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What is Directed Acyclic Graph (DAG)? and how does it work?

Have you ever heard of Directed Acyclic Graph in the world of cryptocurrencies? That could well be, because it is a concept that often comes back in the world of cryptocurrencies. In this article we want to explain to you what Directed Acyclic Graph is, how it is applied and what the advantages and disadvantages are. You are then completely up-to-date when it comes to Directed Acyclic Graph.

What is Directed Acyclic Graph (DAG)?

You often see Directed Acyclic Graph in its abbreviation: DAG. It is actually something that at first glance has nothing to do with cryptocurrencies. Because Directed Acyclic Graph is widely used in the financial and mathematics world. It is a data structure using nodes and edges, in the form of a graph.

The nodes are often visualized by means of circles. The edges are the connections between the nodes, and are visualized in the form of dashes.

Now the big question is what is Directed Acyclic Graph used for. If you understand cryptocurrencies, you know that Directed Acyclic Graph (DAG) is a term that you see often. We can already tell you that in the crypto world a DAG is not used to represent data.

Applications of Directed Acyclic Graph

DAG has several applications. But often it always comes to the same thing: visualizing data. Data can be converted into a DAG. This can be any kind of data. Think of data from a survey, website traffic or from the stock market. A DAY is therefore a pretty old concept. It was used way before the development of blockchain .

However, there is also an application that goes much further than visualizing data. There are also cryptocurrencies that are completely based on a DAG. Each node represents a transaction, with each new transaction built on top of the previous transaction. This means that there are no blocks, as is the case with a traditional blockchain.

However, a cryptocurrency that is based on a DAG uses a consensus algorithm. The algorithm ensures that the network is not cluttered with unnecessary transactions. The nodes also validate the transactions that are added.

It also depends on the algorithm, which has different rules. For example, it differs per currency whether a transaction should refer to a previous transaction. The moment a previous transaction is referenced, the transaction is confirmed.

In fact, it is very similar to a blockchain as we know it. The difference is that in this case no blocks are used that link to each other. The transactions are directly linked to each other. So they are all separate transactions. Where with a blockchain you have a chain of blocks, with a DAG you have a chain of transactions. The means that the chain is therefore much longer than that of a normal blockchain. After all, thousands of transactions fit in one block.

Who uses DAG?

There are several cryptocurrencies that use Directed Acyclic Graph. The most famous cryptocurrencies based on a DAG are IOTA , Obyte and Nano . So these cryptocurrencies do not use blocks. The transaction is validated, after which they are directly linked to each other. The rules that they apply are also different with these cryptocurrencies.

With some cryptocurrencies, transactions must therefore necessarily be linked to the previous transaction. However, it may also be the case that the transaction should be linked to a previous transaction, but that it does not matter much which transaction this is. This creates a chain of separate transactions.

The benefits of Directed Acyclic Graph

Why would a cryptocurrency use Directed Acyclic Graph? Well, because it brings several benefits. Advantages that you do not have with a blockchain. The biggest advantage is that you don’t need miners for a DAY. The transactions are validated by the users themselves and linked to previous transactions. This also ensures that there are no transaction costs. There are no miners that need to be rewarded.

A DAG is also much faster in validating transactions. Normally a block has to be filled before it can be validated. With Bitcoin , for example, this takes about 10 minutes. With a cryptocurrency that uses DAG, the transaction is immediately validated.

You can imagine that this also benefits scalability. There is no transaction time, and users validate the transactions themselves. In fact, there is almost no limit to the scalability of a cryptocurrency that uses DAG.

Does Directed Acyclic Graph also have drawbacks?

DAG therefore has many advantages. But in fact it cannot be the case that there are only advantages. Because of course there are also disadvantages to the use of Directed Acyclic Graph. It is good to weigh the advantages against the disadvantages of DAG.

Blockchain is praised precisely because it is a decentralized network. Decentralization brings many advantages. It ensures that blockchain is a lot more secure than the current, central systems.

However, DAG is not as decentralized as blockchain. A DAG does not contain nearly as many nodes that cooperate. Because each user validates the transaction himself, the network of a DAG is much smaller. In fact, it looks a bit like individual centralization.

This also ensures that DAGs have not yet been tested on a large scale anywhere. Relatively speaking, not many cryptocurrencies use DAG yet. In combination with the fact that there are often not many participants in a DAG, it makes it difficult to test how a DAG actually works. There is therefore almost no substantiation for the safety of a DAG. Nevertheless, a DAY is considered safe. However, large-scale research has yet to prove whether this is really the case.


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