Posted in Finance, Accounting and Economics Terms, Total Reads: 393
Double spend is a fraudulent mechanism involving digital cash where the same digital coin or token is spent twice. Electronic money can be duplicated unlike physical cash. The data for ownership of the digital money doesn’t change when electronic money is spent. This is implemented for an online transaction by a trusted third party. This is nothing but spending the same money more than once.
Physical money cannot be replicated but for digital money all electronic information can be duplicated. Bitcoin is a digital file and it’s easier to replicate than actual money so some people can manipulate their way by paying the same bitcoin more than once
Ways to perform double spending
1. Race attack: sending two conflicting transactions simultaneously into the network
2. Finney attack: send one transaction into the block and spend same coins before releasing the block to invalidate the transaction
3. 51% attack: own more than 51% of the computing power of the Bitcoin network and reverse any transaction and have control over which transaction appear in the block.
E.g. let’s say Amanda has only one Bitcoin and decides to send it to Mike and this transaction is called Trans A and this goes into the unconfirmed transaction pool which is waiting to be confirmed. At the same Amanda decides to send one bitcoin to Susan and this transaction is called Trans B which also goes into the unconfirmed transaction pool. So the same bitcoin was sent out twice, once to Mike and once to Susan. When the transactions are taken out of the unconfirmed transaction pools and put into the block chain they are checked for validity. Let’s say Trans A is pulled out of the pool it seems to be valid because Amanda has one bitcoin and this is inserted into the block chain. Now Trans B is pulled out of the pool it is invalid since Amanda has no more bitcoins to spend and this does not get confirmed
If the validation process for Trans A and B happen simultaneously i.e. both show that Amanda has the money needed , in this case there are two branches of the block chain and a race begins to achieve the next block of conformations will win. If they reach the next block simultaneously as well there is another race and so on. Hence it’s recommended to wait for 6 conformations before considering a transaction complete since it’s highly unlikely that this race will happen more than 6 times. So in the end one transaction wins and until the race is resolved both transaction run the risk of getting cancelled.
Bitcoin face the risk of double spending which gets reduced as the transactions receive conformations. Bitcoin are decentralized digital currency introduced in 2009. This process takes time to confirm because the process involves complex algorithms in the block chain.
Double spending is not just limited to digital currency. In 2009 BBC reported that were 566,000 counterfeit notes circulating in UK.