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Double-Spending

A problem caused by transacting digital currency that involves the same tender being spent multiple times

What is Double-Spending?

Double-spending is a problem that arises when transacting digital currency that involves the same tender being spent multiple times. Multiple transactions sharing the same input broadcasted on the network can be problematic and is a flaw unique to digital currencies. The primary reason for double-spending is that digital currency can be very easily reproduced.

 

Double-Spending

 

Summary

  • Double-spending is a problem that arises when transacting digital currency that involves the same tender is being spent multiple times.
  • The primary reason for double-spending is that digital currency can be very easily reproduced.
  • There are primarily two ways to combat double-spending – central clearing counterparty and blockchain.

 

How a Successful Double-Spending Attack is Administered

  1. Broadcast to the network a transaction where attacked merchant receives payment
  2. Secretly mine a branch that is built upon the block before the transaction, a transaction that pays the attacker
  3. Once the transaction to the merchant receives enough confirmations, and the merchant sends the product
  4. Continue the secret contradictory brand until it is longer than the public transaction, and then make the blocks public. The network will identify the secret branch to be valid because it is longer than the public block, and the payment to the merchant will be replaced by the payment to the attacker.

 

How to Combat Double-Spending?

Preventing double-spending involves a more strenuous verification process and ensures that the same input cannot be shared over multiple transactions. There are two primary ways to combat double-spending:

 

1. Centralized Clearing Counterparty

Centralization can potentially mitigate the inherent risk of double-spending in transacting digital currency. It is done by implementing a central and trusted third party to verify the transactions. The added entity would perform a function equivalent to central counterparty clearing.

In finance, central counterparties are often financial institutions that take on counterparty credit risk between two parties and ensure that a transaction clears. The services are commonly applied to facilitate the trading of financial derivative instruments.

 

2. Blockchain

Decentralized digital currencies, such as Bitcoin, utilize consensus mechanisms that verify transactions with certainty. The consensus mechanisms are alternatively known as proof-to-work. Practically, the mechanism ensures that each participant node verifies the transaction. Therefore, Bitcoin comes with a historical public ledger facilitated through blockchain that provides empirical verification of property rights and transfer.

In order for a market participant to fraudulently double spend, they will need to use a significant amount of computing power to eliminate the previous blocks in the chain, and effectively double-spend the transaction. Additionally, as time passes, confirmations of the block exponentially grow, further protecting the integrity of the transaction.

 

What is a 51% Attack?

A 51% attack is an attempt to leverage high amounts of computing power to control the majority of the hash rate. The hash rate is a measure of the Bitcoin network’s processing power. Controlling the majority of the hash rate can potentially disrupt regular network operations.

Given the outside attacking entity’s computing power, the attacker could potentially alter the order of transactions in the blockchain, or even reverse the previous transaction. Reversing previous transactions will facilitate the double-spending of inputs.

If the attacker is able to achieve 51% of the hash rate, the attacker will also possess the computing power to cause transaction denial of service for other market participants or even Bitcoin mining. Preventing other users from Bitcoin mining will result in a mining monopoly and allow the attacker to reap monopoly economic profits.

Fortunately, if the attacker does achieve 51% of the hash rate, they will not be able to reverse other market participants’ transactions or even prevent the broadcast of their transactions to the network. It would imply that the attacker would be unable to steal other market participants’ coins.

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Cryptocurrency
  • Double Taxation
  • Bitcoin Mining
  • Virtual Currency

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