DAG - A technology for faster and more cost-effective cryptocurrency transactions than blockchain

Since the inception of blockchain, the decentralized finance industry has recognized that this technology offers new solutions compared to traditional banking systems. However, DAG (Directed Acyclic Graph) is also emerging as a notable competing technology. Many see DAG as a potential alternative to blockchain because it addresses limitations related to speed, transaction fees, and energy consumption.

What is DAG and why is it gaining attention?

DAG, or Directed Acyclic Graph, is a data structure used by some cryptocurrencies instead of traditional blockchain. Instead of grouping transactions into blocks, DAG constructs transactions based on each other in a specific order.

The reason DAG is gaining interest is because it solves three major blockchain issues: slow speed, high fees, and high energy consumption. With DAG, users can perform transactions faster, at lower cost, and with less energy usage.

How does DAG architecture differ from blockchain?

To better understand DAG, we need to analyze its structure. DAG architecture consists of vertices representing transactions and edges indicating approval order. Each edge is directed in a single direction, and there are no cycles returning to the starting point.

In contrast, blockchain is organized as a chain of blocks. Each block contains multiple transactions and is linked sequentially by time. When a new block is added, it typically requires waiting a certain period (usually seconds to minutes depending on the blockchain).

This difference creates distinct properties:

• DAG does not require mining like PoW blockchain
• DAG lacks fixed block creation times, allowing continuous transaction processing
• DAG uses less energy because it avoids complex computations

How does DAG technology work?

To send a transaction on a DAG network, a user must first confirm two existing transactions on the network. These are called “tips” — unconfirmed transactions not yet validated by others.

This process creates a continuous chain: User A confirms User B’s transaction, then User A’s transaction becomes a new “tip” for User C to confirm. In this way, all users participate in validation, making the network more decentralized.

DAG also has mechanisms to prevent double spending. When nodes confirm older transactions, they check the entire history from that transaction back to the first transaction. If any invalid transaction is detected, subsequent transactions built on it are rejected. This ensures each transaction has a legitimate origin.

Cryptocurrency projects using DAG

Although DAG has many advantages, only a few projects utilize this technology.

IOTA is one of the most well-known projects using DAG. Launched in 2016, IOTA (MIOTA) is designed for fast and efficient microtransactions. It employs a special structure called “Tangle,” where each new transaction must confirm two previous transactions. This makes all users part of the validation process, helping the network be fully decentralized.

Nano is another project using DAG, though it combines DAG with blockchain technology. Each user has a “account chain” (microchain) to track their transactions. When making a transaction, both sender and receiver must confirm the payment. Nano is famous for instant transaction speeds and zero fees.

BlockDAG is a newer project that uses DAG as its core architecture. BlockDAG offers energy-efficient mining solutions and mobile app compatibility. Unlike Bitcoin, which halves rewards every four years, BlockDAG reduces rewards every 12 months.

DAG versus blockchain: comprehensive differences

Beyond architectural differences, DAG and blockchain also differ in several aspects:

• Processing speed: DAG is not limited by block creation times, enabling continuous transaction processing without waiting periods
• Transaction fees: DAG requires very low or no fees, making it more suitable for micro-payments
• Energy consumption: DAG consumes less energy since it doesn’t rely on PoW mining
• Scalability: DAG avoids network congestion issues because it has no block creation delays

Advantages and disadvantages of DAG

Advantages:

• Fast speed: Transactions can be processed anytime without waiting for new blocks
• Low or zero fees: No mining activity means no need to reward miners; some DAGs only require small fees for special nodes
• Energy efficiency: DAG uses less energy than traditional blockchain, appealing to environmentally conscious users
• Scalability: No transaction limits; users only need to confirm previous transactions

Disadvantages:

• Decentralization concerns: Some DAG protocols rely on centralized nodes to bootstrap the network. Although many projects plan to phase these out, DAG has yet to prove full decentralization without external support
• Limited large-scale testing: DAG has been around only a few years and has not yet achieved rapid development like other blockchain protocols
• Security uncertainties: As a relatively new technology, its capabilities and limitations are still being explored

Conclusion

DAG is a promising technology with clear advantages over blockchain. However, it remains in early development stages and is not yet ready to fully replace blockchain. Instead, DAG will continue to develop alongside blockchain as an alternative solution for projects requiring fast transactions, low fees, and low energy consumption.

As the cryptocurrency industry matures, new use cases for DAG will emerge, and we will better understand the future potential of this technology.