Double-spending is one of the most prevalent concerns in using digital currencies, most notably with cryptocurrencies like bitcoin (BTC) and thousands of others. It’s defined as being “the risk that a digital currency can be spent twice.” While blockchain technology is undeniably complicated, individuals who are sufficiently aware and have high levels of understanding about these kinds of digital solutions are capable of manipulating them.
The double spending problem
Government-issued money doesn’t have many problems. Why? Because paper money can’t be easily replicated or reproduced. It goes through a tedious process of reprinting and quality checking for it to take the form of a legitimate fiat currency. Additionally, transactions involving physical currencies can be instantly verified by both parties involved.
Let’s say you ordered a cup of coffee and a pastry for 10 USD. You paid in cash and handed your 10 USD bill to the cashier. Your payment was instantly confirmed when the cashier accepted your money—both parties involved in the transaction have agreed and physically witnessed the deal. Just like that, you received your order in exchange for the money.
Bitcoin and other cryptos, on the other hand, are digital money, which means that unlike physical currencies, they can easily be copied and reissued. Earlier, we mentioned that since both parties involved in the transaction have agreed and immediately confirmed the transaction, the trade was verified instantly. Without the same verification rule, there’s a high likelihood that the same crypto funds will be spent and sent to two different recipients.
How does bitcoin prevent double spending?
Bitcoin manages double spending fraud through the powerful technology behind it—the blockchain. It works similarly to the monetary system or ledger of fiat currencies’ and traditional money’s, and records and keeps track of transactions in the network. Bitcoin’s blockchain records time-stamped transactions in a chronological sequence, with records dating back to 2009—the year when it first began its operations.
Typically, it takes about 10 minutes for a block or “a new group of accepted transactions” to be generated. Blocks, as defined by Investopedia, are “files where data pertaining to the Bitcoin network are permanently recorded.” It’s like a page of a record book, which, in Bitcoin’s context, is called the blockchain.
Once a block is created, it’s immediately added to the blockchain and published to all nodes. Nodes send information to one another via the network protocol and are responsible for ensuring the system’s integrity. But how do all these complex components help in protecting your bitcoin from double-spending fraud? Let’s use an example to have an idea of how it works.
What does double spending look like?
Say you have 1 BTC, which you plan to spend on your dream car. You found a dealer that offers one and has agreed to get paid in BTC. After all the necessary talks, you finally make the transaction with the vendor by sending your funds. However, without you knowing, the same BTC you used for payment was also used in purchasing certain products or services by a hacker who illicitly gained access to your bitcoin wallet. The transaction was made on the same day and, surprisingly, around the same time as yours. What’s going to happen next?
Chances are: either your car deal pushes through, or the transaction made by the hacker gets confirmed first—meaning you’ll wave goodbye to your dream car. This will depend on whose transaction will be confirmed first.
A confirmation on the blockchain indicates that “the transaction has been processed by the network and is highly unlikely to be reversed.” Transactions gain one confirmation “when they are included in a block and then for each subsequent block.” It is recommended to wait for a minimum of six confirmations, most notably to vendors, to be assured of the funds.
Both yours and the hacker’s transactions were sent into the unconfirmed and unverified pool of transactions. It’s important to understand that, ideally, only the first transaction will be completed and verified by the block miners. This means that the second transaction—if the miners consider it invalid due to the first transaction—will not push through, but will instead be taken out from the network.
Here’s another thing: in our example, both transactions (both yours and the hacker’s) were made on the same day and nearly within the same hour. Assuming that you made the first transaction, is it still possible that the hacker’s transaction will get confirmed first?
The answer? Yes. The second transaction can get the most number of confirmations if the miners simultaneously pull transactions from the pool and if it was pulled before the first one. In this case, the transaction that gets the most number of confirmations first will get verified.
Common double spending approaches
There are three typical ways a double-spending attack is made. Let’s briefly discuss each.
- 51% attacks. An attacker manages to take control of over 50 percent of the hash rate—or the measure of the Bitcoin network’s processing power.
- Finney attacks. This happens when a miner, who has already mined a block, did not broadcast the mined block immediately to the network but spent it instead on another transaction, which then negates the payment.
- Race attacks. This is when an attacker or hacker uses the same coin in two different transactions, but only one transaction gets verified and confirmed—leaving the other one invalidated.
Bitcoin’s ultimate weapon against double spending fraud
What makes bitcoin unique over thousands of other cryptos is that its “base layer transactions on the blockchain are irreversible and final,” when properly used. This means that if someone intends to double spend bitcoin, this person has to go back to all transactions made in the six confirmed blocks that were added after their transaction and reverse all of them. In the crypto sphere, this technique is known to be “computationally impossible.”
Cryptocurrencies and other digital currencies use various electronic systems to prevent this potential flaw from taking place, and Bitcoin has its own defensive structure too. Don’t forget that Bitcoin’s barrier against double spending fraud is deployed on its very own blockchain. Familiarize yourself with this information and the tactics and strategies of the attackers. With these tips in mind, you’ll know how to protect yourself and your bitcoin against potential double-spending attacks.