DAG vs Blockchain: Differences, Pros, and Cons

Distributed ledger technology is an innovative approach to database management that has transformed how digital transactions are managed. While blockchain is the most prominent form of DLT, there are alternatives like Directed Acyclic Graph (DAG) that are just as efficient. 

Blockchain and Directed Acyclic Graphs provide developers with new ways to create Web3 experiences. While a blockchain development company and a DAG developer may achieve similar results as far as recording transactions are concerned, they differ significantly in how they process and validate data. This article discusses the differences between blockchain and DAG, exploring their specific use cases for different projects. 

• Blockchain and Directed Acyclic Graph (DAG) are two of the most common types of distributed ledger technologies offering decentralized data storage. While blockchain structures data in chronological blocks, DAG uses a web-like structure of interconnected transactions.
• Blockchain offers higher decentralization and security, while DAG excels in transaction speed, scalability, and lower fees due to its efficient structure. DAG’s transactions are verified by other transactions, bypassing the need for energy-intensive consensus algorithms like proof-of-work.
• Both technologies have promising futures and use cases. There’s also a potential for hybrid solutions that combine both of their strengths. 

Introduction to Distributed Ledger Technologies

Blockchain, the technology that brought us cryptocurrencies, smart contracts, and decentralized finance is a type of distributed ledger system. This is a set of technological infrastructure and protocols that allow transaction records to be stored and synchronized across multiple network nodes. 

All the participating nodes store the same copy of the ledger and any changes are synchronized simultaneously so that all the ledgers match. The nodes participate in transaction validation on the ledger after reaching a consensus on its accuracy. As a result, a distributed ledger system does not include a central data storage system or a central authority. This is known as a decentralization. 

While all blockchains are distributed ledgers, not all distributed ledgers are blockchains. A Direct Acyclic Graph is a different kind of blockchain that operates on a different set of rules or protocols while achieving the same purpose of decentralized data storage. This makes the DAG protocol a viable alternative to a traditional blockchain architecture.

How Blockchain Works

Blockchain is a distributed ledger technology that records transactions across a network of computers known as nodes. These nodes validate transactions through a consensus mechanism which can be a proof-of-work or proof-of-stake system. Verified transactions are then added as blocks, linked to previous blocks to form a chronological chain of all transactions, hence the name “blockchain”. 

Although blockchains don’t have a centralized authority to determine how new blocks are added to the chain, they still need third parties in the form of staking pools and block producers to create new transactions. 

The most popular use case of blockchain is cryptocurrencies such as Bitcoin and Ethereum. However, Bitcoin has several potential use cases across various industries including smart contracts for blockchain app development, decentralized financial services, digital identity management systems, and so on. 

How DAG Works

A Directed Acyclic Graph (DAG) is a different kind of distributed ledger system that stores transaction information in the form of a directed acyclic graph instead of the linear chain architecture of a blockchain system. 

In directed acyclic graphs, each transaction is stored as a node connected to other DAG nodes by directed edges. Each edge has a specified direction and cannot form cycles (acyclic), meaning there are no paths to return to the starting node. This acyclic structure ensures there’s a clear progression from one transaction to the next, preventing the formation of infinite loops.

In DAG, each transaction is verified by other transactions. This creates a web-like structure that allows simultaneous transaction processes, unlike blockchain where transactions are verified chronologically. Consequently, DAG technology offers faster transaction speeds and scalability. 

Comparative Analysis: DAG vs Blockchain

DAG vs Blockchain are similar in many ways and both technologies are connected by the same fundamental principles of decentralization. Yet, they aren’t quite the same. To understand their differences, we need to do a comparative analysis of the degree of decentralization they offer, their transaction speed, fees, and security considerations as highlighted below. 

Degree of Decentralization

In principle, the blockchain structure offers a higher level of decentralization compared to DAGs. Public blockchains typically have thousands of active nodes that participate in validating transactions and adding blocks to the network. The consensus mechanism of DAGs relies on fewer nodes. For instance, while Hedera Hashgraph, one of the most popular DAG-Based DLTs, is run by a governing council of up to 39 corporations, the Ethereum Network has 4,500 active nodes. Based on this, one could say that blockchain is a lot more decentralized than DAGs.

Transaction Speed 

Most DAG-based DLTs reach consensus a lot faster than blockchain networks do. That’s because they do not rely on miners or a staking pool to validate transactions. Also, unlike blockchain transactions where blocks are created chronologically, multiple DAG transactions can be validated at the same time since a transaction is verified by previous transactions. 

For instance, Hedera uses a gossip protocol where one node randomly shares information with another node and the nodes validate transactions based on this information. This consensus mechanism is a lot more efficient and requires less computation resources, leading to faster transaction speeds. 

Scalability

DAGs inherently offer higher scalability compared to blockchain. The DAG model is less resource-intensive which means an increase in daily transactions will result in lower energy consumption compared to blockchains. As a result, DAG ledgers perform better at handling more transactions without compromising speed. 

Transaction Fees

DAGs are generally cheaper than blockchains because they do not have mining fees or depend on intermediaries to validate transactions. So while transaction costs on the Ethereum network may be up to $0.90, the same transaction with Hedera will only cost about $0.0001 which is significantly lower. The high transaction fees are one of the biggest hindrances to the widespread adoption of blockchain.

Security Considerations

The security of a distributed ledger system depends on the number of nodes involved in validating transactions. Since a blockchain database depends on several nodes and offers a higher level of decentralization, it is generally more secure compared to DAGs. In fact, many DAG-based ledgers have a hard time maintaining security because of their smaller number of nodes.

Energy Consumption

Blockchain systems, especially those operating on a proof-of-work mechanism are typically energy-intensive. On the other hand, DAG-based ledgers process transactions faster and more efficiently. For context, while a proof-of-work blockchain like Bitcoin consumes about 240 to 950kWh of energy for a single transaction, a DAG technology like Hedera will only consume 0.0001 kWh for the same transaction. Even proof-of-stake blockchains that are generally hailed for their low energy consumption require significantly more energy than a DAG does. 

Popularity

Bitcoin emerged around 2009 as the first practical implementation of a distributed ledger system. The Directed Acyclic Graph (DAG) system only began to find application in the DLT world as a potential alternative to blockchain in the mid-2010s. Unsurprisingly, blockchain is still the most popular of these two options and the most commonly used DLT. While a few DAG-based projects like Hedera, Nano, and IOTA are gradually gaining popularity, they’re still not as widely used as blockchains are.  

The table below summarizes the differences between DAG vs Blockchain.

Consensus Mechanisms

As explained above, these two distributed database technologies need to validate transactions before they store data on the network. This is one of the fundamental differences between blockchain and DAG. 

Blockchain technology uses consensus mechanisms such as proof-of-work and proof-of-stake to validate transactions. The proof-of-stake (POS) consensus allows network nodes to stake some of their funds to validate transactions before they’re added to the blockchain as new blocks. In proof-of-work, participating nodes (also known as miners) compete to solve complex mathematical puzzles, expending extensive computation resources in the process. Both methods of achieving consensus on blockchain networks are potentially expensive and energy-intensive. 

Directed Acyclic Graphs use a less complex method to verify transactions. Each new transaction is validated by previous transactions, meaning there is less need for huge gas fees and computational resources. For instance, Hedera uses a gossip where nodes share any new information with another random mode, validating new transactions as they’re added to the graph. The network may also use a virtual voting system to achieve consensus. 

Blockchain and DAG Interoperability

Interoperability refers to the ability of different distributed ledger technologies to integrate with each other, sharing data and leveraging each other’s unique features. Today, every DLT has its own protocols that allow participants to intercommunicate within a network. However, it’s hard to extend this communication outside the DLT network. 

The aim of blockchain interoperability is to bridge these gaps. Thanks to recent advancements such as the introduction of relays, atomic swaps, bridges, and cross-chain protocols, many blockchain networks can now communicate with each other. 

But can these be extended to make blockchain and DAG interoperable? This will make it possible in principle to build an application’s front-end with a DAG-based protocol like IOTA while blockchain would work as the backend. A solution like this will leverage the respective strengths of the blockchain network and IOTA. For instance, the platform will be highly scalable thanks to IOTA while the blockchain backend provides strong security. 

In theory, it is possible to create this type of interoperable system with DAG and Blockchain. This DAG-based blockchain technology (also known DAGchain or blockDAG), will record data with the direct acrylic graph architecture instead of structuring them into blocks like traditional blockchains. 

Bridges and interoperability protocols may also help achieve some communication between isolated DLTs. Of course, interoperability between different blockchain and DAG systems will be technically challenging due to differences in their consensus mechanisms, data structures, and security models.

Use Cases and Popular Projects

Blockchain and DAG have both been used for a wide range of popular projects. Blockchain being the more popular DLT has enjoyed more mainstream usage, as evidenced by past blockchain trends and data. However, as a cheaper and more scalable alternative to blockchain DAG is fast gaming popular as well. Some of the most notable real-world use cases of these two technologies are highlighted below: 

Bitcoin Projects 

• Bitcoin: This is the pioneer blockchain technology and is still one of its most popular use cases. Bitcoin facilitates secure peer-to-peer financial transactions using a proof-of-work consensus mechanism which is characterized by high-energy consumption but offers high security as well. 
• Ethereum: Primarily a smart contract platform, Ethereum allows developers to build Ethereum-based applications on a decentralized network. While it also has tokens similar to Bitcoin, its most important use case is its robust ecosystem of decentralized finance platforms complex applications, and non-fungible tokens operating on the Ethereum virtual machine. 
• Hyperledger Fabric: Hyperledger Fabric is an open-source blockchain technology that serves as the foundation of several enterprise-grade applications with permissioned networks that enhance privacy, security, and control. 

DAG projects 

• IOTA: IOTA is a DAG-based framework that operates on a structure known as Tangle. It facilitates secure communication between IOT devices, but can also be used for micropayments and free data transfers. 
• Nano: Nano is a peer-to-peer cryptocurrency built on a DAG architecture. It has a block-lattice structure and facilitates fast and feeless transactions between peers on the network. 
• Hedera Hashgraph: Hashgraph is a DAG-based DLT solution with a wide range of uses including enterprise applications development with smart contracts, micropayments, and secure data sharing. The main benefit of this DLT is that it offers low latency and high throughput which is great for businesses. 

Predictions for the Future

Considering the many potential use cases of these two technologies, the future of blockchain and Directed Acyclic Graph seems quite promising. Factors that will shape how these DLT frameworks will evolve over the coming years include their speed, scalability, and security which differ considerably for each of them. 

Scalability and cost have been two of the biggest issues limiting the adoption of blockchain technology. With DAG presenting cheaper and equally efficient alternatives, small-scale businesses and organizations that have been unable to adopt DLT due to the high cost of blockchain technology may pivot towards DAG.

The technology is already showing significant potential, especially in IoT ecosystems, where DAG is being adopted due to its ability to facilitate better data management, security, and device interoperability.

However, as DAG technology matures, efforts will likely be geared toward achieving standardization and interoperability, especially with blockchain. This will lead to the emergence of hybrid solutions that combine the strengths of DLT solutions for various use cases, facilitating wider adoption.

Conclusion

As distributed ledgers, DAG and Blockchain can help establish a transparent system for recording and verifying transactions or data while eliminating centralized control. Since they both have their respective benefits (blockchain being inherently more secure and DAG being cheaper and more scalable), choosing between them depends on the specific needs of your project. To learn more, you can also take a deep dive into topics like hashgraph vs blockchain to see how they compare.