What Is a Directed Acyclic Graph (DAG) in Cryptocurrencies?

Introduction

When you think of cryptocurrencies, you likely associate them with terms like blockchain or distributed ledger technology. Since Bitcoin’s debut, hundreds of additional cryptocurrencies have emerged, most built on similar network architectures. Their data structures empower users to transfer value and interact with decentralized applications.

In a blockchain, new blocks are regularly added to the ever-growing chain. Each block links to its predecessor using a cryptographic connection (specifically, a hash). These blocks contain recent transactions broadcast by users.

However, there’s often a delay between when a transaction is broadcast and when it’s included in a block. Picture waiting for a train at a station. Depending on the size of the cars (block size) and the number of other passengers (pending transactions), you might not board the next train—or even the one after. This means you could wait seconds or even hours for your transaction to be confirmed.

For many, this is an acceptable trade-off, as it provides a high level of security without a centralized coordinator. Others, however, see blockchain technology as having an expiration date. Critics argue that, in the long run, blockchain’s scalability issues will block widespread adoption.

Some believe the future of crypto payment networks lies in a radically different architecture: Directed Acyclic Graphs (DAGs).

What Is a DAG?

A DAG is a distinct type of data structure, similar to a database that connects various pieces of information. "Directed acyclic graph" is a technical term with specific meaning, so let’s break it down.

Conceptually, DAGs consist of vertices (the nodes) and edges (the lines connecting them). They are directed because they have a defined direction, represented by arrows. They are acyclic because you cannot loop back to the starting node—if you follow the graph from any point, you’ll never return to where you began. This concept will become clearer shortly.

Such data structures are often used to model information. In scientific or medical fields, for example, a DAG can help analyze relationships between variables and how they influence one another. You might examine nutrition, sleep cycles, and physical symptoms to map connections and determine their impact on a patient.

For our purposes, we’re focused on how DAGs enable consensus within a distributed cryptocurrency network.

How Does a DAG Work?

In a DAG-based cryptocurrency, each vertex represents a transaction. There are no blocks, nor is mining required to grow the database. Instead of bundling transactions into blocks, each transaction builds on a previous one. However, each node performs a small Proof of Work when sending a transaction. This helps prevent spam and validates prior transactions.

To add a new transaction, it must reference earlier ones. Suppose Alice creates a new transaction. For it to be recognized, her transaction must reference previous transactions. This is similar to how a Bitcoin block references its predecessor, but here, multiple transactions may be referenced.

In some implementations, an algorithm determines which transactions (or "tips") a new transaction should build on. Tips with the highest accumulated weight—meaning more confirmations along the path—are most likely to be chosen.

The transactions Alice references are unconfirmed. Once she references them, they become confirmed. Now, Alice’s transaction is unconfirmed, and another participant must build on it before it’s accepted.

Users are incentivized to confirm transactions with greater weight to keep the system growing. Otherwise, nothing would prevent users from continually building on outdated transactions.

In blockchains, double-spending is relatively easy to prevent. You can’t spend the same funds twice in a block—nodes can quickly spot and reject conflicting transactions. Since producing blocks is expensive, miners are motivated to behave correctly.

DAGs also prevent double spending, but without miners. When a node confirms prior transactions, it checks the entire path back to the DAG’s genesis transaction to verify the sender’s balance. Multiple paths may exist, but only one needs to be checked.

If users build on an invalid path, their transaction risks being ignored—even if it’s legitimate—because no one will want to extend a path stemming from an invalid transaction.

This may seem unintuitive: couldn’t there be multiple branches unaware of each other, allowing the same funds to be spent on different branches?

That’s possible, but a tip selection algorithm favors branches with greater accumulated weight. Over time, one branch will outpace the rest. Weaker branches are abandoned, and the network continues building on the strongest one.

As with blockchains, there’s no absolute finality: you can never be 100% certain a transaction won’t be reversed. While it’s extremely unlikely, even Bitcoin or Ethereum blocks could theoretically be undone. The more blocks added after your transaction, the more confident you can be. That’s why waiting for six confirmations is standard before spending funds.

In prominent DAG projects, the concept of confirmation confidence is used. The tip selection algorithm runs 100 times, and you count how often your transaction is directly or indirectly approved in the selected tips. The higher the percentage, the more settled your transaction is considered.

This might seem like it would create a poor user experience. However, that’s not the case. If Alice sends Bob 10 MagicDAGTokens, she doesn’t need to select the right tips. Her wallet might do the following internally:

• Select heavy tips (those with the most accumulated confirmations).
• Trace back through previous transactions to ensure the tips have enough balance to spend.
• Once confirmed, add her transaction to the DAG, confirming the transactions it references.

For Alice, this looks like any typical crypto transaction: she enters Bob’s address, specifies the amount, and clicks send. The steps above are the Proof of Work each participant completes when submitting a transaction.

Advantages and Disadvantages of Directed Acyclic Graphs

Advantages of DAGs

Speed

Without block time limits, anyone can broadcast transactions at any time. There’s no hard cap on transaction volume, as long as users confirm previous transactions as part of the process.

No Mining

DAGs don’t use Proof of Work consensus the way traditional blockchains do. As a result, their carbon footprint is drastically lower than cryptocurrencies that rely on mining for network security.

No Transaction Fees

Because there are no miners, users aren’t required to pay fees to send transactions. Some systems require a small fee for certain node types, but low or zero fees make DAGs appealing for micropayments, where high network fees undermine their utility.

No Scalability Bottlenecks

Without block time constraints, DAGs can process far more transactions per second than traditional blockchains. Many believe this makes them ideal for Internet of Things (IoT) applications, where machines frequently interact with each other.

Disadvantages of DAGs

Not Fully Decentralized

DAG-based protocols often retain some elements of centralization. While this can help bootstrap a network, it remains unclear whether DAGs can operate independently without third-party oversight. Without full decentralization, networks may be exposed to attack vectors that could disrupt operations.

Not Proven at Scale

Although DAG-based cryptocurrencies have existed for years, they have yet to achieve mainstream adoption. It’s still uncertain what incentives might drive users to exploit these systems as they grow.

Final Thoughts

Directed Acyclic Graphs represent a compelling technology for building cryptocurrency networks. So far, only a handful of projects leverage this data structure, and further evolution is needed.

If DAGs deliver on their promise, they could power massively scalable ecosystems. Their technology opens up opportunities for high-throughput, feeless use cases—such as IoT and micropayments—where performance is paramount.

FAQ

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

A DAG is a data structure where each transaction is recorded in interconnected nodes without cycles. This enables efficient, parallel transaction validation without relying on a traditional blockchain, dramatically increasing speed and scalability.

What is the difference between DAG and traditional blockchain?

DAGs use a directed acyclic graph for parallel validation, while traditional blockchains use a linear series of blocks. DAGs are more scalable and faster, eliminating the need for resource-intensive mining.

What are the advantages of using DAG over blockchain?

DAGs offer faster transactions and greater scalability than conventional blockchains. They enable simultaneous transaction processing with lower latency and higher throughput.

Which cryptocurrencies use DAG technology?

IOTA, Nano, and several others utilize DAG technology to enhance scalability and efficiency, overcoming the constraints of legacy blockchains.

How does DAG improve cryptocurrency scalability?

DAGs enhance scalability by allowing multiple transactions to be processed concurrently, rather than sequentially. This reduces congestion by decentralizing storage and validation, significantly boosting network performance without compromising security.

Is DAG technology secure for cryptocurrency transactions?

Yes, DAG technology is secure for crypto transactions. It provides greater speed and scalability than traditional blockchains. Many DAG projects integrate robust security and validation mechanisms to safeguard transactions against attacks and fraud.