What is double spending?
Double spending is the risk that a digital currency can be spent twice. This is a potential problem unique to digital currencies since digital information can be reproduced relatively easily by knowledgeable individuals who understand the blockchain network and the computing power required to manipulate it.
Physical currencies do not have this problem as they cannot be easily replicated, and parties involved in a transaction can immediately verify the authenticity and past ownership of the physical currency. This of course excludes issues involving cash transactions.
With digital currency, there is a risk that the holder can make a copy of the digital token and send it to a merchant or other party while keeping the original.
It was a concern initially with bitcoin, the most popular digital currency or “cryptocurrency”, because it is a decentralized currency without a central agency to verify that it is spent only one time. However, bitcoin has a mechanism based on transaction logs, known as a blockchain, to verify the authenticity of each transaction and prevent double counting.
Key points to remember
- Double spending occurs when a blockchain network is disrupted and the cryptocurrency is essentially stolen. The thief would send a copy of the monetary transaction to make it legitimate, or could completely erase the transaction.
- Although it is not common, double spending does occur. What is much more likely, however, is the theft of cryptocurrency from a wallet that was not properly secured.
- The most common method of double spending is when a blockchain thief sends multiple packets to the network, reversing the transactions so it looks like they never happened.
Understanding double spending
Bitcoin requires that all transactions, without exception, be included in the blockchain. This mechanism ensures that the party spending the bitcoins is actually the owner and also prevents double counting and other fraud. The blockchain of verified transactions is built over time as more and more transactions are added to it.
Bitcoin transactions take a while to verify, as the process involves an intensive calculation of numbers and complex algorithms that consume a lot of computing power. It is therefore extremely difficult to duplicate or falsify the blockchain due to the immense amount of computing power that would be required to do so.
Disadvantages of blockchain regarding double spending
Hackers have tried to bypass the bitcoin verification system by using methods such as calculating the blockchain security mechanism or by using a double spend technique which involves sending a fraudulent transaction log to one seller and another to the rest of the bitcoin network.
These schemes have met with only limited success. In fact, most bitcoin thefts so far have not involved double counting, but rather are due to the fact that users store bitcoins without adequate security measures.
The greatest risk of double spending comes in the form of a 51% attack, which can occur if a user controls more than 50% of the computing power by keeping the distributed records of a cryptocurrency. If this user controls the blockchain, he can process bitcoins to his wallet several times by inverting the blockchain register as if the initial transactions had never taken place.