Cryptocurrency is here thanks to the greatness of blockchain technology which allows transactions without third parties such as banks or governments. However, even this sophisticated technology is not free from the risk of problems which are often called double spending. Basically, the term refers to a problem when someone makes cryptocurrency transactions by sending the same number of coins to two different wallet addresses at once. So why is double spending a big problem? What risks does double spending bring to the blockchain system? And how can this be avoided in the blockchain system? Let’s learn more in this article.
What is Blockchain?
Let’s start by recalling what blockchain is all about. Blockchain is a decentralized digital ledger that functions to store transaction records. This technology guarantees mutual trust and mutual consensus among all the partners involved in its network. The revolution brought about by blockchain in cyberspace has created a safe and robust way to store, manage, process, and record digital information and transactions that are often considered very sensitive. The thing that makes this technology most innovative is the number of computers that work at one time to work on transactions that occur in it.
Cryptocurrencies like Bitcoin are one of the many blockchains out there. Digital identities, contracts, logistics and a growing number of entities can benefit from using blockchain.
What is Double Spending?
When it comes to cryptocurrencies, it is very important to ensure that certain units cannot be duplicated. This is because digital information can be reproduced easily by an individual who is both tech-savvy and familiar with blockchain networks, so that he can make the computational commands necessary to tinker with it. As discussed above, double spending is basically an event when the same funds are sent to two recipients simultaneously. This happens when the blockchain network is compromised and is involved in cryptocurrency theft. Unscrupulous people will then send copies of transactions to make them look authentic, or even delete transactions altogether to make it appear as if they never happened.
Without proper countermeasures to address such issues, the entire network will become unstable and fundamentally broken. Users have no protocol to verify whether the funds they receive are also not being used elsewhere. Therefore, for cryptocurrencies to work properly, there must be strict mechanisms in place that prevent this kind of behavior.
How Double Spending Works
Double spending has the potential to be devastating and poses a major risk to blockchain technology. The whole concept of double spending is not compatible with the blockchain working system. Therefore, it is likely that double spending will eventually undermine users’ trust in cryptocurrencies.
The analogy that is commonly used for the double spending problem is known as the Byzantine Generals Problem. This analogy highlights the challenge that many parties have to face when they do not trust each other and have to participate in a joint venture which requires cooperation in order to succeed. This analogy explains the problem of disagreement in a decentralized system. In this analogy, when all the generals lead a coordinated attack with their troops, they will achieve victory. However, once a general damages or attacks another general, the entire battle, is compromised and eventually lost, and so is the blockchain.
As a result, cryptocurrencies must incorporate Byzantine Fault Tolerance (BFT) into their protocols. This protocol implies that a computer system must continue to function to a satisfactory level even if errors, breakdowns, or participants behave contrary to predetermined plans or cheat the system.
Example of Double Spending
Now that we understand the basics of double spending, let’s take a look at three popular ways scammers double spend.
- 51% Attacks (Majority Attacks)
51% of attacks on blockchain networks occur when one individual or organization controls the majority of the hash rate, causing potential network disruption. When this happens, the “attacker” achieves sufficient mining power to omit or change the order of transactions made on purpose.
In 51% attack, the attacker can reverse the transactions made by them so far, which causes double spending problems. In addition, attackers can also block some or all transactions and prevent some or all other miners from mining, something known as a “mining monopoly”. Bitcoin Gold, a cryptocurrency that emerged as a fork of Bitcoin, was one of the victims of such attacks in 2018 and 2020. - Race Attacks
Race attacks involve sending two opposite transactions simultaneously with similar funds; however, only one transaction was confirmed. The main idea of this attack is to invalidate other payments by validating only transactions that benefit the attacker, i.e. funds are sent to addresses they can control. Race attacks also require recipients to accept unconfirmed transactions as a form of payment. - Finney Attacks
Unlike race attacks, Finney attacks involve the attacker pre-mining a single transaction into a block; however, it was not immediately broadcast across the network. In this type of double spending attack, the attacker spends the same coin in a different transaction and then broadcasts the previously mined block, thereby invalidating the payment. These attacks need to occur in a different order. Like race attacks, they also rely on recipients receiving unconfirmed transactions.
How to Prevent Double Spending
There are two ways to prevent double spending:
- Centralized Approach: This deterrence approach is significantly more centralized and easier to implement and usually involves a single supervisor managing the system and controlling the issuance and deployment of units among participants.
- Decentralized Approach: Ensuring that funds are not spent twice in a single unsupervised environment is challenging. In this prevention it is the participants who jointly control and coordinate around the established protocols to check fraud and incentivize everyone to behave honestly.
In addition, blockchain technology prevents double spending through peer-to-peer file sharing technology, coupled with public key cryptography. Along with this setup, the ownership structure of the cryptocurrency is recorded in the blockchain, which is essentially a public ledger, as well as authenticated via cryptographic protocols and by the cryptocurrency community as a whole.
Therefore, because all transactions are openly logged and cryptographically secured simultaneously on thousands of nodes around the world, everyone involved can view them and verify transactions that have been made. In the case of Bitcoin, all transactions are verified by miners. This system ensures that transactions made during the verification process are immutable and computationally irreversible, thus successfully solving the double spending problem.
How likely is a double spending attack to occur?
Even though it has happened, fortunately double spending on the blockchain is not an easy thing to do. That’s because once a cryptocurrency’s blockchain becomes large enough, like Bitcoin or Ethereum, the chances of one individual or group gaining enough computing power to quickly overturn all other participants become very low or nearly impossible.
In addition, modifying all previously confirmed blocks becomes more problematic as the chain grows, because all blocks are connected via cryptographic proofs. As a result, the more confirmations in a block, the higher the fee for changing or reversing a transaction.
Therefore, a successful double spending attack may only change a few recent block 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 new blocks of transactions given that all network nodes mutually agree that the hash of the block provided by miners is correct. The block hash verifies that the miner has put in enough effort, found an effective solution to the block problem, and will therefore reward a few Bitcoins for solving it.
Conclusion
By double spending, attackers can trick electronic money systems for financial gain, using the same funds two or more times. Initially, none of the suitable solutions to solve this problem. This poses a sizeable challenge for the growth and advancement of cryptocurrencies and Bitcoin. Fortunately certain strict and transparent protocols have provided innovative solutions for decentralized financial schemes. In addition, the establishment of the PoW mechanism and blockchain technology has turned Bitcoin into a powerful and decentralized cryptocurrency system, greatly reducing the possibility of fraud and double spending.
