Thieves have been around for all of time and that’s still the case today with modern cryptocurrencies like Bitcoin. In the realm of zeros and ones, imagine a bad actor spending the same bitcoin twice. This issue threatens the very fabric of financial trust that we put in Bitcoin and is called the Double Spending Problem. Let’s look at how this attack works, and how Satoshi finally solved it.
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What Is The Double Spending Problem?
The double spending problem is the risk that someone might spend the same money twice and thus, effectively steal from one of the receivers. This is a problem that exists in all monetary systems such as gold, USD via online banking and cryptocurrencies.
What Is An Example Of Double-Spending?
The best way to understand the double spend problem is to see an example of it. So imagine you’re a fraudster with 1 bitcoin who wants to get something for free.
- You first find two different merchants, A and B
- You send both of them the same money at the same time
- Both merchants think they’ve been given valid money and send you your purchases
As you can see, there needs to be a way that people and companies that receive money can verify that what they’ve received is valid and that it hasn’t been spent or used elsewhere already.
Solving The Double Spend Problem
With physical cash or gold the double-spending problem is automatically solved as you cannot give a single $10 note to two people simultaneously, but in the digital realm it’s a big problem. It’s trivial to copy and paste any digital data a thousand times, which means it’s also possible for someone to send a digital money, be it cryptocurrencies or USD, to two people simultaneously.
Historically this problem was solved in the digital space by having a centralized trusted third party that controls and verifies the record of all money and transactions. These are institutions such as banks, payment processors and central banks.
If someone tries to do a fraudulent transaction such as paying two people with the same money, they would detect and stop it. With Bitcoin however, this isn’t possible as there is no company or person that controls or owns Bitcoin. It does away with all third parties.
How Does Bitcoin Prevent Double Spending?
As there are no trusted third parties in the Bitcoin Network, there needs to be another way for users to verify that the bitcoin they’ve received has only been spent once. Like with all monetary systems, Bitcoin has its own ledger or record of what transactions have been completed. This is what’s called the Bitcoin Blockchain.
With legacy monetary networks, these ledgers are private and controlled by the aforementioned banks and institutions. By contrast, Bitcoins blockchain is completely open and transparent. All members of the Bitcoin network can view any and all transactions.
In order for a receiver to be sure that the bitcoin they’ve received is valid and not spent somewhere else, they can simply lookup the transaction or coins on the blockchain. If it has been mined into a confirmed block, they can safely assume that those bitcoin are now theirs and not double spent to someone else.
Transactions that are still pending confirmation in the Bitcoin Mempool can still be double spent or overridden at any time. As such, they shouldn’t be trusted. Always wait for at least 3-6 confirmations to be absolutely sure that your transaction is final.
Preventing Double-Spending Attacks
As users of the Bitcoin network rely on the blockchain to tell them which transactions are valid and which aren’t, it’s not surprising that bad actors try to attack this. These attacks can take on a few different forms but one of the worst ones is the 51% attack.
- The attacker sends a transaction to the network paying the merchant
- While this transaction is being confirmed, the attacker starts secretly mining their own branch that sends the same funds back to themselves
- Once the original transaction is confirmed, the merchant sends the goods
- The attacker then releases their secret branch of mined blocks to the network. If their branch is longer than the public branch, the Bitcoin network will recognize it as valid and the original transaction will be replaced with the secret transaction paying the attacker
This is quite a sophisticated type of attack, but more importantly it requires the attacker to have enough computing power to “out hash” or out compete the Bitcoin networks current hash rate. This is because they need to be able to mine their secret blockchain with the fraudulent transaction faster than the rest of the network can.
This type of attack is essentially only possible if the attacker has 51% or more than the networks hash rate, hence the “51% attack” name. Thus the more computing power and hash rate the Bitcoin network has, the more impossible it is for attackers to attack it like this and the safer it becomes.
Bitcoin is the most powerful computer network on the planet with a hash rate currently around 500 ExaHash!
An attacker would need about 800,000 Bitmain S19 XP Hydro-Cooled Miners (one of the most powerful Bitcoin miners out there) costing around $6.8 billion dollars. Plus a 4.3 GW power station to power them as well as something to house and cool them all as well.
Even if some huge company or government could muster these massive resources, it would still make more financial sense to act honestly and be a huge Bitcoin Mining company. This is because if they act honestly they’d receive transaction fees and the block subsidy for their work. If instead they attacked the network it would likely become untrustworthy and thus, unusable and worthless.
Dive Deeper: Bitcoin Proof Of Work
FAQ
Who Solved The Double-Spending Problem?
By combining several previous as well as new ideas, Satoshi Nakamoto first solved the double-spend problem for digital money that does not rely on a centralized trusted third party when they released the Bitcoin Whitepaper in 2009.
How Does Crypto Solve Double Spending?
Cryptocurrencies like Bitcoin solve the double spending problem by having publicly viewable transaction ledgers that anyone can look at. This allows them to confirm that the bitcoin they’ve received hasn’t been double spent elsewhere.
What Is Double Spending?
The double spending problem is the risk that someone might spend the same money twice and thus, effectively steal from one of the receivers. This is a problem that exists in all monetary systems, but was very difficult to solve with digital money without using trusted third parties.
What Causes Double-Spending?
Double-spending is caused by bad actors that try to steal and defraud others by spending the same money twice. They try to purchase goods or services from two separate merchants and pay them with the same money, one real, one copied.
