What is DAG? Discover the revolutionary alternative to blockchain technology

Since the beginnings of blockchain technology, it has been clear that it offers significant advantages over traditional banking systems. Although it took time, financial institutions eventually paid attention to these innovations. However, blockchain is not the only revolutionary technology to emerge from the fintech sector. Many in the crypto world consider DAG (Directed Acyclic Graph) to represent another transformative breakthrough in the industry. While some compare it to blockchain, DAG is actually a completely different solution and, for many, a superior alternative.

DAG vs. Blockchain Technology

DAG is a data modeling tool that uses a graphical structure instead of the traditional chain structure. Some cryptocurrencies have adopted it as a primary alternative, and many in the crypto community promote it as the “blockchain killer.” What mainly differentiates DAG is its ability to process transactions faster and more efficiently than traditional block-based systems.

Blockchain remains the dominant technology in the cryptocurrency industry today, but DAG presents features that could change this landscape. The question many ask is whether the day will come when it completely replaces blockchain.

The Architecture of DAG

The DAG structure is based on circles and lines. Each circle, known as a vertex, represents a transaction that must be validated on the network. The lines, called edges, establish the order in which these transactions are approved. These lines only move in one direction, which is the origin of the name “Directed Acyclic Graph.”

The reason for the term “directed” is that the lines go in a single direction. It is called “acyclic” because the vertices do not loop back on themselves, forming a structure without cycles. This setup allows data to be organized more efficiently than in a traditional blockchain, where transactions are grouped into blocks that must be validated sequentially.

Unlike blockchain, in DAG transactions are not packaged into blocks but built upon each other. This fundamental feature significantly improves processing speed compared to blockchain systems.

Key Differences Between DAG and Blockchain

Although both systems serve similar functions in the crypto industry, their operational mechanisms are very different. DAG does not create blocks like blockchain does but constructs transactions sequentially, one on top of another. While blockchain resembles a chain of connected blocks, DAG looks more like a graph of connections.

This structural difference has profound implications in terms of speed, scalability, and energy consumption. The absence of blocks eliminates waiting times associated with mining and block validation, enabling continuous transaction processing.

How Does DAG Technology Work?

To understand how DAG operates, it is important to grasp its essential component: each circle or vertex represents an individual transaction. Transactions are built upon each other, forming a directed chain.

When a user wants to make a transaction, they must first confirm a previous transaction sent by another participant. These unconfirmed previous transactions are called “tips.” The user must verify these tips before submitting their own transaction, which then becomes the new tip, waiting for another user to confirm it to perform their own operation.

In this way, the community builds layer upon layer of transactions, allowing the system to grow continuously. This mechanism ensures that all participants contribute to the validation process, fostering a truly decentralized network.

DAG includes a sophisticated system to prevent double spending. When nodes validate old transactions, they verify the entire history up to the original transaction. This ensures that the balance is sufficient and everything is in order. Users attempting to build on an invalid chain risk having their transactions ignored, even if they are legitimate, if the balance is inconsistent due to previous fraudulent transactions.

Applications of DAG in Cryptocurrencies

DAG is mainly used to process transactions more efficiently than blockchain. Without the need for blocks, waiting times are eliminated, allowing users to send multiple transactions without significant delays.

Another major benefit is its energy efficiency. Unlike blockchain, which uses Proof of Work (PoW) with high energy consumption, DAG-based cryptocurrencies require only a fraction of that energy, significantly reducing their carbon footprint.

DAG is particularly advantageous for microtransactions. While blockchain may struggle with small payments due to high transaction fees, DAG offers very low or zero fees, with only small node charges. Even during network congestion, these fees remain stable.

Projects Using DAG

Although many believe DAG is more efficient than blockchain, only a handful of projects currently implement it. IOTA is the most prominent example, an acronym for “Internet of Things Application.” Launched in 2016, IOTA is known for its fast transaction speeds, superior scalability, robust security, and privacy protection. It uses nodes and Tangles (combinations of multiple nodes validating transactions). To approve a transaction, users must verify two previous transactions, ensuring everyone participates in the consensus algorithm and maintaining a fully decentralized network.

Nano is another project that implements DAG, although it is not a pure DAG project but combines elements of DAG with blockchain technology. All data is sent and received through nodes, and each user has their own wallet. Nano is recognized for its instant transactions, scalability, security, and especially for its zero transaction fees.

BlockDAG also adopts DAG in its infrastructure, offering energy-efficient mining equipment and a mobile app. Unlike Bitcoin, which reduces its reward every four years, BlockDAG reduces it every 12 months, significantly altering its issuance model.

Advantages and Disadvantages of DAG

Like any technology, DAG has both strengths and important limitations.

Main Advantages:

DAG provides speed without block time restrictions, allowing anyone to process their transaction at any moment. There is no limit to the number of transactions, only the need to confirm previous ones.

Fees are zero or extremely low, since there is no traditional mining. This feature is especially beneficial for microtransactions. Additionally, by not relying on Proof of Work, DAG consumes much less energy and has a minimal carbon footprint. Scalability is virtually unlimited without the bottlenecks associated with block times.

Main Disadvantages:

Some DAG protocols exhibit elements of centralization. Many accept this as a temporary solution to establish the network initially, but DAG has not yet reached a point where it can fully thrive without third-party interventions. Without these interventions, the network could be vulnerable to attacks.

Furthermore, although it has been around for several years, DAG has not been adopted as quickly as other blockchain protocols like Layer-2 solutions. Time will tell if this technology can achieve full-scale validation.

Final Reflection

Directed Acyclic Graphs represent a fascinating technology with enormous future potential. While they offer significant advantages such as lower fees and greater scalability compared to blockchain, they are still relatively young in development. DAG faces important challenges that it must overcome to truly challenge blockchain dominance. The technology is still in its early stages, with many of its limitations and possibilities yet to be explored. However, the advantages it presents generate optimism within the crypto community about how DAG will evolve as new use cases and technical improvements emerge.