What is Double Spending?
Double-spending is a scenario where the same amount of digital money can be spent twice. It’s a common problem faced by crypto developers. The cryptocurrency is stored in a digital file. Anyone can make multiple copies of the same digital file and can create counterfeit cryptocurrencies of the same value. There’s no set protocol to verify whether the coins used in a particular transaction are not used elsewhere. This creates an alarming situation as the counterfeit coins increase the circulation and at the same time, the value of such coins falls rapidly compared to other cryptocurrencies. The users’ trust is compromised and the retention trend around these coins witnesses a major shift. For instance, A has 10 tokens and he/she spends the same tokens while engaging in a transaction with B and C. It’s hard to determine whether A has cheated B or C. The financial security of such transactions is something which should be given utmost importance.
The problem of double-spending is only limited to cryptocurrency and not physical currency. The physical currencies are controlled by a central authority of their respective regions like the Federal Reserve System for the US dollar, European Central Bank for Euro, Reserve Bank of India for Indian Rupee, People’s Bank of China for Yen, Central Bank of Kuwait for Kuwaiti dinar and so on. The protocol set by these central authorities has hard and fast rules. They design a specific printing plate which will have serial numbers, date of issue, specific markings, grading, and color pattern. Hence, physical currencies cannot be exactly duplicated and only the imitation ones can be created. It becomes relatively easy to identify counterfeit physical currencies. Furthermore, there are strict laws and mechanisms in place to deal with such menace. This is the reason why the majority of the people still prefer physical currencies or digital payments which comes under the rules & regulations of central authorities.
How Bitcoin Deals With Double Spending?
The blockchain technology was pioneered by Bitcoin. The preventive measures were put into practice to avoid double-spending with the effective use of blockchain technology. Bitcoin handles transactions through blocks that are later added to the chain. The coins used for each transaction are verified by a confirmation mechanism. If a trader tries to send the same coins to different addresses, it gets stored in a network of unverified transactions. The first transaction gets approved and the second is rejected by the confirmation mechanism. If both the transactions are carried out at the same time, then the transaction with maximum confirmations gets approved and the other one is rejected. In order to have maximum transparency, it is recommended that a trader should wait for at least 6 confirmations.
How is Double Spending Executed?
51% Attack – In this method, an attacker has to get access to 51% of hash power, which verifies the transaction and blocks. If he/she successfully manages to pull it off, then double-spending can happen as the verification mechanism will be under his/her control. But, seldom does this situation arise as it involves exorbitant costing of mining, hardware and software, electricity charges, and other required factors. This sort of situation is highly improbable to happen in bitcoin but has happened in several other networks.
Race Attack – The attacker can execute this method only if a trader accepts the transactions with zero confirmations. Such a situation puts the trader in a vulnerable position as there are high chances that he/she has received double-spent coins. For instance, if the attacker performs a dual transaction with the same coins where A accepts it without confirmation and B waits for the confirmation. The coins sent to B will be stored in a network of unverified transactions and will be accepted by confirmation mechanism considering it as genuine. Whereas A will get the double-spent coins as the transaction was accepted without any confirmation. Hence, it has been strongly advised by trade analysts that every trader should wait for at least 6 confirmations to prevent such attacks.
Finney Attack – An attacker with mining expertise generates blocks at regular intervals without transmitting it to the network. The attacker spends the same coins in multiple transactions in which some payments are directly made to the dealer. The dealer checks the value of coins and transfers the goods accordingly. The attacker releases the block after receiving the good. In such a scenario, the confirmation mechanism gives approval for other transactions and the coins that the dealer has received are declared invalid. This method happens in a specific sequence and if the beneficiary has accepted the transaction with zero confirmations.