The “double-spend” problem is one of the many pieces of jargon that often seems confusing to anyone unfamiliar with cryptocurrencies because it doesn’t exist in traditional finance. Understanding the double-spend problem and how Bitcoin solves it is key.
It’s generally not possible to double-spend fiat currency or other types of assets like stocks or gold. For all its complexities, the financial system is effectively a set of ledgers maintained by banks, exchanges, brokers, and other industry players. They keep track of the flow of money and assets and attest to their ownership.
If your bank account says you have $10,000, it’s because your bank agrees you have $10,000. Central banks play a similar role in issuing physical cash, where the act of holding a $20 bill proves you own a $20 bill.
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However, when the earliest pioneers attempted to launch digital money that could operate independently, they immediately ran into a problem. Digital currencies are essentially digital files, which can be replicated with ease. Therefore, they had to find a way to introduce digital scarcity. Otherwise, someone could copy their digital currency and spend it in two places at once.
When Satoshi Nakamoto launched the Bitcoin blockchain, it seemed that they had discovered the solution to this problem. The Bitcoin blockchain is a ledger that contains records showing the issuance of all new BTC and the transactions for every single BTC in circulation, along with the BTC balances for each Bitcoin address. The ledger is maintained by a decentralized network of miners, each of whom has an identical copy.
Satoshi devised a system for maintaining the Bitcoin ledger that’s based around game theory, incentivizing miners to be honest and enter only legitimate transactions into the ledger. For example, when Alice sends Bob one BTC, the transaction is entered into a pool along with all other unconfirmed transactions. Miners compete under the Proof-of-Work model to become the next to mine a block, expending significant computing power to solve complex cryptographic puzzles. The first miner to solve the puzzle selects a group of transactions from the pool, which is known as a block.
The miner then presents their solution, and their block, to the rest of the miners on the network. The miners verify the solution and also that the transactions in the block are legitimate. Alice must have a valid Bitcoin address that contains at least one BTC for her transaction to succeed. Assuming she does, then the transaction is confirmed and added to the Bitcoin ledger.
Each block is tied cryptographically to its predecessor, creating a verifiable trail of transactions. Coming back to the double-spend problem, it would now only be possible to enact a double-spend if someone can somehow convince or dupe the network into believing that Alice still has that one BTC in her account after she’s already sent it to Bob. There are only a limited number of ways that can happen, and none of them is straightforward.
The most well-known type of double-spending attack is the 51% attack. In this scenario, one or multiple entities manage to command at least 51% of the network’s total computing power, also called hash power. Once they’ve done so, they have enough control of the network to begin confirming invalid transactions, which often involves enacting double-spends.
Another type of attack is the race attack. Going back to the transaction between Alice and Bob, let’s assume Alice is a malicious actor trying to carry out a double spend. She sends her one BTC to Bob but immediately sends a reverse transaction before her payment to Bob is confirmed by the Bitcoin network.
A Finney attack is a more complex version of the race attack, where a miner is involved in the transaction. If Alice is the miner, in this case, she pre-mines a block with her payment to Bob but creates another transaction before the pre-mined block is broadcast to the network. Therefore, the network will reject the transaction to Bob.
Both of the last two scenarios depend on Bob having accepted the transaction as completed before it was confirmed on the Bitcoin blockchain. For this reason, most merchants that accept Bitcoin won’t issue goods or services until transactions are finalized. Finalization involves waiting for several more blocks to be confirmed after the transaction to minimize any chance of double-spending.
The Bitcoin network is relatively slow, and finalization can take up to an hour. This lack of scalability is one reason why Bitcoin hasn’t become a global medium of exchange as much as an asset similar to a commodity yet. However, a lot of work is being carried out on layer-2 solutions such as the Lightning Network to enable this.
While users should be aware of the risks of double-spend attacks, the fact is that they are relatively rare on the Bitcoin blockchain. Provided users are aware of the need to wait for finalization, the chances of becoming a victim of a double-spend attack in a BTC transaction are thankfully rather low.
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