Every economic system faces the problem of manipulation of money, whether it is counterfeit notes, fake precious metals such as gold, or replica coins. The crypto space is no different in this regard and has to contend with issues such as double spending, where malicious actors manipulate digital currencies for personal gain. As new technology and innovations become available in the crypto ecosystem, malicious entities often become their first adopters, largely because the technology is untested and can be easily manipulated.
But what is double spending? How does it work, and how can you prevent them? This article examines the double spending problem and how it can be prevented.
Key Points
- Double spending refers to a technical flaw that allows malicious users to duplicate money and use the same currency twice or more to avail of certain services.
- Any malicious user can manipulate the network, creating multiple copies of the currency and using it in multiple transactions.
- There are several variations of double spending attacks, with the 51% attack being one of the most commonly cited attacks.
What Is Double Spending?
Let’s first understand the double spending problem in a general sense. Double spending occurs when a single currency unit is spent more than once, creating a disparity between the spending record and the amount of currency available. How about an example? Let’s assume an individual walks into a store with $20 and purchases a bunch of things using the currency. However, then the individual goes ahead and purchases even more items using the same $20 used to buy the previous items. Now, such a scenario is almost impossible to pull off using physical currency, but there is a greater opportunity to pull off something like this in digital currencies.
Understanding Double Spending In Crypto
To understand the concept of double spending, we must understand how the blockchain works. When a block is created on the blockchain, it receives a hash, a type of encrypted number. This “hash” includes a time stamp, information regarding the previous block, and relevant transaction data. All of this information is encrypted through the SHA-256 algorithm on Bitcoin. The information contained in the block is then verified by miners using the Proof-of-Work consensus mechanism. Once verified, the block is closed, and a new block is created containing the timestamp, transaction information, and the previous block hash. The miner verifying the hash is rewarded through block rewards, consisting of Bitcoin.
Double spending can seldom happen in physical transactions, and almost always occurs in online transactions where there is no authority to verify transactions. If any malicious user wishes to double spend, they would first have to mine a secret block that outpaces the creation of the actual blockchain. This block needs to be introduced to the network before it catches up. Once this has been accomplished, the network would recognize it as a new block and add it to the chain. The user would then be able to give themselves back the crypto they had spent and use it for another transaction.
How Does Double Spending Work?
Double spending is the antithesis of the principles on which the blockchain functions and undermines the trust placed in cryptocurrencies such as Bitcoin and other blockchain-based digital currencies. A common analogy to describe this problem is the “Byzantine Generals’ Problem.” The problem highlights the challenges participating parties face when there is a lack of trust in each other, and they have to work together. The Byzantine Generals’ analogy perfectly explains the issues that arise when there is a disagreement in decentralized systems.
If every general leads a coordinated attack, they have a greater chance of victory. However, if a general defects, the battle, like the blockchain, is compromised and can be lost. Cryptocurrencies must deploy something known as Byzantine Fault Tolerance (BFT) to counter this. This implies that a system must always function optimally despite errors or participants attempting to cheat the system.
Types Of Double Spending Attacks
There are several types of double spending attacks. Let’s look at each in a little more detail.
51% Attack
A 51% attack occurs when an individual miner or organization can gain control of over 50% of the hash rate, potentially disrupting the network. After gaining control of the network, the attacker can alter or entirely omit the sequence of transactions. The attacker can also reverse transactions, leading to a double spending problem on the blockchain in question. The miner can also deny other miners from mining, a phenomenon known as a “mining monopoly.”
Race Attack
A race attack occurs when an attacker sends two opposing transactions simultaneously containing the same funds. However, only one of these two transactions is confirmed. The central premise of a race attack is to invalidate other payments on the blockchain by validating only the transaction that benefits the attacker. However, a race attack is only possible if the merchant or recipient accepts an unconfirmed transaction.
Finney Attack
A Finney attack occurs when a miner pre-mines a block containing a single transaction. However, the miner does not broadcast this transaction immediately. The attacker then spends the same coins in a different transaction but broadcasts the previously mined block. This ends up invalidating the payment. Finney attacks require a particular set of sequences to occur and, like race attacks, depend on the intended recipient accepting unconfirmed transactions.
How To Prevent Double Spending?
Double spending can be prevented by taking two approaches.
- Centralized Approach – A centralized approach involves a single entity overseeing the system and controlling the issuance and dispersal of assets between participants. It is also considered the easier of the two approaches.
- Decentralized Approach – This approach is slightly more complicated because ensuring that funds are not double-spent in a decentralized system is more challenging.
Additionally, blockchain technology can prevent double spending by implementing peer-to-peer file-sharing technology and public-key cryptography. All details are logged and recorded on the blockchain, ensuring a public record of all transactions.
In Closing: Should You Worry
As you can see, double spending allows users to scam systems for their financial benefit, enabling them to spend the same funds more than once. While double spending was quite a headache, becoming a significant hindrance to the growth of cryptocurrencies, recent innovations have helped minimize its impact. As long as a user does not accept an unconfirmed transaction, they do not have to worry about the threat of double spending.
Implementing stringent and highly transparent protocols has gone a long way in providing a solution for double spending. In contrast, Proof-of-Work consensus mechanisms have further reduced the possibility of fraud through double spending.
Disclaimer: The content of this email is strictly for information purposes only. All of the opinions expressed in this email are not connected to CoinSmart and are not intended to provide you with investment advice. It is important that you do your personal research and/or consult an investment advisor to determine what is right for you.
