With no central authority to ensure the validity of transactions, participants in blockchain networks face the problem of trusting that the coins they receive are not duplicates of funds already spent. Decentralized networks rely on measures that incentivize users to act honestly and eliminate the double-spending problem.
Read on to learn about the double-spending problem, how it occurs, and the measures blockchain networks take to prevent it.
What Is the Double-Spending Problem?
The double-spending problem involves one party sending the same funds to two recipients simultaneously.
When a blockchain network fails to implement countermeasures to prevent that problem, recipients can’t verify that the sender hasn’t already spent the funds elsewhere.
Understanding the double-spending problem requires insights into how blockchain networks operate. The workings of a blockchain network involve the creation of blocks.
Each block receives an encrypted number called a hash. The hash contains the timestamp, transaction data, and information from the previous block. In proof-of-work networks such as Bitcoin, miners verify the information and add the block to the chain once they reach a consensus.
How Does Double-Spending Occur?
Double-spending occurs when a malicious party adds a transaction to a block on a blockchain and includes it in the mainchain before miners confirm a transaction involving the same asset.
It can also occur in a flawed smart contract or when a transaction is not confirmed properly, leading to double confirmation on the network.
The network recognizes the transaction added first to the chain and invalidates the other one. This can allow a malicious party to send funds to pay for a service and then transfer the same funds to a wallet they control. If the recipient accepts payment based on an unconfirmed transaction, they leave themselves open to getting scammed.
Examples of Double-Spending Attacks
Let’s look at the various examples of double-spending attacks malicious players can execute on a network.
If a single entity or entities working towards the same goal manage to take control of more than 50% of the network’s nodes, they can exclude certain transactions or modify their ordering.
In such a scenario, the group controlling 51% of the nodes can block transactions or even reverse others to allow them to double-spend them. The cost is a deterrence to this type of attack, given the resources an attacker needs to out-hash the main network.
When carrying out this attack, the malicious party relies on the recipient accepting an unconfirmed transaction. The sender broadcasts two transactions involving the same funds in succession.
The sender takes steps to ensure the beneficial transaction receives priority during confirmation. One such strategy involved here is to pay a higher fee for the transaction. When the second transaction gets to the confirmation stage, miners reject it as they cannot prove that the sender owned the funds at that time.
Like the race attack, a Finney attack relies on the recipient accepting unconfirmed transactions as payment.
In a Finney attack, the attacker prepares a transaction but fails to broadcast it to the network. They then spend the same coins in another transaction and broadcast that one. A successful Finney attack invalidates the second transaction with the pre-mined one confirmed first.
How to Prevent the Double-Spending Problem
Blockchains that fail to place countermeasures to prevent the double-spending problem present a trust and reliability problem. There are two ways to avoid it:
Trusted Third Parties – The Centralized Way
Here, parties to a transaction rely on a central authority to verify transactions. A central authority can be a bank, a payment processor, or an Automated Clearing House (ACH). The centralized authority sets the rules and keeps records private. Given their importance to the system’s integrity, they set limits on the fees charged and can impose limits on users.
Distributed Ledgers – The Decentralized Way
A distributed ledger is public to all users, allowing them to examine the complete history of transactions. This enables them to confirm that the sender has not double-spent the coins. A consensus mechanism ensures transactions are processed correctly, and validators ensure the validity of each transaction.
Considering the resources required for a 51% attack, vulnerability to the double-spending problem arises from accepting unconfirmed transactions. Provided a party waits for transaction confirmation, ideally by multiple nodes, they can avoid facing the problem.
Well-established blockchain networks like Bitcoin achieve true decentralization by ensuring that the cost of a 51% attack is prohibitively high for any party to attempt.