How Double Spending Works?

Basics

In the world of digital cash, double-spending is a critical concern. This issue occurs when the same funds are sent to two recipients simultaneously. Without proper countermeasures, the protocol becomes fundamentally compromised, as there's no way for users to verify that they've received unique funds that haven't already been spent elsewhere.

To ensure the integrity of digital cash, it's crucial to prevent the duplication of specific units. The entire system would collapse if a user could copy and paste units multiple times, leading to an excess of funds. Likewise, it would be impossible for Alice to send the same 10 units to both Bob and Carol at the same time. Therefore, mechanisms must be in place to prevent this behavior and ensure that digital money can function effectively.

Solutions to the Double Spending Problem

There are two approaches to preventing double-spending in digital transactions: the centralized approach and the decentralized approach. The centralized approach involves one overseer managing the system and controlling the issuance and distribution of units, whereas the decentralized approach requires equally powerful participants to coordinate around a set of rules to prevent fraud.

Centralized

David Chaum’s eCash is an example of a centralized solution to the double-spend problem. It is considerably easier to implement than decentralized alternatives as it involves one overseer managing the system and controlling the issuance and distribution of units. To issue users with digital assets, a bank can use blind signatures as detailed in David Chaum’s 1982 paper Blind Signatures for Untraceable Payments.

Suppose a user, named Frank, wishes to receive $100 in digital cash. Frank must inform the bank and generate a random number, adding a blinding factor to each one to prevent the bank from tracking specific units. Frank then submits this data to the bank, which debits his account and signs messages certifying that each of the five pieces of information is redeemable for $20. Frank can now spend the funds issued by the bank.

To illustrate, Emily's restaurant accepts digital cash and Frank decides to have a meal there. He reveals two random numbers, which serve as unique identifiers for each unit, to pay for his $40 meal. Emily must redeem these immediately with the bank to prevent Frank from spending them with another merchant. The bank checks that the signatures are valid, credits Emily's account with $40, and burns the bills used. More bills must be issued if Emily wishes to spend her new balance in the same way.

Although Chaumian eCash may be valuable for private transfers, it fails in resilience because the bank is a central point of failure. The value of the bill issued is derived solely from the bank’s willingness to exchange it for dollars, and customers must rely on its goodwill for money to function. This is the problem that cryptocurrency aims to remedy.

Decentralized

In a decentralized system, preventing double-spending is challenging. All participants must follow a set of rules that prevent fraud and encourage honest behavior. The Bitcoin white paper introduced a solution to this problem: the blockchain.

A blockchain is a database with unique properties that allow participants on the network to synchronize their copies of the database with their peers. By making the blockchain viewable publicly, it's easy to detect and prevent fraudulent activity, such as double-spending.

When a user broadcasts a transaction, it must first be included in a block through mining before being added to the blockchain. As a result, the recipient should only consider the transaction valid after its block is added to the chain. Once confirmed, the coins can't be double-spent because ownership is assigned to a new user, and the entire network can verify this.

In the scenario of buying a meal at a restaurant, if the restaurant accepts Bitcoin, the customer must send the funds to the public address provided by the restaurant. Anyone presented with the signed transaction can verify that the customer had the authority to send the coins. However, it's recommended that the restaurant waits for at least six block confirmations (approximately one hour) before accepting the payment to prevent fraud.

While the blockchain solves the double-spending problem in a decentralized system, it's not foolproof. Accepting unconfirmed transactions is risky and can allow the sender to spend the same coins elsewhere. The more block confirmations a transaction receives, the more secure it is.

Solving the Double Spending Problem in Bitcoin

Bitcoin has been designed to prevent double-spending attacks, but it only works if transactions are confirmed in a block. If individuals wait for confirmation, it's not easy for the sender to undo the transaction. The blockchain would need to be "reversed," which is unrealistic without an excessive amount of hashing power.

However, double-spending attacks are possible when parties accept unconfirmed transactions. For example, a merchant may not want to wait for transactions to be included in a block for low-value purchases. In a busy fast-food restaurant, waiting for each purchase to be confirmed is not practical. If a business enables "instant" payments, they become vulnerable to double-spending. Someone may buy a burger and pay for it, then immediately send the same funds to their address. With a higher fee, the new transaction is likely to be confirmed first and will invalidate the previous one.

To prevent double-spending attacks on Bitcoin, users typically wait for transactions to be confirmed in a block. However, for low-value purchases, waiting for confirmation may not be practical. In such cases, instant payments can expose a merchant to double-spends. A double-spend happens when someone orders and pays for an item, then immediately sends the same funds to their address, which may be confirmed first, invalidating the initial transaction.

There are three popular methods for performing a double-spend.

• The first is a 51% attack, which occurs when an entity or organization controls more than 50% of the hash rate, allowing them to exclude or modify the order of transactions.
• The second method is a race attack, where two conflicting transactions are broadcast in succession, but only one transaction gets confirmed. The attacker's goal is to invalidate the payment by only validating the transaction that benefits them.
• Finally, Finney attacks involve an attacker pre-mining one transaction into a block without broadcasting it immediately, spending the same coins in another transaction, and only then broadcasting the previously mined block, which may invalidate the payment.

To minimize the risk of becoming a victim of double-spends, a merchant should wait for block confirmations before accepting a payment.

Conclusion

The issue of double-spending is when a user uses the same funds more than once in an electronic cash system for financial gain. This has been a problem with no adequate solution for a long time, hindering progress in the field.

However, the solution proposed by blind signatures has provided an interesting solution for centralized financial schemes. Afterward, the emergence of Proof of Work mechanisms and blockchain technology gave rise to Bitcoin as a powerful form of decentralized money, which has, in turn, inspired thousands of other cryptocurrency projects.