Cryptocurrencies exist thanks to the wonders of blockchain technology. They are a form of digital currency, with encryption techniques in place to manage and create the monetary units and transfer funds.
In this digitalized world of cryptocurrency, you may have come across a term known as double-spending.
Essentially, double-spending is the concept that someone can replicate Bitcoin or cryptocurrency transactions with funds being sent to two different addresses simultaneously.
So, why is double-spending such a problem? And how can it be prevented in a blockchain?
What Is Blockchain?
Let’s begin by refreshing our minds on the concept of blockchain.
A blockchain is a decentralized ledger that stores transactions. It guarantees mutual trust and a collective consensus among all partners involved.
The revolution brought about by blockchain in the cyberworld has created a safe and robust means of storing, managing, processing, and recording information and digital transactions, often highly sensitive.
What makes blockchain innovative is that a single computer, or node, does not finalize processes; many computers are simultaneously involved.
Cryptocurrencies such as Bitcoin are among blockchain’s many diverse applications. Digital identities, contracts, logistics and an increasing amount of entities can benefit from using blockchain.
What Is Double-Spending?
With regard to digital currency, guaranteeing that a particular unit cannot be duplicated is extremely important. This is because digital information can be relatively easily reproduced by tech-savvy individuals familiar with the blockchain network, and computing commands required to tamper with it.
As we’ve already established, double-spending is essentially where the same funds are sent to two recipients simultaneously.
It occurs when a blockchain network is disturbed, and the cryptocurrency is basically stolen. The person responsible would then send a copy of the transaction to make it look genuine, or even delete the transaction altogether to make it look like it had never occurred.
Without proper countermeasures to resolve such an issue, the entire transaction will be rendered fundamentally destabilized and undermined. Users have no protocol to verify whether the funds they have received aren’t also being spent elsewhere.
Hence, for a digital currency to function reliably, there have to be strict mechanisms preventing this kind of behavior.
How Does Double-Spending Work?
Double-spending destroys and compromises the technological basis of a blockchain. Its whole concept is the opposite of what the blockchain is all about. Hence, the possibility of double-spending would ultimately undermine the trust in a cryptocurrency such as Bitcoin or any other blockchain-based digital currency.
A commonly used analogy for this conundrum is known as the Byzantine Generals’ Problem. This highlights the challenge numerous parties have to face when they do not trust each other and have to participate in a joint venture where they require cooperation to succeed. This analogy explains the issue of disagreement in a decentralized system.
In this analogy, when all generals lead a coordinated attack with their armies, they will achieve victory. However, as soon as a general defects or attacks another general, the entire battle, similar to a blockchain, will be compromised and eventually lost.
As a result, cryptocurrencies must deploy Byzantine Fault Tolerance (BFT) into their protocols. This protocol implies that a computer system must keep functioning up to a satisfactory level despite errors, breakdowns, orparticipants behaving contrary to the designated plans or cheating the system.
Examples of Double-Spending
Now that we’ve understood the basis of double-spending, let’s look at three popular ways scammers perform a double spend.
1. 51% Attacks (Majority Attack)
A 51% attack on a blockchain network occurs when a sole individual or organization controls most of the hash rate, causing potential network disruption. When this happens, the so-called “attacker” attains enough mining power to omit or alter the sequence in which transactions are conducted purposely.
During a 51% attack, the attacker could reverse transactions made by them during this time, leading to a double-spending problem. Moreover, the attacker can also inhibit some or all transactions from confirmation (i.e., a transaction denial of service) and prevent some or all other miners from mining, something known as “mining monopoly.”
Bitcoin Gold, a cryptocurrency that came about as a fork of Bitcoin, was a victim of such attacks in 2018 and 2020.
2. Race Attacks
A race attack involves sending two opposing transactions simultaneously with similar funds; however, only one transaction is confirmed.
During such an attack, the main idea is to invalidate other payments by validating only that transaction that benefits the attacker, i.e., funds sent to an address that they can control.
Also, race attacks need recipients who accept unconfirmed transactions as a form of payment.
3. Finney Attacks
Unlike a race attack, a Finney attack involves the attacker pre-mining a single transaction into a block; however, it is not broadcast immediately to the entire network.
In this kind of double-spending attack, the attacker spends the same coins in a different transaction and then broadcasts the previously mined block, thus invalidating the payment.
These attacks need to occur in a distinct sequence. Likeike race attacks, they also depend on the recipient accepting unconfirmed transactions.
How to Prevent Double-Spending
There are two ways to prevent double-spending.
✔ Centralized Approach
A centralized approach is significantly easier to implement and usually involves a single overseer who manages the system and controls the issuance and dispersal of units among participants.
✔ Decentralized Approach
Guaranteeing that funds aren’t double spent in an environment without a single overseer is more challenging.
Equally controlling participants then need to coordinate around set protocols that check fraud and incentivize everyone to behave honestly.
Moreover, blockchain technology prevents double-spending via peer-to-peer file-sharing technology, coupled with public key cryptography. Along with these setups, ownership structures of cryptocurrencies are logged in the blockchain, which is fundamentally a public ledger, while simultaneously being confirmed via cryptographic protocols and by the overall cryptocurrency community.
Hence, since all transactions are openly chronicled and cryptographically secured simultaneously on thousands of nodes worldwide, everyone involved can see them and verify those that have already been made.
When it comes to Bitcoin, all transactions are verified by miners. This ensures that the transactions performed during the verification process are irreversible and cannot be altered computationally, hence successfully resolving double-spending.
How Likely Are Double-Spending Attacks to Occur?
Even though it has occurred, thankfully double-spending in a blockchain is difficult to achieve.
This is because once a cryptocurrency’s blockchain becomes large enough, as with the case of Bitcoin or Ethereum, the probability of a single individual or group gaining enough computing power to overthrow all other participants speedily becomes very low.
Moreover, modifying all previously confirmed blocks becomes more problematic as the chain grows, since the blocks are all linked via cryptographic proofs. As a result, the more confirmations in a block, the higher the cost of altering or reversing transactions.
Hence, a successful double-spend attack would perhaps only modify a few recent blocks’ transactions, and only for a relatively short time.
As for Bitcoin, its consensus algorithm, also known as Proof of Work (PoW), ensures that miners can only validate a new block of transactions given all network nodes mutually agree that the block hash given by the miner is correct. The block hash verifies that the miner has put in enough effort, found an effective solution for the block’s problem, and will therefore reward some Bitcoins for solving it.
The Bottom Line
With double-spending, participants can scam electronic cash systems for financial benefit, using the same funds two or more times.
Initially, there were no suitable solutions for resolving this problem. It posed a considerable challenge for the growth and progress of cryptocurrency and Bitcoin. Fortunately, the practice of blind signatures as well as certain stringent and transparent protocols have provided an innovative solution for such decentralized financial schemes.
In addition, the formation of PoW mechanisms and blockchain technology has turned Bitcoin into a powerful and decentralized digital currency system, considerably reducing the possibility of fraud and double-spending.