The cryptocurrency industry is home to various concepts that might not make sense at first. Double-spending is one such term that is as bad as it sounds. Luckily, the number of double-spend attacks is meager, yet it remains crucial to know what this could mean for users and companies.
As the name suggests, double-spending is a very problematic issue in the world of digital payments. If a user or group of users gains the ability to spend the same amount of money more than once, the system will fall apart eventually. Thankfully, there are countermeasures in place to prevent double-spending from taking place in most blockchain ecosystems. That doesn’t mean it can’t happen, although it primarily seems to affect smaller cryptocurrencies.
The main selling point of digital cash systems is to ensure units cannot be duplicated or forged. With cryptography, that process should become impossible, yet a double-spending attack will remain feasible without additional countermeasures. In a system where one can achieve scarcity in a verifiable and transparent manner, it is essential to ensure nothing or no one can manipulate the supply for nefarious benefits.
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Preventing the Double-Spend Attack
As is often the case in the world of technology, different countermeasures exist to achieve a specific goal. That situation is no different for a double-spend, even though some measures may prove more successful or favorable than others. Without any measures in place, however, a network is doomed to fail sooner or later.
More Centralization Is An Option
Even though cryptocurrencies and blockchains are all about decentralization, it can prove essential to retain some centralized control. While this approach isn’t favorable, it is easier to implement compared to other options. Today, several public blockchains rely on this method with a “node council” or “validators” that specific individuals can only operate. Centralized control may not affect the performance of an ecosystem right away, yet it can prevent abuse actions.
One crucial benefit to the centralized approach is how users can only perform actions under specific circumstances. With cryptographic methods, developers can make this process as straightforward or complex as developers see fit. Most users may not even notice they have to do something special to send or receive money on the network. Under the surface, however, there can be very complex mechanisms to keep track of individual units of account and transactions.
One example of introducing centralized aspects into a decentralized world is the Blind Signature scheme of eCash, developed by David Chaum. It was an exciting way of introducing untraceable payments while still making the system relatively easy to use. Logistically, it created a bit of a hassle, as every spent bill would need to be destroyed and new ones issued. A viable approach for small transactions, but the system – in that form – would not be viable on a large scale.
Unfortunately, the eCash system presents a fatal weakness: it relies on financial institutions being able to access one’s money. As consumers know today, that is far from an ideal situation. Banks are always a central point of failure, regardless of how they integrate into a payment system. That is why cryptocurrencies are so popular: they don’t require centralized entities to support a network.
Taking The Decentralized Route
Preventing double-spending in a decentralized manner is far more complex to implement. As there is no overseeing a decentralized network, all participants are responsible for their own financial activities. That includes finding a way to achieve consensus on financial rules safeguarding the system from fraud and manipulation. A daunting task, but not an impossible one.
Satoshi Nakamoto, the anonymous creator of Bitcoin, came up with an intriguing approach to this problem. The use of blockchain technology can make it impossible for users to spend funds twice, although only if the implementation is correct. By implementing a blockchain structure, an important first step is taken. While it serves as a decentralized database with unique properties, it is still up to individual nodes to run specialized software to synchronize their copy of the database with the rest of the network.
Every time a transaction occurs, it is not added to the blockchain immediately. Instead, the nodes or miners need to validate it before submitting it. Until a transaction is included in a block and confirmed by the network, the funds is in an unspent stage. However, some payment processors may operate on zero-confirmation transactions, effectively deeming a transfer “valid” without confirmations. A risky approach, but one that can make the use of cryptocurrencies for payments more commonplace.
Confirmed transactions will, by default, prevent coins from being double-spent. Ownership is assigned to a new user as soon as the first network confirmation occurs. Reversing that ownership is not possible. As more blocks are added, the amount of effort required to reverse previous transactions grows exponentially.
Transaction Fees And Confirmations
There are multiple ways to get a transaction included in the next network block. The easiest method is to broadcast it via a wallet and a standard network fee and wait until a miner includes it in the next block. For Bitcoin users, this process usually takes around 10 minutes, depending on current network activity and congestion. If there are too many transactions, however, miners will first include transfers with higher transaction fees.
Users who prefer to ensure a network confirmation as quickly as possible can explore higher network fees. most wallets let users decide the fee they pay for a transaction. A higher fee will increase the chances of getting a transfer included quicker, as it is “more appealing” to miners. Opting for this route can result in paying upward of $15 per network transaction, far from ideal. Always explore the different options carefully before committing to anything.
For the person or company accepting the payment, it is advised to wait for at least 3-6 network confirmations before deeming a payment as valid. Most merchants and payment processors will ensure a delay in deeming transactions valid due to network confirmations. There is no reason to risk a double-spending attack to serve customers quicker. Cryptocurrency payments are non-refundable and users are responsible for their funds. Taking all the possible security precautions is no unnecessary luxury.
How To Pull Off Double-Spending
Although very few networks are susceptible to double-spending these days, there is always a chance something can go awry. Even Bitcoin may not be safe from disaster once quantum computing becomes more commonplace. Despite Satoshi Nakamoto carefully designing the network to prevent such attacks, no system is 100% invulnerable either.
Several methods exist to create a successful double-spend, even if the economic incentives may not be present. Attacking the Bitcoin network may seem alluring to some, yet it will always come at a cost. Anyone who deals with zero-confirmation transactions is effectively at risk of double-spending attacks. Not every location can wait an hour for payments to be confirmed, creating an opportunity for criminals to explore.
The 51% Attack
As the name somewhat suggests, a 51% attack would give hackers or criminals control over 51% of the blockchain and ecosystem. With this control, they can determine which transactions are included in future network blocks. Moreover, the attackers can modify the ordering of transactions, allowing for double-spends to slip through. Such an attack is nigh impossible to pull off against Bitcoin or Ethereum, yet smaller cryptocurrencies are a different story.
The Race Attack
It may seem strange to broadcast two conflicting transactions after the other, but it is possible. Both transactions can even use the same funds, yet only one of these transfers will receive a network confirmation. An attacker can sue this approach to invalidate the payment by only validating the transaction that benefits them. For example, they send a payment to a retailer and then broadcast the same amount to themselves. If the latter transaction succeeds, the first will fail, but a double-spend can be created if the merchant deals with zero-confirmation transactions.
The Finney Attack
Perhaps the most “nefarious” approach to double-spending comes in the form of Finney attacks. Attackers need to pre-mine a transaction into a block without alerting the rest of the network. Furthermore, the attacker spends the same coins in another transaction, after which he broadcasts the previously mined block to the ecosystem. It is a very crafty approach, yet one that requires a particular sequence of events to prove successful. Similar to the attacks above, this method can be negated by waiting for multiple network confirmations when accepting payments.
Dealing with cryptocurrency payments is evidently a bit of a tricky matter for both consumers and companies. The risk of a double-spend is always present, although it doesn’t require too much effort to circumvent this threat altogether. Patience is of the essence when dealing with cryptocurrency payments. That will, unfortunately, make them less suitable for real-world purchases until solutions are found to address the delay in network confirmations.
For attackers, pulling off successful double-spend payments hinges on many different factors. For major networks, such alignments are virtually impossible to achieve, yet smaller cryptocurrencies can offer a better target. Whether it is worth exploring double-spending through networks that have little to no use for payments is a different matter, though.
As unlikely as a double-spend may seem today, it remains advisable to be on the look for suspicious activity. With many newcomers being introduced to Bitcoin and other cryptocurrencies, anything can happen. Be vigilant and follow the basic rules and guidelines to prevent any mishaps from causing financial distress.