networks.

What Is a Directed Acyclic Graph (DAG)?

A directed acyclic graph, or DAG, is a distributed digital ledger that records transactions and stores cryptocurrency. Like a Layer 1 blockchain, some DAG networks support smart contracts and host innovative dApps and DeFi products.

To the untrained eye, using a DAG isn’t very different from using a traditional blockchain. However, looking under the hood, you’ll find that DAG-based networks use a slightly different data structure.

How Do Directed Acyclic Graphs Work?

In a blockchain, new blocks are validated by nodes or miners and added to the network. Nodes validate new transactions by confirming their data against the recorded history of previous transactions in the last block.

If a blockchain resembles a chain of blocks, a DAG looks more like a tree with unclosed vertices and edges. Every node in a DAG-based model can have more than one parent root, meaning multiple new transactions can be validated simultaneously. Instead of referencing only the last block, DAG nodes reference previous transactions from any node in the network.

In a directed acyclic graph, interconnected nodes build off each other and reference multiple transactions. This theoretically makes them more expansive and eases network congestion. 

Like traditional blockchains, nodes achieve network validation by ‘agreeing’ on the network state through consensus algorithms. Generally speaking, DAG networks use the Proof-of-Stake (PoS) consensus mechanism due to its low energy consumption. 

Which Crypto Projects Use DAG Technology? 

Despite being a relatively new DLT system, DAG-based networks are proving popular within the crypto market. Crypto projects like Hadera Hashgraph and Fantom (FTM) are built using DAG technology to great effect. They are supporting thousands of users within their thriving ecosystems.

Other projects include IOTA, a directed acyclic graph designed to support Internet-of-Things (IoT) applications, and Nano, a decentralized payment network.

Distributed Ledger Technology (DLT) Compared: DAG vs. Blockchain

While it’s important to understand how directed acyclic graphs work, most people are more interested in results. How does DAG technology fare against traditional blockchain standards?

Scalability

DAG networks were invented to solve some of the scalability issues faced by legacy Proof-of-Work blockchains, including high transaction fees and low throughput.

Speed

On paper, a directed acyclic graph can reach consensus and process transactions faster than blockchain networks. Why? Blockchains are only able to create one new block at a time, and cannot begin producing a new block until the previous one has been completed.

In contrast, nodes in DAG-based networks can reference multiple other operators simultaneously. In Hadera Hashgraph’s Gossip protocol (pictured below), nodes share information with each exponentially, meaning large amounts of data flow freely across the network quickly, helping nodes reach validation quickly.

Blockchain vs hashgraph diagram.
Source: IntellectSoft

While this sounds great in theory, DAG-based networks like Hadera Hashgraph and Fantom still can’t achieve the same transaction speeds that we see in top PoS chains like Solana (SOL) or Aptos (APT).

Costs

Compared with legacy traditional blockchains like Ethereum and Avalanche, DAG-based networks are more affordable. Transaction fees on Hadera Hashgraph cost as little as a fraction of a penny, while a similar transaction on Ethereum might set you back a few dollars.

The competition gets a bit tighter between Fantom and Avalanche, with both networks demanding only a few cents to process transactions. It’s also important to mention that network demand plays an important role here. While Ethereum, Avalanche, and Fantom have all witnessed spikes in gas prices due to congestion, Hadera Hashgraph’s scalability hasn’t been truly tested yet.

Energy Efficiency

If there is an area where DAGs shine, it is their sustainability. Directed acyclic graphs typically boast low energy consumption rates, making them an ideal candidate for global adoption.

To give you an idea, the Fantom network uses between 0.000024-0.000028 kWh to process a single transaction. While it has made huge strides in reducing its environmental impact by moving to a PoS consensus, it still uses 0.03 kWh to execute a transaction. 

Decentralization

Due to slow adoption rates, decentralization is a weakness for DAG networks. For example, the Hedera Hashgraph is governed by the Hedera Council, a central committee of 39 node operators. Compared to Ethereum, which has over 500,000 validators, you can see how easy it would be to convince a majority of validators to take over the network.

Additionally, DAG networks are less secure than their blockchain counterparts. Blockchains benefit from a ‘global state’ or a universally agreed-upon condition of the network with the creation of each new block. In a DAG, this global state is altered every time a new transaction is processed. 

If communication between nodes isn’t fast enough to ensure every node is referencing correct information, there are increased chances of vulnerabilities or inaccuracies.

DAG Technology & The Ethereum Virtual Machine

Despite the architectural differences behind the scenes, most users won’t be able to tell the difference between using a DAG or a blockchain. This is due mainly to the simplicity and practicality of the Ethereum Virtual Machine.

Top DAG-based networks like Fantom and Hedera are both EVM-compatible. Their smart contracts are generally written in Solidity and compatible with EVM wallets like Metamask. Thanks to the EVM, developers can easily ‘copy and paste’ Ethereum-based applications directly onto Fantom and Hedera. 

The Verdict

Directed acyclic graphs are fast and affordable networks far more scalable than legacy blockchains like Bitcoin or pre-merge Ethereum. However, they still face some decentralization and security issues that might discourage some users. 

Moreover, modern Proof-of-Stake blockchains like Solana and Aptos are theoretically more scalable than the leading DAG networks, meaning DAGs still have some work to do to compete with top Layer-1s.

That being said, blockchain technology has been in development for much longer than DAG networks. With time and resources, DAG-based networks might still overcome their current limitations and push new boundaries in distributed ledger technology.

On the Flipside

  • From an end-user perspective, it’s almost impossible to tell whether you’re using a directed acyclic graph or a blockchain. The average person doesn’t care about the underlying infrastructure as long as the final product is functional and serves its purpose.

Why You Should Care

Directed acyclic graphs are a creative method of building a distributed ledger. Just because blockchain is the most common and best-understood kind of DLT network, that doesn’t mean that innovative new systems can’t emerge and improve the industry.

FAQs

What does DAG mean in blockchain?

DAG is an acronym for directed acyclic graph. Like a blockchain, a DAG is a network architecture for storing data and digital assets on a distributed ledger.

Does Bitcoin have a DAG?

No, Bitcoin does not have a DAG. Bitcoin uses blockchain technology to record a distributed ledger of accounts and transactions.

Is DAG decentralized?

Yes, in most cases DAG-based networks are decentralized. However, the top DAG crypto projects like Hedera Hashgraph and Fantom are less decentralized than leading blockchains like Bitcoin and Ethereum.

What is the advantage of DAGs?

DAGs are considered to be more scalable than blockchains because nodes can validate new transactions simultaneously. On a blockchain, the network validates new blocks one by one.

Does Cardano use DAG?

No, Cardano (ADA) does not use a DAG system. Cardano is a blockchain that uses a Proof-of-Stake consensus mechanism to secure the network.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Finn Miller

Finn Miller is a New Zealand-based blockchain writer for DailyCoin who specializes in simplifying complex blockchain topics. He is experienced in crafting whitepapers, researching on-chain data, and advising emerging crypto projects, and uses his unconventional approach to learning and passion for knowledge to provide cornerstone educational content for readers of all levels. When not exploring the depths of DeFi, Finn can be found exploring his other passion, the great outdoors.