While digital currencies have made online transactions far more effective and efficient, they also pose new challenges and security risks. One key issue curtailing blockchain-based cryptocurrencies is the double-spending problem, where one unit of a token is spent more than once. Although blockchain ecosystems have managed to mitigate the problem for the most part, it continues to remain a possibility, and if left unchecked, could undermine the integrity of digital currencies.
In this article, we will explain what the double-spending problem is and the safeguards crypto investors should take to stop themselves from becoming victims.
What is the Double-Spending Problem?
Although Bitcoin is widely regarded as the apex cryptocurrency, it is not the first one. Many cryptocurrencies and blockchains preceded Bitcoin, but the main reason they were unsuccessful until Satoshi Nakamoto introduced the world to Bitcoin was due to a critical issue where those systems could not stop users from altering on-chain information to get back any tokens they had already spent.
This is a weakness affecting any digital monetary system and is likened to counterfeiting physical currency, but with a slight twist. While counterfeiting is the creation of fake money, double-spending refers to using the same unit of a digital currency in two places at the same time.
Let’s take an example to understand this better. Suppose you made two BTC transactions – one to buy pizzas for $10 worth of BTC, and simultaneously used the same Bitcoin to purchase a pair of socks. This means that you purchased two items using the same fund, which indicates that you double-spent the Bitcoin.
Types of Double-Spending Attacks
Bad actors can utilize different avenues to conduct double-spending attacks using cryptocurrencies on blockchains. Here are the most prominent methods:
51% Attack
Not every double-spending attack is due to a bug in the code or security breaches. It can also occur when playing by the rules of the blockchain ecosystem. Blockchains powered by proof-of-work (PoW) consensus, like Bitcoin and Litecoin, consist of a network of miners that agree on the current version of the network. If an individual or group takes control of more than 50% of the blockchain’s computing power or validation mechanisms, then they will be able to dictate transaction consensus and control the currency supply. This is known as the 51% attack.
Proof-of-stake (PoS) blockchains like Ethereum or Solana are also susceptible to these attacks, but it is very rare. For a 51% attack to occur on PoS blockchains, the attacker will need to control more than 50% of the native token’s supply and stake them under a contract. However, this effort is very costly, and the blockchains now employ mechanisms that burn tokens of dishonest validators.
Race or Unconfirmed Transaction Attacks
Race attacks, also known as unconfirmed transactions, occur when the attacker attempts to send two quick, malicious transactions to the same person simultaneously. The attacker would create one transaction to an unsuspecting recipient and a second transaction to another wallet controlled by them. The recipient may accept the first transaction, but won’t receive the token, as the blockchain would have confirmed the sender’s second transaction first, allowing the attacker to keep the crypto for themselves.
This technique is used to exploit network congestion and is extremely technical, requiring the sender to perfect their timing and count on a very specific sequence of events to occur. However, a race attack can be easily thwarted by not accepting unconfirmed transactions.
Finney Attack
Named after the infamous cypherpunk and recipient of the first-ever Bitcoin transaction, Hal Finney, who discovered the weakness in the Bitcoin network in 2011, the Finney Attack is another variety of an unconfirmed transaction attack.
It involves a miner creating a fake block without broadcasting it to the blockchain and sending an amount of crypto to a wallet they own. Simultaneously, a second transaction is made to another party within the same block. Once the recipient accepts the payment, the miner broadcasts the block to the mainnet with only the first transaction, essentially returning the amount they sent to the other party and allowing them to spend it again.
This attack is less likely to occur on larger blockchains like Bitcoin or Ethereum and can be prevented by not accepting unconfirmed transactions or using a wallet that can detect malicious transactions.
Sybil Attack
A Sybil attack is similar to the 51% attack, where multiple nodes are created on the blockchain in an attempt to gain influence over its consensus mechanism. With enough fake nodes, the attacker can overwhelm the network and disrupt the transaction validation process to double-spend tokens. These attacks are carried out as precursors to the 51% attacks and often target smaller blockchains.
How Was The Double-Spending Problem Solved?
The double-spending problem on blockchains was solved through the implementation of consensus mechanisms, timestamps, cryptography, and a distributed network of nodes.
Satoshi Nakamoto presented a solution that involved timestamping transactions and chaining them together using a computational cryptographic proof. This system ensured that each transaction is verified and recorded on the blockchain in a way that prevents the same units of a cryptocurrency from being spent more than once. For the solution to work, a large and fast distributed network of nodes is required that can keep bad actors from altering transactions.
The timestamp is crucial because it marks the time and date the block was created, while the consensus mechanisms, such as proof-of-work and proof-of-stake, ensure that all nodes or validators in the blockchain agree on the correct sequence of transactions, making it nearly impossible for an attacker to gain majority control through a 51% attack and alter on-chain events to double-spend tokens.
Bitcoin introduced the Unspent Transaction Output (UTXO) system, where each transaction refers to a previously unspent transaction. This way, the blockchain can ensure that each output can only be used once. On most blockchains, once a transaction is included in a block, it is considered final and irreversible, ensuring that bad actors cannot manipulate the chain of events.
While most established blockchains are large and distributed enough to prevent double-spending attacks against them, users should take precautions and make sure that they do not accept unconfirmed transactions. Modern crypto wallets are aware of these risks and have incorporated mechanisms to flag suspicious transactions.
How Can Double-Spending Attacks Be Prevented?
Here are some effective strategies to mitigate double-spending attacks using cryptocurrencies:
Network Monitoring
Implement real-time monitoring tools to detect suspicious activity, such as malicious or conflicting transactions, and prevent potential double-spending attacks.
Conflict Detection
Nodes are now capable of detecting conflicting transactions and can prevent them from being added to the chain. If an attacker attempts to send funds that have already been used in another transaction, then it will be invalidated and rejected.
Multiple Confirmations
Crypto recipients should wait for multiple node confirmations before considering the transaction final. This is crucial if the person or entity is to receive large amounts of tokens.
Avoid Zero-Confirmation Transactions
Avoid accepting transactions with zero confirmations at all costs. Make sure to use additional verification processes to ensure that the funds are not double-spent.
Segregated Witness
SegWit technology reduces the risk of accepting double-spent tokens by storing the transaction data across nodes and requiring multiple validations to confirm, significantly improving network efficiency and security.
Layer-2 Solutions
Layer-2 networks help reduce congestion on the main chain by processing transactions on a parallel layer, making the blockchain much faster and more efficient while maintaining the security of on-chain transactions.
Also Read: Crypto Fear & Greed Index: What Is It And How Does It Work?
Final Thoughts
A double-spend attack usually occurs when a bad actor gains control over the blockchain’s consensus mechanism through a 51%, Finney, or Sybil attack, allowing them to spend the same unit of a cryptocurrency in multiple transactions without losing the tokens.
Users can defend themselves against this threat by not accepting unconfirmed transactions or using wallets that can automatically flag suspicious activity. Blockchains have implemented technologies like UTXOs, SegWit, and Layer-2s to protect against fraud and secure transactions.
Established blockchains like Bitcoin, Ethereum, Litecoin, or Solana are large, distributed, and secure enough to prevent double-spending attacks. However, smaller or newer chains are much susceptible to it, unless they operate as a layer-2 to the mainnet. It is best to transact using cryptocurrencies with a higher market cap, on blockchains with a large network of independent and secure nodes.
