Fiat money is characterised by three main functions - medium of exchange, store of value and unit of account. A central bank controls the growth of money and therefore negates the possibility of double spending.
Cryptocurrencies, however, are decentralised and instead work on digital signatures and proofs of work, etc. When a single cryptocurrency unit undergoes a second transaction, it creates an unstable situation which leads to double-spending. This article dives into double spending in cryptocurrency and its effects.
What Is Double Spending?
Imagine a situation where you purchase an item for Rs. 1000 and use the paid amount to buy another item for Rs. 1000. While it is almost impossible to do so with physical (fiat) money, you can do it with digital currency. Double spending is a situation where a single currency unit is used more than once for valid transactions.
Fundamentally, double spending creates a disparity between currency availability and spending records. Many crypto blockchains, including Bitcoin and Ethereum, suffer from the problem of double spending.
The absence of a third-party intermediary makes confirmed transactions possible when new unconfirmed transaction information is added to a new block. Writing on the new block on the public ledger confirms the transaction. However, double spending arises when two miners work on the same block simultaneously or when internal issues occur.
Types Of Double Spending
Despite desperate efforts to solve the double spending problem, attempts to exploit the blockchain are common. There are three different types of double spending attacks that cryptocurrency networks face:
- Race attack: To disrupt the normal flow of blockchain, hackers may quickly make two transactions and purchase something using the unconfirmed transaction. If the recipient merchant approves an unconfirmed transaction due to asymmetric information, the hacker retains the confirmed block resulting in double-spending.
- Finney attack: Like a race attack, the Finney attack is possible only when merchants approve the transaction. The miner uses two wallets. They pre-mines a transaction in a block from one wallet to another. Then, they broadcast the pre-mined block while using the first wallet to make a second transaction. This leads to double spending on crypto coins.
- 51% attack: When an individual or a group owns more than 50% of the hashing power of a blockchain, they can alter it. They can easily launch a double spending attack with a majority power to alter hashes. However, the enormity of Bitcoin’s hash rate, for example, makes this situation improbable.
Impact Of Double Spending Problem
The key to avoiding double spending is to prevent unconfirmed transactions or blocks. Most cryptocurrency wallets and exchanges label such 'unconfirmed’ transactions, thus preventing the possibility of such incidences. However, cases of double spending are not rare. Some impact of double spending problem are as below:
- Hackers can circumvent the verification process out of the blockchain's security parameters and disrupt their security mechanism. Double spending can essentially cause problems in the decentralised exchanges. The absence of a regulatory authority makes it impossible to trace such changes.
- Double spending arises from accepting unconfirmed transactions mostly without paying attention to them. A wait time determines the confirmation period after which the transaction will complete itself. Since higher payments demand higher wait times, multiple confirmations are necessary. Failure to intercept the validity of transactions can result in monetary losses.
Prevention Of Double Spending
Cryptocurrencies like Bitcoin utilise special security measures to verify transactions undertaken by miners. In the pool of unconfirmed transactions, transactions can validate themselves sequentially. A transaction becomes invalid if it does not receive enough confirmations.
Two specific measures to prevent double-spending are:
- The transaction with the maximum number of confirmations is included in the network while the others are removed. Typically a minimum of 6 confirmations are necessary to validate a transaction.
- All transactions and confirmations contain a timestamp that makes them impossible to backtrack. Users cannot alter confirmed transactions and hence cannot spend them again.
Final Word
Although double spending is an ongoing concern in the crypto fraternity, stringent verification processes have transformed the scenario. The decentralised validator nodes can now solve complicated mathematical problems to verify the ledger. Despite the minuscule possibility of accepting unconfirmed transactions, the crypto network verifies the authenticity of every transaction.
