Imagine you were given a $10 bill, and somehow, you managed to spend it twice at two different stores. Sounds strange, right? Well, while this double spending situation might be impossible in real life, it is a subject of concern in the crypto world. Since currency is primarily data, a coin or token can be used in more than one transaction.
Double spending is a threat to the trust and reliability of cryptocurrencies. Because if the asset can be spent twice, what then is its value? In this article, we will be discussing what is double spending in crypto? and why is it a problem. We will also explain the technology behind cryptocurrencies that works to prevent such occurrences.
Let’s get started!
KEY TAKEAWAYS:
- Double spending happens when the same crypto is used for more than one transaction.
- Vulnerabilities that lead to double spending include 51% attack, race attack, and Finney attack.
- Coin reuse is a problem because it leads to financial losses, network integrity threats, and loss of trust in a blockchain.
- Some solutions to duplicate payment are proof-of-work (PoW), digital signatures, cryptography, and confirmation systems.
What Is Double Spending?
Double spending or coin reuse happens when the same crypto is used for more than one transaction, thus duplicating its spending power. Unlike fiat currencies, where you simply hand over cash to transfer ownership, the transfer of digital currencies gets verified through a more complex process. If not properly addressed, it can affect the worth of a virtual currency by allowing for double spending.
How Does Double Spending Happen
Coin reuse happens when vulnerabilities in a digital system are exploited using advanced methods, some of which include:
- 51% attack: A 51% attack happens when an entity controls over 50% of the mining power of a proof-of-work (PoW) blockchain. This gives them the ability to create multiple versions (or forks) of the network where a transaction is reversed or does not exist. So, the attackers can spend the same coins again in the parallel version of the chain.
- Race attack: Here, a malicious person targets zero-confirmation transactions, which some people accept before they are confirmed on the blockchain. They initiate two transactions, A and B, using the same cryptocurrency. Transactions A is sent (e.g., to a merchant) as supposed payment for goods and services, while B is broadcast to the rest of the network.
The goal is to ensure transaction B is confirmed on the blockchain before A. So, while the first recipient (e.g., a merchant) has sent the attacker the goods and services, the transaction would eventually be invalidated. Thus leaving them without payment.
- Finney attack: In this situation, an attacker uses a pre-mined transaction to trick a recipient. They create a transaction A that sends funds to their own crypto wallet and then mine a block containing the transaction without broadcasting it to the network. So, transaction A is ready to be confirmed, but no node on the network knows about it.
They then go ahead to a merchant and make a payment with the same crypto, thus creating a second transaction B. Immediately the merchant accepts it, the attacker quickly broadcasts the block containing transaction A. Since it was mined on a valid block, it gets confirmed on the chain, while payment B is canceled.
Why Is Double Spending A Problem?
Double spending compromises the trustlessness and security that decentralization is supposed to bring. Here are the consequences of an unchecked coin reuse or duplicate payment issue:
- Loss of trust: If investors and businesses are not sure that a crypto transaction is final and irreversible, it ruins the credibility of an entire blockchain network. This eventually leads to reluctance to adopt it.
- Network integrity threat: Duplicate payment can make a blockchain unstable, which often leads to splits or forks.
- Financial losses: Merchants who rely on zero-confirmation transactions for quick sales face financial risk if coin reuse happens.
Double Spending Solutions In Blockchain
Duplicate payment is not a new issue in the blockchain space. As such, some solutions have been developed over time to reduce its possibility as much as possible. These include:
- Proof-of-work (PoW): In a blockchain like Bitcoin, miners must solve a complex cryptographic puzzle before a transaction is validated and added to the chain. This makes it expensive for malicious people to alter the transaction’s block, which prevents coin reuse.
- Confirmation system: Some blockchain networks use a confirmation system to verify the finality of a transaction. The higher the number of confirmations a funds exchange receives, the harder it is to alter it.
- Digital signatures and cryptography: Digital signatures and cryptographic hashing authenticator prevents double spending by confirming the identity of the sender. Since a new transaction creates a new and unique identifier, duplication is difficult.
Read Also – What Is Cryptography? Its Importance and Types
How To Prevent Double Spending
While there are technical solutions to duplicate spending, the following measures can be taken to further minimize coin reuse:
- Wait for multiple confirmations before accepting a transfer of funds as final.
- Stay away from zero-confirmation payments as much as you can.
- Experienced developers should carry out code reviews on a blockchain to identify vulnerabilities.
- Make use of wallets that offer advanced security features like the multi-signature option to prevent unauthorized payments.
Conclusion
Coin reuse is indeed possible with cryptocurrency and sometimes affects their integrity. Luckily, numerous robust mechanisms have been developed to significantly reduce such occurrences. By understanding all these and practicing the measures we have shared on what is double spending in crypto? and why is it a problem; you can protect your interest while participating in decentralized finance (DeFi).
Reference
- investopedia.com – Understanding Double-Spending and How to Prevent Attacks
- hacken.io – Double-Spending in Blockchain and How to Prevent?
- komodoplatform.com – The Double Spending Problem, Explained