A directed acyclic graph or DAG is a data modeling tool used in cryptocurrencies. It consists of vertices, edges or arcs, with each edge directed from one vertex to another. This way, following those directions will never form a closed loop.
Transactions are recorded as vertices on top of one another and are submitted to the DAG via nodes. While a blockchain system looks like a chain, DAGs system is like a graph. Since it is very efficient in processing online transactions as well as in data storage, DAG could become the next link in the chain of blockchain evolution.
Moreover, the DAG model is seen as a potential solution to the current decentralization in cryptocurrencies. With this alternative miners will not have to compete for new blocks to add to the chain, so it represents a new option for digital transactions that promises to speed up processes and improve a network’s usability.
The DAG model could reduce fees significantly and eliminate the need for mining equipment too, so there is less energy consumption, which could tackle crypto’s environmental impact. However, DAGs are vulnerable to attacks because of their low volume of transactions.
Blockchain, on the other hand, is widely used, secure and cost-effective for high-value transactions. But it’s not perfect either: it uses large amounts of power (Bitcoin mining consumes roughly 0.5% of all energy consumption worldwide, according to the New York Times) and has high fees for small transactions or micropayments.
While DAG is still in the early stages and not fully decentralized, there are cryptocurrencies that use this model, such as Nano, IOTA and Obyte. At the moment, however, it is not being used to build stable networks, only to get them started.