Blockchain 3.0: How DAG-based smart contracts are bridging the gap between blockchain’s promise and capability

Traditionally, third parties have always been responsible for maintaining interactions between businesses — from validating transactions to deciding whether or not the terms and conditions of a working relationship have been met. These third-parties (or intermediaries) come in many forms, from government bodies and regulators to banks and security companies, and increase inefficiencies and costs for both businesses and consumers.

But inefficiency is just one of a number of evils; centralized intermediaries also collect and put at risk large amounts of user data to cement their monopoly (user data is commonly sold to other third parties for target marketing) and limit consumer freedom.

Smart Contracts

Blockchain technology emerged from the desire to disintermediate and democratize digital relationships, to protect data and ensure directness and transparency by eliminating reliance on third-parties. Smart contracts, meanwhile, are computer protocols able to execute transactions and agreements once preprogrammed criteria has been met, and allow blockchain users to codify digital relationships.

Smart contract technology provides the framework for direct and secure agreements. They remove the need to ‘trust’ the other party, as smart contracts encase agreements within an immutable structure that cannot be altered or otherwise moderated once it exists on the blockchain.

In an increasing distributed and digitized world, smart contracts are a credible alternative to existing centralized solutions, such as payment processing (which, currently, relies predominantly on the VISA and Mastercard networks). Their promise is massive; the challenge, however, is in providing the infrastructure for millions of smart contracts to be executed simultaneously — to match, in other words, the throughput and processing speeds of existing mass-market solutions. Until this is achieved, enthusiasm for smart contracts will be stymied by the underlying limitations of the blockchain.

Many projects try to provide a solution to blockchain’s current scaling limitations. Most, however, do not delve deep enough into blockchain’s architecture to provide a realistic and effective solution.

But some have: Directed Acyclic Graphs (DAGs) are the key to blockchain’s future, and the means through which we realign promise with capability.

The Emergence of DAGs

DAG-based blockchains are commonly touted as blockchain 3.0, and for good reason. DAG eliminates the blockchain’s pain points and is distinct from existing blockchain architecture through its removal of blocks (instead, DAG is a directed graph with no direct cycles, and allows for asynchronous processing) and miners.

DAGs utilize topographical ordering: each sequence is linked directly to the next and can only navigate forward. Significant to its design, ‘acyclic’ means that it is impossible for the same node to be encountered twice. The result is that information can be processed in parallel rather than sequentially on blocks, as is the case in first and second generation blockchain solutions, which leads to significantly higher throughput.

The emergence of DAG-based solutions comes at a crucial time for the blockchain industry, particularly as companies and organizations from across the globe begin to fully recognize the necessity and importance of decentralization. According to new research from PwC’s 2018 Global Blockchain Survey, which included 600 executives from 15 territories, 84% of companies are now dabbling in blockchain experimentation. Despite 62% of respondents indicating that their organizations are in the research, development, and pilot phases of blockchain, its limitations could be forcing them to reevaluate the blockchain’s capability; in fact, more than half of the organizations surveyed said that their efforts have not been justifying the results.

As this number continues to grow, addressing the fundamental question of scalability will play an important role in whether or not decentralized technologies succeed in everyday applications. By providing compatibility between transaction bodies of all kinds and enabling real-time transactions and data sharing with nearly instant finality and watertight security at a much lower cost, DAGs offer an alternative to traditional blockchain technology that is more suitable for real-world implementation and mass-market adoption.

A Decentralized Future

Looking beyond the meteoric interest in cryptocurrencies — which undoubtedly contributed to the incredible success and prominence of blockchain — it’s clear that decentralized technologies have a bright future across a number of industries. From Fantom’s perspective, some of the most promising use cases lie in supply chain management, traditional finance, and point-of-sale (PoS) processing, with markets such as food-tech, energy, and real-estate remaining predominantly untapped.

Despite its tremendous potential, the key to decentralization will be overcoming blockchain’s weaknesses and providing businesses with fault-proof solutions that are ready for mainstream adoption.

In actuality, the promise of smart contracts is infinite. It doesn’t take much of an imagination to imagine the potential of self-executing smart contracts, able to facilitate direct, secure, and transparent transactions and agreements, instantaneously and from any location. Every industry will be irrevocability changed by their implementation, if we can bolster the blockchain’s underlying capability. A DAG-based platform is the answer: the key to bridging the gap between promise and capability, and delivering smart contract functionality to the mass market.

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