Part 1: Why DAGs don't scale without centralisation
Disclaimer: This article was produced for Radix DLT. The full post can be found here.
The most prominent blockchains have struggled with high fees and slow confirmation times in recent months. So, it’s no coincidence that a new form of distributed ledger technology known as Directed Acyclic Graph (DAG) is the subject of increasing interest.
In contrast to blockchains, which see a block created and added to the ‘chain’ every set number of seconds/minutes, DAGs allow each transaction to link directly on to the next. This means there is no wait for the next block to confirm, and for the global ledger to reflect this update.
This architecture enables DAGs to bring forth two major improvements. DAGs can process transactions almost instantly, in a fraction of the time it takes blockchains. DAGs such as IOTA and Nano also remove traditional miners from the equation, thus making transactions both fast and free; the holy grail. They hint at an end to the scaling issues that plague blockchain projects and promise a vision of world-spanning networks underpinning systems such as the Internet of Things (IoT) and financial payment industries.
However, just as blockchains struggle to scale, owing to fundamental early stage design choices which are proving difficult to overcome, so too will DAGs. They will hit an inflection point where scaling is not possible without significant centralization.
To understand the potential issues with DAGs, it is important to understand how they operate. DAGs are directed graphs with no directed cycles. What this means in practice is that unlike blockchains, which operate on a vertical architecture (i.e. miners process a block, this block gets added to the chain, the miners mine another block, etc), DAGs utilize a horizontal architecture.
This allows, as stated above, for transactions to link to transactions. For example, DagCoin (the original DAG implementation) and IOTA require each pending new transaction to process one and two other transactions respectively before the transaction is processed. There is still Proof of Work (PoW) mining, it just comes through processing transactions in order to allow your own transaction to be processed.
As a result, DAGs claim to be more decentralized than blockchains, which have seen control consolidate in the hands of an increasingly concentrated group of miners. Instead of a relatively small number of miners being responsible for the overall security of the network, all active participants on a DAG are not just capable of but tasked with the responsibility of approving new transactions.
This also enables projects to scale to more transactions per second (tps) than blockchain to meet future needs. In contrast to the blockchain, where the more participants on the network and the more transactions being processed has thus far led to a slower network, on a DAG the more participants and transactions the better, as it theoretically enables quicker resolution of more transactions. Whereas Bitcoin and Ethereum currently manage 7 and 15-20 tps respectively, the likes of IOTA and Nano claim ~1,000 and 7,000 tps as currently possible. It also means there are no transaction fees – your ‘fee’ is processing the other transactions.
So far, so good.
However, there is one overriding issue with how DAGs are structured which will hinder scaling to the levels needed to become the backbone of the IoT or a financial payment system. This is covered in Part 2.