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Double Spending

| November 17, 2023

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As blockchain technology witnesses increased usage, it is important to know the frontiers it surpasses in the digital payments landscape. You can, essentially, hold your own value and transact it as you please to peers on the network you use. Third parties like financial institutions and centralized payment processors are absent from the equation, enabling anyone with an internet connection to transfer value to their peers while maintaining complete control over their assets and actions.

Before the blockchain arrived in the payments world, there were several attempts at creating digital payment systems that did not involve centralized overseers. The developments, in fact, ended up needing to involve some form of centralization in their processes. While there are sufficient reasons to develop decentralized digital payments, as exhibited by the success of several blockchain networks, it was impossible to overcome certain issues with decentralized payments. Bitcoin’s introduction as a functional blockchain in 2009 changed that, allowing the digital payments landscape to conquer problems like double spending and finally embrace decentralization.

What Is Double Spending?

Double spending is an issue with peer-to-peer decentralized payments networks, including certain blockchains, where the same units of digital currency can be spent more than once. With blockchain, specifically, they are attacks on a blockchain network that allows attackers to spend the same cryptocurrencies twice. Although blockchain technology eliminates the possibility of double spending at a fundamental level, it can be achieved in certain rare conditions.

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Basically, attackers can convince the recipient that an initiated transaction will deliver the promised cryptocurrency, but the funds never reach the recipient. Such an instance enables attackers to spend the same cryptocurrency in a subsequent transaction. The subsequent transaction invalidates the previous one, ergo, allowing them to pull a fast one. Otherwise, they can invalidate an executed transaction by manipulating the blockchain. Accomplishing the latter is immensely hard and is not a concern for most blockchain networks that have their basics right.

While there were several attempts to create a truly decentralized digital payments network, centralization always crept in. The issue was that without a centralized entity overseeing the state of the network, it was near impossible to develop a system that prevented the possibility of spending the same digital currency twice. After all, who is keeping a check on your transactions? Or the balance in your accounts preceding the transaction you just made?

The absence of intermediaries facilitating the bookkeeping activities of a financial network made it possible for users to replicate transactions and spend the same units of value again. Thus, such projects barely made it as working products and remained conceptual. Those that did witness usage inculcated centralized practices to prevent double-spending.

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Decentralized and distributed networks faced the Byzantine General’s Problem. In a nutshell, the anonymous parties governing the functioning of the networks were susceptible to attacks from bad actors, like malicious counterparts wanting to double-spend digital currencies. Although centralized practices evade the problem more than they eliminate it, the need for decentralized alternatives brought us the Bitcoin network, which addressed the issue.

Blockchain And Its Ability to Ward Off Double Spending

Thanks to the use of cryptographic methods to store transaction data on the blockchain and the Proof-of-Work consensus mechanism to mine blocks and confirm transactions — blockchain technology found a solution to the double-spending issue. Satoshi Nakamoto, the party behind the creation of Bitcoin, is responsible for bringing these developments. The Proof-of-Stake consensus mechanism, more popularly adopted these days, follows PoW’s footsteps in providing blockchain networks immunity against double-spending.

Blockchain technology secures confirmed transaction data on blocks that are added consecutively to the blockchain. The blocks are cryptographically hashed to secure the transaction data they store in them. Cryptography makes the data in the blocks immutable, preventing bad actors from changing the recorded transaction data. Further, the stored data, acting as the transaction history, is written on every block and maintained transparently for everyone to see.

Blockchain transparency and immutability offer a decentralized ledger that allows the entire network to verify the balances held by each user. It helps assess if the users indeed have the cryptocurrency they want to spend. Those on the network can, hence, identify double spending efforts. The identification is mostly made by network participants — miners or validators depending on the consensus mechanism — who are rewarded for adding the verified transactions on blocks and attaching them to the chain.

Because of the incentive mechanism, the network participants are determined to act in the best interest of the network. Since network security and upkeep yield profits, the network participants are likely to identify malicious attempts to double-spend cryptocurrency. Immediate consensus is reached by the network participants to deem the malicious blocks as invalid and keep up the network’s integrity. Thus, blockchain networks face significantly low chances of witnessing double spending incidents.

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