Learn Cryptocurrency
17 Feb 2022

What is the Double-Spending Problem, and How Can Blockchains Handle It?

Ananda Banerjee

Let’s think of the laptop you have been checking out all this while will set you back ₹60,000. Now let’s assume you think that’s a bit much.

But what if someone like you, just a tad more unscrupulous and very interested in making the purchase, can find a way around? What if you can pay for the laptop, get it delivered, and eventually find the amount transferred back into the account? Sounds illicit, right? Well, it is, and that’s what ‘double-spending’ is all about.

It’s wrong, fraudulent, and certainly punishable in the real world. In a decentralized ecosystem, though, it’s harder to execute and a lot more technical. If you are curious to know why, read on. We will learn all about it and more.

Key Takeaways

  • Doubles-spending attacks are carried about by bad actors who leverage the blockchain network’s loopholes to manipulate blocks, mining credibility, and other factors.
  • In a decentralized ecosystem, they are still quite rare.
  • Race, Finney, Vector76, and 51% attacks are the major double-spending drivers.
  • Shifting from a Proof-of-Work consensus model to Proof-of-Stake will prevent attacks and compromised networks.
  • Blockchains with faster transaction finality are more immune to double-spending.

Double-spending is not just jargon. It is precisely what you think it is if you are going by the literal meaning. It is the ability to transact a single unit of an asset or legal tender more than once to procure services and products. In a crypto network, the crypto asset allocated for a given service gets used twice or more.

Double-spending can easily destroy the credibility of and trust in the entire ecosystem. Because, for something like a Bitcoin (BTC) double-spend to occur, the blockchain network has to be significantly compromised.

But aren’t decentralized ecosystems supposed to be safe? Well, they are, and it is important to note that, unlike a standard digital ecosystem, a decentralized one rarely encounters double-spending attacks. Still, it is good to be aware of their possibility—however remote—and to learn about them from a more technical standpoint.

Through this discussion, we shall understand the technical aspects of double-spending using analogies, the types of attacks that are required to bring double-spending to effect, and why specific blockchain networks are more immune to it than others. Check the everyday BTC to INR rate. 

Fact Check: Satoshi Nakamoto drafted the Bitcoin whitepaper with the double-spending issue in mind? In it, he talked at length about how the Timestamp server can help handle it.

What is the Double-Spending Problem?

As mentioned before, double-spending is an issue where one unit of a crypto asset gets used multiple times. But then, in a decentralized ecosystem replete with nodes, validators, and participants, how is it even possible to avoid public glare and bring duplicated transactions to effect?

To understand the answer to this question, let’s first consider the standard functioning of a blockchain.

How does a Blockchain function?

Blockchains, as we know, are meant for transactions. Each transaction in a standard ecosystem requires a block to be created and then sent to the unconfirmed repository or pool, from where it will get added to a block. Once the transaction gets added to a block and the block size maxes out, miners or validators need to confirm or reject the transaction, or the entire block, after solving a complex mathematical problem.

The double-spending problem hides within this very process.

Note: To simplify key concepts, we will be considering the Bitcoin network as a blockchain benchmark in this article.

Imagine you only have a single BTC on you. And you plan on using that BTC to make two payments. Now that may sound impossible, let’s see what will happen if you did try.

You initiate both the transactions simultaneously, moving them to the unconfirmed pool. They are randomly picked; so any one of the two transactions from the same wallet will be verified and approved, moving into a block, while the other gets rejected. 

Bitcoin Double Spend

The sender wallet shows that the required BTC is not available in the second instance and that’s why it gets rejected. This is the standard and secure blockchain operation, and this is what most regular users like us would see happen.

However, the ideal scenario doesn’t always hold. Products and services in the real-world move differently from the way they do in the blockchain network. Once you initiate both the transactions with one unit of your crypto, merchants wait for up to six confirmations—that is, six blocks—to see if the same has been credited to their wallets or not. It is this time gap or rather delayed transaction finality that gives unscrupulous parties a window through which they initiate double-spending attacks.

Real-World Analogy

Imagine you want to pay for a coffee in crypto. You initiate a transaction, get a cup of coffee, and the merchant receives the crypto. Well, they don’t actually receive the crypto yet, but since they receive confirmation that the transaction is successful, that’s all that matters to them for now.

The time at which the merchant actually receives the asset depends on the transaction finality of the blockchain protocol.

Now, having received the coffee, you initiate another transaction from the same wallet, but only this time, it is part of a longer chain. Meaning, you jump the queue and use the crypto reserved for the coffee to pay for another service or product, perhaps by paying some additional fee. Doing this would render the first transaction invalid. But then, you have the coffee already.

The only thing the merchant can do is blacklist your wallet, barring you from using their services ever again.

Types of Attacks That Can Stir Up Double-Spends

Cryptocurrency double-spending isn’t an isolated problem. Instead, it is always a part of a bigger issue or an attack that exploits transaction verification loopholes.

Listed below are some of the full-fledged attacks that are initiated to unlock the double-spending demons.

Race Attacks

Well, the analogy we just discussed is what a race attack looks like. Two conflicting crypto transactions are initiated in the same time frame. Once the second transaction gets verified and has been broadcast (owing to the person jumping the queue or being a part of a longer chain), the initial one fails, and the merchant never gets the crypto. There is a race between the transactions to get verified in more than one way. Hence the name.

Finney Attacks

This kind of attack is facilitated mainly by an unscrupulous miner. While mining the blocks, the person might insert a transaction that returns assets to the wallet. However, for this attack to succeed, the miner must also assign the same number of crypto assets to a pre-mined block as part of the second transaction.

The first unscrupulous transaction does not get broadcast as that would mean crypto being credited before it’s even available in the network. And regardless of what the attack is, assets cannot be created or credited out of thin air. The success of the reverse (first) transaction depends on the failure of the second or the pre-mined one.

Vector76 Attack

Mostly a combination of a Race and a Finney attack, a Vector76 signifies the fact that a transaction with a single confirmation can also be rejected for double-spending crypto. However, this attack takes substantial effort on the part of the attacker, who must make sure that only credible nodes are connected. Unlike most attacks that target Proof-of-Work (PoW) setups, Vector76 can even thwart blockchains with Proof of Stake (PoS), delegated Proof of Stake (dPOS), and PoA (Proof of Authority) consensus mechanisms.

51% Attack or Majority Attack

Arguably the most talked-about attack, a 51% hack means that more than half of a project’s hashing (computing) power belongs to a specific entity. This unaccountable power allows attackers to create a new fork or blockchain that can render transactions in the original version null and void.

The attack on Ethereum Classic (ETC), back in August 2020, was a majority attack. And it even led to crypto double-spending amounting to $5.6 million. Read this highly insightful post to know more about the 51% attack.

Is Every Decentralized Ecosystem Vulnerable?

Not at all. Small crypto projects are prone to attacks, as they have a smaller mining pool. And it is easy to coax and coerce a smaller set of individuals. However, there are a few traits that make some blockchain networks safer than others. They include:

  • Lower transaction finality to speed up confirmations;
  • A built-in Byzantine Fault Tolerance protocol to combat majority attacks;
  • Multiple consensus algorithms to handle every loophole;
  • An ever-growing user base to ensure proper segregation of power;
  • Incorporation of slashing penalties to keep the miners clean; and
  • Increased visibility across the ecosystem with sharding.

Crypto projects that have some or all of the aforementioned traits built-in are expected to stand the test of time.

Wrap-Up

A decentralized ecosystem is now a reality we all need to accept at the earliest. But there are some valid arguments made by those who express skepticism towards adopting it wholly. For example, it is true that we cannot double-spend a ₹100 note or the physical variant of a legal tender, but 100 units of something digital can be reused.

And while this might sound counterintuitive to our vision, every decentralized project isn’t prone to these attacks. In fact, most blockchain networks are immune to these threats, and knowing about these attacks helps us understand the ecosystem’s capabilities better, and in turn make better choices. And talking of better choices, you can buy Bitcoin at the best rate with CoinSwitch. 

Yes, we have experienced a few attacks in the past. But, we will still go on record and say this: A decentralized, blockchain-driven network is significantly less susceptible to attacks compared to a physical safe, which just needs a few good tricks and hands to crack it open.

FAQs

Q1. What is double-spending, and how can it be avoided?

Double-spending is an illegal activity, where one unit of a digital tender can be spent twice by bad actors. While there are many ways to prevent this, increasing transparency is the best way to go about it in a decentralized space. In simple words, the higher the number of validators, the fewer are the chances of a crypto double-spend.

Q2. How do blockchains solve the double-spending problem?

A blockchain network solves the double-spending problem by building a fault-tolerance consensus mechanism, sharding the more extensive network into smaller chains, and/or shifting to a more stake-based transaction verifying algorithm that can be selectively punitive.

Interested in learning more about crypto and blockchain. Well, you can now ‘Double Spend’ your time to learn and read more about interesting topics at CoinSwitch.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Ananda Banerjee

Content Writer

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