With the global economy having entered another period of negative growth, exacerbated by the Coronavirus outbreak, pundits are calling for Bitcoin and digital assets to take centre stage. If digital currencies are the future of money, as they are touted to be, then a logical question to ask is, which is the best technology to underpin the new means of value transfer and storage? Blockchain would be the go-to option for most, but they would probably be overlooking the fact that there are digital assets that run on different distributed ledger technologies, Directed Acyclic Graph (DAG) for instance.
What differentiates DAG based digital assets from blockchain can be found, not in the encrypted asset itself, but the technology underpinning it – which makes its functionality possible. We ran a spitfire comparison of the two forms of distributed ledger technology; looking at what differentiates them, what makes each one tick. To ascertain which might better serve the liberterian-styled economy of the future.
Both blockchain and DAG store transaction data on a distributed ledger, and both have a token based economic mechanism in place. For this reason, the two have been pitted against each other, but the question of which is superior lies in how well they fulfill our needs.
Blockchain stores transaction data in blocks of a specific size, at specific intervals, and distributes the blocks across the network for storage, insuring that there is no single point of failure.
DAG works a little differently. Though transaction data is stored across the network – as with blockchain – DAG doesn’t store transactions in blocks, transactions are directly linked to one another like a spiderweb. A transactional spiderweb where each transaction validates the other.
The validation of transactions, or consensus, in a blockchain is conducted block-by-block. The blockchain sphere has not yet come up with a universal method to achieve this end, but many exist today, from Proof of Work, to Proof of Stake, each with its shortcomings.
With DAG, on the other hand, there are no blocks to painstakingly sift through and – as mentioned before – each transaction is linked to another, each validating the other.
Being the backbone of forerunner digital asset, Bitcoin, blockchain enjoys a developmental headstart over DAG. Blockchain also enables transparency and security, in addition to low cost, speedier (in comparison to incumbent financial systems) international mid-to-high value transactions.
DAG technology is not as hardware and energy intensive as blockchain, meaning no mining equipment. DAG also offers little-to-no fees for instantaneous transactions, and scales efficiently to process transactions faster in a high volume environment.
High network maintenance costs, risk of 51% attacks being conducted by corrupt validators, high cost of micro payments, the shortcomings of blockchain technology are well documented.
At low transaction volumes DAG tech becomes vulnerable to manipulation. To increase network security DAG based networks use network coordinators which add an element of centralization to the technology. The overall digital asset market’s sentiment is that DAG isn’t purely centralized.
So should we go with blockchain based or DAG based digital assets for the digital currencies of the future? Digital asset enthusiasts tend to believe one or the other technology will prevail. Right now, the tide is more in favor of blockchain, despite DAG offering a more scalable alternative.
Perhaps there’s space in the future for both, either coexisting, or hybridising. As they exist today, the best approach would probably be to apply the technology according to a specific use case. A high value international transaction would probably forego the speed of DAG for the security of blockchain. An international online store, or digitised road toll system, on the other hand, would require the scalability and low transaction fees of DAG.