The Directed Acyclic Graph, a form of distributed ledger technology, is often perceived as a rival to blockchain. But how do they truly differ, and can DAG be referred to as a competitor?

The Directed Acyclic Graph (DAG) technology introduces multiple advantages to the crypto market, including potential scalability enhancements, reduced transaction times, and a flexible structure. These benefits have led many to consider DAG as the next step in the evolution of decentralized systems.

Read on to delve deeper into the workings of DAG and its myriad use cases. Discover how it compares to blockchain and learn about real-life projects and protocols that have adopted DAG technology.

What is DAG technology?

DAG technology is a data modeling and structuring tool that uses vertices and edges. Unlike blockchain, where transactions are recorded in blocks, DAG transactions are represented as vertices that build upon one another.

However, much like on blockchain, transactions on DAG are also routed through nodes. To submit a transaction, nodes need to complete certain tasks, similar to the Proof-of-Work (PoW) consensus mechanism.

Directed Acyclic Graphs (DAGs) serve as efficient tools to depict and manage complex workflows and data processing tasks. They detail the sequence and directionality of tasks, ensuring a clear path from one activity to the next without any loops.

How does DAG technology work?

DAG technology operates using a tree-like architecture where interconnected nodes serve as its “branches”. Since each node can have more than one parent root, the model allows for more transactions to be validated simultaneously. So, users don’t have to wait till the previous transaction completes to process a new one.

In a Directed Acyclic Graph, each vertex represents a transaction. There are no blocks, so mining is also not required. Transactions are built on top of one another, and Proof-of-Work tasks are done whenever a node submits a transaction. This allows for validating prior transactions and avoiding spam.

To prevent double-spending in DAGs, nodes validate earlier transactions by retracing the route to the initial transaction, determining the sender’s balance adequacy. If a user bases a transaction on a flawed route, it might be ignored.

As for the conflicts resulting from multiple paths, DAG technology resolves them through an algorithm that prioritizes tips with a more substantial accumulated weight.

DAG technology key benefits

From high speed and ease of scalability to flexibility and reduced transaction fees, DAG technology offers multiple benefits.

High scalability

DAGs can process a high number of transactions per second (tps), making them more scalable than many blockchain systems. For example, Constellation Network can process 11k tps, with only 6 nodes. As more participants join and use the network, the performance can actually improve, rather than degrade. This is because DAGs aren’t constrained by block generation times.

High transaction execution speed

One of the main benefits of DAG technology is its rapid transaction speed. This allows any user to send transactions to the network and receive approval simultaneously. This is especially beneficial for applications requiring near-instant transaction confirmations.

Reduced transaction fees

Since DAGs don’t require miners to validate transactions, this leads to low transaction fees. It allows for the inclusion of more transactions without the concern of rising fees.

Good flexibility

DAGs can be integrated with different consensus mechanisms and can be used for multiple applications beyond just currency. This includes IoT development, supply chains, and various other sectors.

Improved performance with rising traffic

Unlike traditional blockchains, such as Bitcoin and Ethereum, that suffer slowdowns during traffic spikes, a Directed Acyclic Graph gains momentum. As the volume of transactions increases and more users engage, the DAG network’s performance improves. This is particularly beneficial for platforms expecting high transaction volumes.

DAG vs Blockchain

Since DAG technology is often referred to as a blockchain rival, we will analyze both technologies paying attention to their similarities and distinct features.

In the DAG technology vs Blockchain infographic below, we’ve outlined their main differences based on multiple aspects.

Structure

Blockchain operates as a distributed ledger, wherein all network nodes replicate its content. This ledger chronologically lists transactions in immutable blocks. After that, they are validated to a series of previously confirmed blocks.

In contrast, DAG technology functions as a web of individual transactions, each interconnected with several others. Unlike blockchains, DAGs don’t cluster transactions into blocks. They are more tree-like, expanding from one transaction to another.

Consensus

In blockchain systems, consensus is reached by verifying transactions in blocks. One common method for this is the Proof-of-Work consensus, wherein participants, called miners, compete to solve complex computational challenges. Miners who successfully validate a block receive a reward.

In DAG technology, transactions provide validation for one another. DAG network participants act both as miners and validators but they cannot authenticate their own transactions. Consequently, DAG systems often have minimal to no transaction fees.

Scalability

Thanks to their ability to process transactions concurrently, DAG-based ledgers demonstrate enhanced scalability compared to blockchain networks. Furthermore, Directed Acyclic Graphs can easily handle a surge in transaction numbers.

Blockchain developers, in contrast, often struggle to build networks that can handle significant increase in transaction activity.

Transaction speed

Since blockchain networks process transactions in blocks, the time to confirm a transaction often depends on the network’s block time. The speed of transactions can significantly vary depending on the blockchain. For example, Solana on average processes 4,000 tps whereas Bitcoin can handle only 7 tps.

DAGs allow for transactions to be added in parallel, which can increase throughput and decrease confirmation times. For example, Hedera Hashgraph can process 10,000 tps.

Degree of decentralization

Blockchains, especially market mastodons like Bitcoin and Ethereum, are known specifically for their high degree of decentralization. Their wide distribution of nodes makes it difficult for any single entity to gain control over the network, thereby ensuring its decentralization.

However, not all blockchains offer the same level of decentralization. Some newer and more scalable blockchains might use fewer nodes, which decreases their decentralization. For example, the EOS blockchain uses a Delegated Proof-of-Stake (DPoS) system where token holders vote for 21 block producers. These producers validate transactions, enhancing throughput. While this increases throughput and scalability, it can be argued that having a limited number of block producers centralizes the network to an extent.

In contrast to blockchain platforms, DAGs face challenges with decentralization, partially because of lower adoption rates. For instance, Hedera Hashgraph, which is overseen by the Hedera Council, has a central group of 39 node operators compared to Ethereum’s 500,000 validators.

Level of adoption

When it comes to the adoption of distributed ledger technologies, blockchains like Bitcoin and Ethereum have been pioneers, gaining significant traction and awareness over the past decade. These platforms have established themselves with a considerable user base and diverse application ecosystem.

DAGs, on the other hand, are relatively newer in the scene and face challenges in gaining widespread acceptance. Their unique structure and benefits, such as scalability and lower transaction costs, make them promising for future applications. However, they’re still in the early stages of adoption compared to some more established blockchains.

What projects and protocols use DAG technology?

Below we’ll provide you with insights into the most prominent protocols employing DAG technology. These are Constellation Network, Hedera Hashgraph, and Fantom.

Constellation Network & Hypergraph Transfer Protocol

Constellation Network stands at the forefront of distributed ledger technology, blending the best of Directed Acyclic Graph and blockchain elements. It uses DAG architecture, the native DAG coin, and the Hypergraph Transfer Protocol (HGTP) to manage and verify data exchanges and transactions throughout the network. It also provides the Hypercube development suite, a tool tailored for developers harnessing the Hypergraph Transfer Protocol and enabling them to develop efficient dApps.

The Constellation Network is structured into layers, each with distinct functions. Here’s a quick overview of each layer:

Global L0 Network (Hypergraph)

The foundational layer where data is organized and validated
Work is done by validator nodes which are central to the protocol
Mainly focuses on cross-chain interactions and shareable execution

Metagraph Networks

Subnetworks that do their own data validation
They act on data triggers from off-chain sources
Each metagraph manages state, similar to conventional blockchains
Enable separate processing between unrelated state updates

DAG L1 Network

Specifically validates DAG currency transactions
Transactions are grouped into blocks
Relies on Global L0 for final validation
Supports $DAG, the network’s native currency

Hypergraph Transfer Protocol offers a novel approach to distributed ledger technology. By employing DAG technology, it offers a scalable and feeless solution enabling small and medium-sized enterprises to build decentralized applications. Notably, the HGTP network integrates effortlessly with existing centralized IT systems.

Furthermore, the Directed Acyclic Graph architecture of the protocol allows for limitless horizontal expansion. Thus, as more participants join the network, its speed and efficiency amplify. This unique construct addresses the so-called blockchain trilemma by ensuring the network remains secure, thoroughly decentralized, and scalable.

At the heart of the Constellation HGTP Network lies a secure communication protocol tailor-made for extensive networks and simultaneous operations. The protocol is driven by the unique Peer-to-Peer (P2P) reputation mechanism, named Proof of Reputable Observation (PRO).

This mechanism incorporates advanced machine learning techniques, which helps balance the system by linking the performance of validators to the rewards they receive. So, here is how it works:

To become a validator, one must stake a certain number of DAG coins
Validators earn rewards in DAG tokens
The reward amount depends on how much the node contributes to the network and the reliability of the new nodes it brings
The best score a validator can get is 1.0. The higher the score, the more DAG coins they earn

Hedera Hashgraph & Hashgraph Consensus

Another example that employs DAG technology is Hedera Hashgraph. It’s an open-source public distributed ledger, harnessing the strengths of the hashgraph consensus to ensure transactions are conducted swiftly, fairly, and securely.

Hedera offers a comprehensive toolkit for developers, enabling them to build efficient dApps. The toolkit includes Solidity-based smart contracts, consensus, and native tokenization.

Hedera’s underlying consensus mechanism, Hashgraph Consensus, allows for increased speed, energy efficiency, and security.

In Hashgraph, every set of transactions is integrated into the ledger, with all branches persisting indefinitely, intertwining to form a unified structure.

Hashgraph Consensus is Asynchronous Byzantine Fault Tolerant. This ensures that no individual or small group can disrupt or modify the consensus. When compared to the blockchain, where a member never truly reaches the certainty of an agreement and only experiences an increasing probability over time, the Hashgraph Consensus ensures definitive agreement.

In the Hashgraph system, every user plays a role in the validation process, as opposed to only specific validators.

Let’s take a look at a real-life example. Imagine a classroom where students pass notes to each other about the upcoming test.

Lucy writes a note about a surprise test next week and passes it to Jake
Jake reads Lucy’s note, writes his own note about a homework assignment and passes both pieces of information to Mia
Mia adds her own piece of information, and the process goes on
By the end, each student doesn’t just have the latest piece of news but has all the news from every student before them

This is similar to the gossip mechanism in Hashgraph. Instead of just the latest transaction, each participant has a record of all previous transactions, ensuring everyone has the complete data.

Fantom & Lachesis Mechanism

Based on DAG technology, Fantom has created a smart contract platform designed specifically for the development and deployment of decentralized applications. It provides full compatibility with EVM and supports comprehensive smart contract development functionalities through Solidity.

At the heart of Fantom’s consensus lies the Lachesis mechanism, which combines Asynchronous Byzantine Fault Tolerance (aBFT) with directed acyclic graphs. Here, each validator has a local block DAG where they add transactions into event blocks. These blocks are then shared asynchronously with other validators.

However, blockchains still play a significant part in Fantom’s consensus approach. When an event block is propagated across validators, it transitions into a root event block once the majority of validators have agreed upon it. The block is then integrated into the mainnet representing the finalized agreement of all such root event blocks.

This hybrid approach offers the best of both worlds: the speed and efficiency of a DAG-based system and the order and finality of a traditional blockchain. In addition, with the added security layer of Proof-of-Stake, where validators stake tokens as collateral, Fantom ensures energy efficiency and the uncompromised integrity of its network.

What is the future of DAG technology?

DAG technology brings a promising advancement in the evolution of decentralized frameworks, providing an efficient solution to manage complex workflows and data processing tasks. DAGs have demonstrated efficiency in projects demanding thousands of transactions per second.

Moreover, DAGs present solutions in situations where blockchains fall short. Their potential for minimal to zero fees makes them particularly suited for micro or nano-transactions, such as those between devices and sensors.

Nevertheless, blockchain technology currently retains a strong position in the market, enjoying broader user adoption and wider market recognition. DAG is still in the process of garnering a wider audience. At present, there are projects like Hedera Hashgraph and Conventional Networks that are gaining traction. For example, as of August 2023, Conventional Networks boasts a market cap of over $49M, while Hedera Hashgraph’s market cap surpasses $1 billion.

Considering diving into DAG or evaluating which protocol is best for your needs? PixelPlex is here to guide you. Whether you require expertise in protocol selection or comprehensive dApp development services, do not hesitate to reach out to our professional team.