The meteoric rise of FinTech in recent years has exposed us to jargon that many of us (especially those less techy amongst us) have perhaps struggled to understand, as words such as "blockchain" and "Distributed Ledger Technology" (or "DLT") continue to dominate our computer screens and magazines.
These two words are often used concurrently, though this is not entirely accurate. As is often the case with new technical jargon, we grasp the basic concept but often miss the finer details. In truth, blockchain is DLT – but not all DLT is blockchain...
A Chip off the Old Block
Blockchain first hit our screens when Bitcoin, an early player in the DLT game, announced blockchain as the basis of its operation. In his now-legendary paper, Satoshi Nakamoto explained how Bitcoin intended to revolutionise aspects of financial services by (to put it very basically) using a public distributed digital ledger to register, via a series of blocks, a chain of transactions each confirmed by participants known as "miners".
This was the genesis of blockchain in 2008. Since then, other notable players, such as Ethereum (amongst many others), have also employed the blockchain framework to effectuate their business models. As such, the term "blockchain" has come to be a household name. Blockchain, however, is only one technology operating within the DLT framework.
In the decade since its inception, the blockchain model has faced growing difficulties. Two of the largest challenges blockchain faces are its inability to handle a large volume of transactions simultaneously and its high transaction fees. Opportunity has been envisaged and competition has sprung. The result? There's a new player in town hoping to resolve these drawbacks. Its name? Directed Acyclic Graph, or "DAG".
DAG versus Blockchain
Put simply, DAG is, much like blockchain, composed of a network with a number of different nodes confirming transactions. Every new transaction that is submitted requires the confirmation of at least two earlier transactions before it is successfully recorded onto the network.
As more transactions are submitted, more transactions are confirmed and entered, resulting in a distributed web of doubly-confirmed transactions.
Unlike the blockchain model, however, DAG requires no miners to confirm each transaction as being authentic. By having two "parent transactions" confirm the validity of a subsequent transaction, human intervention becomes dispensable resulting in a vastly accelerated process: not requiring miners' confirmation means transactions go through almost instantaneously.
Additionally, if there are no miners, there are no miners' fees, helping to keep actual transaction fees to a minimum. It is also worth noting that this low-fee structure opens itself to another important feature; DAG's ability to process micro transactions.
Directed Acyclic Graph Examples
IOTA is one of the more prominent examples of Directed Acyclic Graph, incorporating the framework through the use of its own aptly-named "Tangle" protocol.
Hashgraph is another contemporary entity which utilises DAG. Its protocol, "Gossip", differs slightly to that of IOTA. The Gossip protocol is every bit as chatty as its name suggests; each network node transfers the information they have to other nodes in the network. It is from this string of ongoing confirmations that the distributed ledger is then created.
DAG is proving to be a fitting challenger to blockchain (though we expect more contenders to follow) as it ventures to address the flaws identified in blockchain. It is perhaps still too early to ascertain whether DAG will prevail, but it is certainly one to watch out for. In such a fast-paced and novel industry, new ideas and frameworks will strive to lead the charge. Could DAG make its way to the top, or will blockchain continue to lead the way?
Only time will tell.
Hassans – the FinTech Law Firm
It is often said that a week in FinTech is like a month in the real world. It truly is a 'blink-and-you'll-miss it' industry. So much can change, and so quickly, keeping up with the latest developments can seem like a full time job – and your time is precious enough as it is.
At Hassans we have had our finger on the pulse of FinTech from the very beginning and continue to be instrumental in helping develop the industry in Gibraltar and beyond. Our dedicated FinTech team, the largest in Gibraltar, advises clients from all over the world on a broad range of crypto-related queries.
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