Future of Digital Currency May Not Involve Blockchains

Although it may be hard to imagine, cryptocurrencies are far older than Blockchain technology. Most of us look at Bitcoin as the first cryptocurrency, although it is only the first Blockchain-based currency. Cryptocurrencies like B-Money and BitGold existed prior to Bitcoin, however, these didn’t really go far, especially when judged against Bitcoin.

The problem with cryptocurrencies conceived before Bitcoin was their centralized structure. Without Blockchain technology, there was no “decentralized, immutable, transparent” ledger in which transactions could be recorded, leading to a centralization. Yet it looks like Blockchain may not be the be-all, end-all of digital currency technologies.

Recently, a new form of crypto has emerged that leverages the Directed Acyclic Graph (DAG) organizational model for the structure of its decentralized ledger, allowing old problems to be solved and new features to be added.

Today, we’re going to take a look at the technology that can potentially replace the Blockchain itself and some of its current implementations.

Although the implementations that we are going to discuss today are new, the concept is not. In a 2013 paper dubbed “Accelerating Bitcoin’s Transaction Processing. Fast Money Grows on Trees, Not Chains,” the authors Yonatan Sompolinsky and Aviv Zohar introduce the GHOST protocol which proposes a change to Bitcoin’s structure from a Blockchain into a tree, reducing confirmation times and improving security. Although this change has not been implemented in Bitcoin, other cryptocurrencies are using the DAG-based system successfully. Let’s meet them!

Byteball: The DAG

Byteball is a DAG-based cryptocurrency. The first of its kind, Byteball is distributed through an airdrop process in which GBYTE, the native currency in the network, is distributed according to the user’s Bitcoin holdings. Recently GBYTE distribution has also begun to take place through cashback partnerships with participating merchants. Although it’s refreshing to see an ICO-less cryptocurrency, its distribution method is one of the least interesting aspects of Byteball.

In Byteball, there are no blocks. Instead, transactions are linked directly to each other and each transaction contains one or more hashes of previous transactions. The set of links between the transactions forms what is known as the DAG, as opposed to the “Blockchain” system used in Bitcoin and other cryptocurrencies.

There is no Proof of Work or Proof of Stake mining in Byteball. Instead of having subsequent blocks confirm previous ones, transactions are confirmed by new transactions that come after them.  But this kind of “confirmation” is only a confirmation that the transaction exists, not that it is not a double spend.  

So, how are double spends resolved?  In PoW currencies, the conflicts caused by double spends are resolved by selecting the version of block history that has the most work committed to it.  In Byteball, since it is DAG-based, there is already partial order among transactions. This allows most double spends to be caught and rejected immediately.

What if the double spends are on parallel branches of the DAG and their ordering is not evident?  Then, Byteball uses “Main Chain” - a chain on the DAG that goes through transactions posted by known trusted users called witnesses.  Of the two conflicting transactions, the one that appears earlier on the Main Chain is deemed valid.  Witnesses are selected by the users themselves, who list their preferred witnesses with each transaction they post.

Although there is still much to explain regarding Byteball and its DAG-based system, one thing becomes clear: This system is a viable alternative to Blockchain technology and can even solve some of the most prominent problems found in the technology, such as such as speed, sustainability, scalability, security, privacy and legal compliance.

If the system becomes widely used, transactions become frequent, ensuring that they can be confirmed in mere seconds, as opposed to the 10 minute wait in Bitcoin. As for sustainability, the witness system employed by Byteball offers a security model in which no Proof of Work mining is required, meaning that electricity is not mindlessly wasted in order to secure it. Since Byteball does not have blocks, there is no block size issue.

When compared with Ethereum, Byteball smart contracts are not as powerful and not Turing complete, but they are simple, allowing them to be displayed in user-readable form. This means that regular users can see what is actually going to happen to their money for themselves.  Prediction markets are already working based on these contracts, and a recently introduced manual oracle feature allows anyone without technical knowledge to run a prediction market.

As for privacy, other altcoins like Zcash and Dash have already come up with efficient ways of protecting user’s privacy. Nevertheless, it’s good to know that you can keep this privacy in a network that does not require long confirmation times or wasteful Proof of Work mining. Byteball allows value to be transferred privately through an asset called “blackbytes.”

Lastly, legal compliance is addressed by Byteball through its asset issuing system. The whitepaper reads:

“Users can issue new assets and define rules that govern their transferability. The rules can include spending restrictions such as a requirement for each transfer to be cosigned by the issuer of the asset, which is one way for financial institutions to comply with existing regulations.”

IOTA: The tangle

IOTA is a unique cryptocurrency. Although it also uses Directed Acyclic Graph (DAG) organizational model under the name “Tangle,” its implementation and applications differ wildly from Byteball. Designed specifically for the IoT (Internet of Things) industry, IOTA held a successful ICO in 2015, gathering 1,337 BTC and launched on Bitfinex earlier this year.

Apart from its distribution method, IOTA has several differences when compared to Byteball. For example, in IOTA, all transactions created must validate a minimum of two previous transactions. In order to do so, users (who create and validate transactions) must solve a cryptographic puzzle similar to those found in Proof of Work cryptocurrencies.

Furthermore, IOTA has no fees. Unlike Byteball, where GBYTE transaction fees are the same as the GB size of a transactions, IOTA charges no fees at all, regardless of the transaction size or amount. Instead, nodes are incentivized to participate in the creation and confirmation of transactions by other nodes who will drop nodes if they do not make transactions regularly.

The lack of fees solves two critical problems in the eyes of the IOTA developers. The whitepaperreads:

“The importance of micropayments will increase in the rapidly developing IoT industry, and paying a fee that is larger than the amount of value being transferred is not logical. Furthermore, it is not easy to get rid of fees in the Blockchain infrastructure since they serve as an incentive for the creators of blocks. This leads to another issue with existing cryptocurrency technology, namely the heterogeneous nature of the system. There are two distinct types of participants in the system, those who issue transactions, and those who approve transactions. The design of this system creates unavoidable discrimination of some participants, which in turn creates conflicts that make all elements spend resources on conflict resolution. The aforementioned issues justify a search for solutions essentially different from Blockchain technology, the basis for Bitcoin and many other cryptocurrencies.”

The lack of fees would normally create vectors for spam attacks on the network. In order to avoid this issue, IOTA employs a “weight” mechanism in which transactions are confirmed according to their weight. This weight is proportional to the amount of work that the issuing node invested into it. IOTA’s weight system ensures that spam is not feasible as no entity can generate an abundance of transactions with “acceptable” weights in a short period of time.

Despite the several differences between these two implementations of DAG-based cryptos, IOTA sets itself apart by its unique focus, the Internet of Things (IoT) industry. If you’re not familiar with the IoT, the concept involves a global network where devices like home appliances, cars and so on are able to communicate and exchange data, allowing them to be remotely monitored and even controlled.

IOTA’s goal is to allow value and data to be exchanged and transferred freely between these elements, allowing any IoT-enabled device, appliance, or vehicle to be used or rented in an efficient and trustless way. The data provided by devices can also be bought and sold through the IOTA network.

This concept allows the distributed economy movement to evolve in such a way that anyone will be able to make the most out of their belongings. In short, IOTA acts as a backbone for the exchange of value on the IoT paradigm in which devices produce value for their owner and not the other way around.