DAG – An Alternative Ledger System for Cryptocurrencies
Blockchain-free cryptocurrencies are those that use alternative systems in order to function similarly to cryptocurrencies that utilize blockchain technology.
Sergio Demian Lerner published a paper in 2015 outlining his concept of a cryptocurrency called DagCoin, which deployed DAG technology instead of blockchain technology.
DAG stands for Directed Acyclic Graph and can serve as a viable alternative to blockchain technology as shown in cryptocurrencies such as DagCoin, ByteBall, and IOTA.
In a DAG system, there are no miners and there are no blocks, users confirm each other’s transactions via a process that confirms previous transactions with each new transaction. Because there are no blocks, there is no blocksize issue and therefore, the block scaling debate seen in currencies such as Bitcoin does not exist.
In blockchain technology, transactions are grouped into blocks (represented by squares above) and are confirmed by miners and subsequently added to the chain. In DAG technology, each new transaction confirms at least 1 previous transaction. Transactions are not grouped into blocks (transactions are represented as circles, the red lines represent the confirmation “link” between new transactions and previous transactions).
Consider the Efficient Teacher Analogy:
Grading papers can be a considerable workload for any teacher. If Bob the teacher has 5 classes or approximately 150 students, he may have to grade 150-300 papers/assignments per week.
Rather than spend a significant amount of his free time grading these papers from scratch, Bob decides to hold a peer-review session in each class once a week for students to grade each other’s’ papers.
Each new student who turns in a paper must review the paper of another student who previously turned in a paper during the same class period.
Now all Bob has to do is quickly review each peer-graded paper as they are turned in to ensure that students are grading fairly. The occasional error is inevitable but Bob is on the lookout for such errors and he will manually take care of them as they present themselves.
DAG is very similar to this peer-grading system. Instead of having large mining firms confirming transactions via proof of work, DAG employs the very transactions that users make in order to confirm each other’s transactions.
DAG is essentially a distributed, peer-confirming system at scale. The more new transactions on the network, the more the available transactions to confirm previous ones. DAG could solve many issues associated with blockchain technology:
- Increased Speed – Low speed is a common problem with blockchain systems. DAG solves this by confirming transactions on a transaction to transaction basis rather than a block to block basis. Rather than waiting for miners to process a large block of transactions, DAG allows users to process each other’s transactions on a micro scale – leading to lowered TX costs and faster TX times.
- Increased Reliability – Built-into the DAG system is the multiple confirmation of transactions – both direct and indirect confirmations. This leads to an increased level of security and decreased likelihood of double-spending when compared to transactions on a standard blockchain.
- Simplified Mining – Mining on a typical blockchain cryptocurrency (Bitcoin for example) has led to an oligopoly issue. That is, the majority of mining power is being sent to mining pools because of the increasing difficulty of successfully mining a block. By joining a mining pool, individual miners greatly increase their chance for profitability at the cost of sharing their profit with the entire pool. These mining pools have led to the majority of hashpower being concentrated in just a few places and in just a few pools. This leads to a centralization effect that directly violates one of the main principles of Bitcoin and cryptocurrencies. Blockchain-free solutions such as DAG aim to solve this issue. Through the key role of individual transactions coupled with the speed at which transactions are processed, DAG provides less power in a technological sense to miners.
- Centralization of mining: as mentioned above, centralization of mining, especially in terms of mining pools, is becoming an increasingly difficult problem to solve in the current state of blockchain technology. The implications of centralized mining can easily lead to damaging abuses of cryptocurrency ecosystems.
- Advancement of Quantum Computing: currencies such as Bitcoin run based on cryptographic “puzzles” that are hard to solve with current hardware. As technology advances, how obsolete will these “puzzles” become? This is a long-term issue with cryptocurrencies and won’t be the source of any near-term panic, but it is an issue that must be considered over the coming years. Tangle (DAG) transactions aren’t confirmed using the same “puzzle” functions as Bitcoin and thus aren’t vulnerable to this issue.
- High Transaction Fees = No Micro payments: Low or no transaction fees are essential when it comes to creating an ecosystem where micro payments and transactions can be regularly sent. In the current state of Bitcoin and others, micro payments are illogical because of the high transaction fees. IOTA, for example, touts zero transaction fees with their Tangle – a necessary step, they say, toward integration with the internet of things (IoT).
- Division of Participants: In many blockchain applications, participants are divided into several different categories/roles. These roles can lead to fundamental differences in opinion and thus, can result in more conflict in the network. This conflict needs to be solved and will require the use of resources to do so – time, hashpower, money, etc.
- Limit of Scalability: The nature of blockchain technology and the usage of block confirmation can result in both long-term and short-term scalability issues. You’ve probably heard quite a lot about the Bitcoin scaling debate, segwit 2x, bitcoin cash, etc. These forks on the Bitcoin blockchain are aimed to solve the scaling issues associated with Bitcoin. If these issues are left unsolved, we’ll see rising issues of transaction fees, long transaction times, “clogging” of the network and even decreased security.
- Hardware Scaling Issues: This topic is related to that of the centralization of mining. The costs associated with mining hardware are on the rise and are subsequently raising the cost of entry to the mining space leading to centralization. The less discussed costs associated with energy usage and global footprint are also issues. If the number of cryptocurrencies and usage of them continue to rise, this global footprint will increase and cause even more issues.
- Data Volume: The nature of blockchain technology is such that nodes need to keep individual records of the blockchain and its historical transactions. Again, as usage increases, so will the issues of scalability. DAG’s deployment of transaction to transaction confirmation could solve these issues of scalability by being much lighter and having alternative methods of ledger distribution.
Current Implementations of DAG Technology:
Iota deploys a mechanism they call “Tangle.” Tangle is based on DAG technology and is at the heart of the Iota ecosystem.
IOTA’s mission is to be the backbone of the internet of things (IoT) and bring about what they call “The Economy of Things.” IOTA makes it clear than in order to create an efficient ecosystem where people will actually interact with the IoT, there needs to be low or no transaction (tx) fees.
“In this new autonomous Machine Economy IOTA will be the backbone. The Tangle ledger is able to settle transactions with zero fees so devices can trade exact amounts of resources on-demand, as well as store data from sensors and dataloggers securely and verified on the ledger.”
ByteBall aims to create a widely adopted smart payments network that touts a plethora of use cases, made possible with DAG technology:
- -P2P (Peer-to-Peer) Insurance
- -Prediction Markets
- -P2P Betting
- -P2P Payments Via Text Messaging
- -Bot Stores
- -Blackbytes for Private Transactions
“Mass adoption requires wide distribution, that’s why 98% of all bytes and blackbytes are to be distributed for free.
Part of the Bytes will be distributed as cashback for purchases at the merchant stores we partner with. In most cases, the offered cashback is 10% of the purchase amount. Fill out the application form or contact us if you run a store or a payment processor and want to be part of the cashback program.
Another part of the distribution is split into multiple rounds and in each round holders of BTC and Bytes are rewarded. The amounts you receive are proportional to your proven balances in BTC and Bytes on the distribution date, these are the rules for the November round:
-For every 16 BTC you receive 0.1 GB (1 gigabyte = 1 billion bytes),
-For every 1 GB you receive additional 0.1 GB.”
Created to be “The Most Usable Cryptocurrency In the Universe”, DagCoin aims to deliver on a fast and scalable network with almost zero transaction fees by deploying DAG technology.
“We love Bitcoin, we really do… but what we all need is a cryptocurrency that gets faster every time a new transaction is made. Not vice versa. Bitcoin just gets slower… and slower. And this is exactly why we created Dagcoin – to become one of the fastest and most easy-to-use cryptocurrencies in the universe.”
Is DAG the future of cryptocurrencies? Can DAG compete with blockchain technology? Do DAG and blockchain even need to compete, or are they to have totally separate and/or interconnected use cases?
Time can only tell what these technologies will be used for and how they will interact with each other. DAG and blockchain accomplish similar goals with different techniques. There are tradeoffs to both and there many developers on both sides – though it should be noted that there are significantly more developers on the blockchain side.