Satoshi Nakamoto introduced the concept of a blockchain and its first use case, Bitcoin, in 2007. Since then, blockchains have become central to cryptocurrencies and other tokenization efforts. However, the concepts of cryptocurrencies and blockchains aren’t necessarily inseparable, and several new projects aim to introduce alternatives.
In this article, you’ll learn why not all cryptocurrencies leverage blockchain technologies and about some alternative approaches that are picking up steam.
What is a Blockchain?
A blockchain is a digital ledger of transactions that is decentralized and secure. Using the unique technology, anyone can record transactions in a transparent and immutable way, meaning they cannot be altered or deleted after the fact. And, of course, cryptocurrencies have become the most popular blockchain use case by a wide margin.
However, blockchains are notoriously slow relative to centralized services. For example, Bitcoin and Ethereum have a throughput of seven and 30 transactions per second, respectively. By comparison, Visa can process 1,700 transactions per second (and a theoretical 24,000 transactions per second from a technological standpoint).
Blockchains must balance decentralization, security, and scalability concerns, but only two of the three are achievable at the same time. This so-called “blockchain trilemma” is at the heart of the technology’s scalability issues and remains an open problem. While some Layer 2 solutions and sharding could help, scalability remains problematic.
As a result, some cryptocurrency projects are second-guessing the need for blockchain technology in the first place.
Directed Acyclic Graphs (DAGs)
Directed Acyclic Graphs, or DAGs, have become a popular blockchain alternative. However, while blockchains and DAGs are both distributed ledger technologies enabling users to obtain consensus over the state, they leverage a different underlying mechanism influencing scalability. And that could solve a significant problem impacting today’s blockchains.
The primary innovation is the handling of “orphan blocks” or the creation of blocks before consensus. While blockchains always seek the deepest or most work-intensive chain, DAGs only require each transaction to approve two previous transactions. And the result is a data structure where each newer block is attached to multiple older ones.
Using this data structure, DAGs use a leaderless, probabilistic consensus protocol that enables rapid validation of transactions without the need for total order. In particular, parallel validation of transactions creates a much more performant consensus and ledger solution than blockchains, which require each block to propagate before the next block can change.
The rise of DAGs prompted many cryptocurrencies to experiment with alternative consensus mechanisms.
Hashgraphs, like DAGs, offer a compelling alternative to traditional blockchain technology. While they’re also a distributed ledger technology, they leverage a different underlying mechanism that offers more scalability and efficiency than blockchains. As a result, they could also provide a viable alternative for future crypto projects.
The primary innovation in hashgraphs is using a “gossip protocol” to transmit information about transactions and events. Network participants exchange information with their peers about transactions they’re aware of with a timestamp and cryptographic signature. The data forms a DAG where each event references two previous ones.
Hashgraphs combine the parallel processing of DAGs with rapid information sharing via gossip protocols to facilitate faster transactions and a more efficient network. And like DAGs, there’s no need for any proof-of-work or proof-of-stake consensus mechanism. Instead, its Swirlds mechanism ensures fairness and security.
But DAGs and Hashgraphs aren’t the only blockchain alternatives for projects and investors to consider.
Holochains are another intriguing alternative to conventional blockchains. Unlike blockchains, hashgraphs, or DAGs, they use an agent-centric architecture where each participant has a unique chain. They record transactions and interact with the network using this chain, resulting in very few limitations to throughput.
Individual chains are linked and validated through a distributed hash table (DHT), which serves as a global data store. Allowing each participant to maintain their own history eliminates the need for global consensus on a single, shared ledger, eliminating many bottlenecks. Nor is there a need for a DAG-like data structure containing all transactions.
Most blockchain alternatives use the concept of an acyclic graph (DAG), but they implement different consensus mechanisms.
Nano, formerly Raiblocks, uses a Block-lattice approach where each user operates their own chain while holding a copy of all other chains. Every transaction consists of a send block on the sender’s chain and a receive block on the receiver’s chain. However, this approach could be vulnerable to “penny-spending” attacks.
Byteball’s consensus mechanism involves building a main chain containing most units published by witnesses – or trusted and verified addresses that regularly publish sequential units. Each user includes a list of 12 witnesses whose blocks will become part of the main chain and trusted by a significant fraction of the whole network.
The Bottom Line
Blockchain technologies have set the stage for a crypto revolution, but the concepts of cryptocurrencies and blockchains aren’t inseparable. Acyclic Graphs, Hashgraphs, and Holochains represent three popular blockchain alternatives that could dramatically improve scalability and open the door to exciting new use cases.
Moving forward, some of these ambitious projects are pursuing interoperability with existing blockchains, including Ethereum’s EVM. That way, they could address key crypto movement challenges while offering backward compatibility to drive adoption rates.
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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.