The Rise of DAG Coins: Fast, Feeless, Minerless | DAG Coin Investments
Blockchain technology coupled with decentralization has the potential to completely revolutionize the world as we know it. Through the use of smart contracts, peer to peer transactions and the removal of third party intermediaries, the blockchain revolution takes power away from large organisations, enabling everyday people to take full control of their finances, data, privacy and identity. In a world controlled by corrupt corporations and governments, this is really only a natural progression.
Why use a social network that harvests your data and sells it to third party advertisers when the decentralized alternative pays the users directly for the ads they see? Why pay fees to banks every time you make a transaction or send money abroad when you can use a globally accepted currency with minimal to no fees? Why pay extortionate commission to intermediaries like eBay and Amazon when you can list your products for free on a peer to peer decentralized marketplace owned and run by its users?
And that is barely even scratching the surface. There are endless use cases for these technologies, most of which have not even been thought up yet, that will revolutionize countless industries ranging from finance to healthcare. However, it is not all flowers and rainbows, and as the popularity of blockchain technology has boomed in the past year a couple of known problems have intensified: scaling and energy consumption.
Problems with the Blockchain
Probably the biggest technological hurdle facing cryptocurrencies right now is the issue of scaling. In computer science, scalability can be defined as how capable a network or system is at handling increased levels of work and usage. Applied to cryptocurrency, this basically means how fast the network can process high volumes of transactions and at what cost, and there are a couple of examples recently that highlight the current limitations of the blockchain.
During the December mini bubble when Bitcoin prices reached an all time high of $20,000, the network was put under an immense amount of pressure. The average transaction fee soared to $26 on one day, with fees moving around $10-20 for the majority of the month. During the same period, the average confirmation time on transactions also spiked to record highs, peaking above 3500 minutes!
In its current state, Bitcoin cannot serve its intended purpose as a day to day payment network. Who is going to go to the store and pay $2.50 for a loaf of bread whilst paying $20 fees and waiting 3 days for the payment to clear… As such, Bitcoin is simply not practical for micro transactions in its current state.
But this is not an isolated Bitcoin incident, we have also seen Ethereum struggle to cope with rising network demand in the past few months. The worst part is that it was all because of Crypto Kitties! You read that right, Crypto Kitties – a blockchain based game where users trade and breed digital cats by spending Ether.
This interesting application of Ethereum smart contracts went viral and at its peak was accounting for 16% of all transactions. The result was a heavily congested network, with unconfirmed transactions at any one time increasing from around 2000 before the launch to 15,000, or an increase of 750%!
However, coping with scaling is nothing new in the technology sector and it is a problem the internet also encountered and largely overcame. For example, when emails were first sent over the internet it was only possible to send them in text format. Then users began to demand more and support came for small attachments, then photos, more photos, videos, HD videos and so on. The internet infrastructure had to scale and develop to cope with ever increasing data demands, and there are those who will tell you that cryptocurrency will do the same.
Solutions such as the Lightning Network upgrade for Bitcoin, which utilizes an off-chain protocol to reduce loads on the main blockchain, could see transactions rise from a theoretical maximum of 10 per second to millions! Similar scaling solutions have also been developed for Ethereum, such as the Raiden Network, as well Sharding. Though, these technologies are still in the early stages with a lot of theoretical speculation. They also add an additional point of failure, increasing susceptibility to hacks. Furthermore, whilst they have the potential to reduce transaction fees and confirmation times, they fail to address the growing issue of mining energy consumption.
2. Energy Consumption
The issue with Bitcoin and, to a lesser extent many other cryptocurrencies, is the energy consumption associated with mining. To understand why, it is first necessary understand how the network functions. Whenever a transaction is initiated, a mathematical problem must be solved by a high powered computer in order for it to be verified. This is known as mining.
In return for investing computing power and electricity, miners receive a reward of Bitcoin and transaction fees. However, only the first to solve the problem wins the reward, and there are many miners in competition. Thus, the more invested into mining equipment and the higher the electrical consumption, the more likely miners are to win rewards.
And therein lies the problem. The total electricity consumption of operating the Bitcoin network is colossal, and it is on track to get worse. To put it into perspective, the most up to date figures from the Bitcoin Energy Consumption Index estimate the annual usage at 43.09 TW. This means it is currently using more electricity than New Zealand and Hungary, and it is on an upward trend. Credit Suisse estimates that total consumption could reach a maximum of 100 TW before it is no longer profitable to mine Bitcoin. However, this is only based on the current price range. If it were to reach $50,000, the bank estimates the total consumption could increase 1000%…
Again, this issue is not isolated to Bitcoin with Ethereum also currently consuming roughly 11.65 TW per year. The proof-of-work system for verifying transactions is neither efficient nor sustainable, but there are alternatives, one of which is known as proof-of-stake. In PoS, it is the owners of coins who create blocks by running clients on their own computers. The energy consumption is insignificant compared to PoW, plus it reduces the risk of centralization caused by mining pools.
In theory, PoS could be implemented by the Bitcoin developers, but there are no plans as of yet to incorporate this consensus algorithm into the architecture and many predict they never will. Conversely, Ethereum are planning to make the move with their upcoming Casper update. However, there are lots of variations of PoS, with a lack of agreement between developers and the community on their functioning and security. Furthermore, due to it being a resource based approach, it is also at risk from becoming centralized by people buying up more of the coin to gain control of the network. This leads us to another alternative: directed acyclic graphs or DAG.
What are DAG Coins and Could they Solve Problems with the Blockchain?
The use of DAG architecture within cryptocurrency is a relatively new innovation, but what actually are DAG coins? If you have no background in computer science or mathematics this may sound complicated, but a it is essentially just a network of nodes that are all connected to each other, with the connections between nodes having direction i.e. A to B is not the same as B to A. This is way easier to visualize than it is to explain in words, so check out the diagram below for a representation.
This differs quite significantly from the blockchain, which is basically one long chain of data blocks. Due to this structural difference, the network functions in an entirely novel way with some major benefits. Firstly, transactions are not verified by miners, but instead rely on more efficient mechanisms. The exact method of verification depends on the coin in question – more on this below.
The result is minimal or no fees, no wasteful energy consumption associated with mining, plus near instantaneous transactions. Whilst this is certainly great for peer to peer payment networks, it also enables a whole host of potential applications that were simply not feasible with previous blockchain structures.
The Best DAG Coin Investment Opportunities
It’s hard not to get excited about DAG technologies, but it is important to remember that there are always going to be flaws when dealing with novel tech. No system or network is perfect and it is possible to find a technical critique of every single crypto project out there if you look hard enough! As such, our intention here is not to advise you to ‘sell all your Bitcoin & Ethereum and buy DAG coins’, but rather to inform you of these new technologies and highlight their strengths and weaknesses. Below we will outline some of the best DAG coins we believe to have potential in 2018 and beyond.
IOTA: Internet of Things Applications
IOTA was the first DAG coin to reach mainstream popularity within the crypto world, though there were others working on similar technologies around the same time. The project is aiming to enable internet of things devices to communicate and make transactions, as well as designing an open and secure marketplace for real time data exchange. These machine to machine (M2M) micro-transactions are only feasible because of the feeless structure of IOTA.
The scope of this technology is enormous. It is estimated that by 2025 there will be over 75 billion internet connected devices, resulting in a 10 fold increase in the total amount of data generated globally. However, the vast majority of data is locked in what are known as data silos, with over 99% currently wasted because systems lack an efficient and secure mechanism for exchange. Through working with a wide array of corporate participants including Bosch, Fujitsu and Microsoft, IOTA are aiming to create an open and decentralized data lake, allowing the full potential of Big Data to be realised.
With applications ranging from climate modelling to AI, we are very excited to see how the project develops in the future. Check out the video below for an animated look at how IOTA could be implemented in smart charging! That said, it should be noted that the major use case for IOTA is for a market that does not yet exist. So the value is almost purely based off projections on how we see technology developing in the next 10 – 20 years.
Transactions made on the IOTA network are confirmed with what is known as the Tangle. With this method, each transaction that is added to the Tangle verifies two transactions, with the next transaction verifying two before it and so on. This differs from POW where verification is done by miners or by coin owners like in PoS systems. In theory, this means that as the network gets larger it gets faster i.e. more transactions to confirm new transactions. Additionally, fees will not increase with size, but security will. You can watch an awesome live illustration of the Tangle in action here!
Although, IOTA is not a full DAG and does require some minimal PoW to be done on the device that is adding a new transaction to the network. This has led some critics to suggest that IOTA is not truly feeless as devices pay fees through electricity consumption associated with the minor PoW. Whilst this cost is minimal on computers with high processing power, it could be more significant on IOT devices with tiny processors. Another criticism of IOTA is that the network is currently not fully decentralized due to relying on the central coordinator to protect the network from attacks. That said, it is expected that the coordinator will be removed at some point during 2018.
Byteball is an interesting cryptocurrency with a focus on smart contracts, secure storage of arbitrary data and value exchange. As such, it could be seen as a competitor to Ethereum trying to solve the scaling issue with different technology. Similar to IOTA, it utilizes a DAG whereby every new transaction confirms one or more previous transactions. However, it differs in two key areas. Firstly, there are minimal fees on transactions equal to the number of your transaction data. The second is the consensus method.Byteball does not rely on PoW or PoS, but uses a ‘main chain’ and set of 12 witnesses to determine transaction order and validity. If a double spend occurs, the transaction that occurred earlier on the main chain is viewed as valid – almost like a point of reference. Generally, the main chain path is determined by transactions that are approved by witnesses, all of which are chosen and can be changed by the users. Whilst this does raise some centralization concerns, it would require a collusion of 7+ witnesses to threaten network security, which is highly unlikely.
Byteball currently has some interesting features built in to enable a variety of simple and secure P2P transactions through smart contracts. For example, Conditional Payments allows the user to set a condition for when the payee is to receive the money. If the condition is not met before the time you set expires, the funds are returned to your wallet. In the future the developers are also adding features such as tying the payment to a real world event! Additionally, you can also make P2P payments through chat by simply clicking links.Another cool feature is the Bot Store, which already has some interesting bots to enable P2P betting, insurance and merchant purchases. Additionally, developers are free to build and publish their own bots to the store for users to access, so we are excited to see the list of available bots grow in the future. The final feature we think worth mentioning is Blackbytes, which is an extension of Byteball that enables completely private, untraceable transactions.
The initial distribution method of Byteball also presents an interesting investment opportunity. Since it is a DAG coin, supply is not determined by miners. In the case of IOTA, the total supply was pre-mined and issued in an ICO. However, in order to encourage adoption and fairness, Byteball is being distributed through airdrops to all Byteball and Bitcoin owners. The airdrops occur every full moon and all you have to do is link your addresses to receive free Byteball in the following proportions:
- For every 16 BTC you receive 0.1 GB (1 gigabyte = 1 billion bytes),
- For every 1 GB you receive additional 0.1 GB.
Basically, you will get an extra 10% of your Byteball holdings for free! The coin will also be distributed through cash back to merchant stores that are partnered with the project. It’s great to see the developers coming up with these innovative solutions to solving the problems of scaling and adoption within the crypto world.
Nano, formally known as Raiblocks, is a DAG coin designed to function purely as a P2P payment network. Rather than trying to solve too many problems at once, the developers are focusing on doing one thing and doing it well. Nano is a super fast, fully decentralized cryptocurrency that at the time of writing is boasting confirmation times of a couple of seconds and 7000 transactions per second! However, in theory TPS is unlimited and pre-caching could half the current transaction times, so we should see Raiblocks get even faster in the future.
But how is this incredible speed enabled? With an entirely novel crypto architecture known as a ‘Block Lattice’. This system is basically a database where each account (address) has their own private blockchain. In order to send funds, a user creates a send block on their blockchain, shown as red squares on the visualization below. A receive block is also created on the recipients blockchain, shown as the green square, which they can then ‘pocket’ to receive funds. However, the transfer of data is minimal compared with traditional blockchains because only balances are transferred, resulting in lightweight and speedy transactions with no fees.
The Block Lattice utilizes DAG architecture because send and receive blocks on any two chains can be linked with direction. Although, it is quite a different approach to the DAG technology employed by IOTA and Byteball. Transactions are signed by the users themselves in order to confirm them, requiring a minimal PoW to be carried out. Additionally, in order to prevent double spend attacks Nano makes use of a Delegated PoS representative system.
That may all sound great, but great tech means nothing without adoption, so how accomplished are Nano when it comes to partnerships and real world usage? Due to how new the crypto is to the sphere, the team have yet to develop any notable partnerships – although they are rumored to be releasing some in Q1 2018. That said, businesses stand to save millions in Visa, Paypal, Mastercard etc fees through adopting Nano payment technology, so we think there is a great deal of future potential.
The strong Nano community have also started to develop their own solution, with one user building a free Nano payments plugin for merchant websites that use Woocommerce! It’s super simple and easy to use for both owners and users, check out the video below to see it in action. When community development and support is this strong, it is hard not to see Nano becoming extremely valuable in the future.
The projects we have outlined above have quite different use cases, so they are not really in direct competition with one another. Therefore, we do not believe any one DAG coin to be better than the other, however we do think the technology is superior to competing traditional blockchain projects. As we mentioned above, good tech is not the be all and end all, and adoption is now the greatest hurdle.
Thanks for reading, we highly recommend you check out the resources below before committing any funds to the above projects.
- IOTA Whitepaper
- Nano (Raiblocks) Whitepaper
- Byteball Whitepaper
- Technical Critique of Byteball and IOTA
- In-Depth IOTA v.s. NANO (Raiblocks) Analysis
- IOTA, Nano, Byteball Specs Comparison Table
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