What is Double Spending in Digital Currency?

Blockchain networks are still facing many challenges. One of the oldest and most significant challenges, which has been around even before Bitcoin emerged as the first digital currency for blockchain networks, is the double spending of a digital currency.

Double spending is a problem that, if not avoided, will render entire blockchain-based financial systems useless. In the rest of this article, we will explain the concept of double spending and discuss the details of this problem and techniques to avoid it.

Understanding the Concept of Double Spending

As the Persian equivalent of double spending shows, a digital currency is meant to be spent twice; but how does this problem arise?

In general, a cryptocurrency is a token that has value on a distributed ledger. The term “distributed ledger” means “distributed ledger” in Farsi and refers to a decentralized database. Due to the decentralized nature of the stored data, an entry in the distributed ledger can be changed and the issued token can be reused; this is called double spending.

Avoid double spending

Double spending is considered a serious risk for all cryptocurrencies and no digital currency is far from this problem; because all digital currencies are implemented using blockchain technology and this technology always faces this problem. The fact is that double spending can be avoided by using special techniques as follows:

Proof-of-Work mechanism

With the Proof-of-Work mechanism, also called PoW, each transfer made must be confirmed by several other members of the network. These members, called miners, add a block to the blockchain by solving complex mathematical problems and storing a series of transactions in it. Storing and managing transactions on the blockchain prevents a person from transferring the same cryptocurrency to another address after it has been transferred to another address. Because it contradicts the information available on the blockchain and therefore the transaction will not be approved. Cryptocurrencies like Bitcoin use this mechanism to confirm transactions.

Proof of Stake Mechanism

One of the new mechanisms used today by many cryptocurrencies is the Proof of Stake mechanism, or PoS for short. The advantage of this mechanism is that it requires much less energy than PoW and does not require complex mathematical calculations. With the PoS mechanism, any owner of a cryptocurrency on a blockchain can join the network as a validator; in this way, they confirm transactions and add new blocks to the blockchain.

The fact is that validators must deposit cryptocurrency on the network as collateral. The reason for this is that if the validator intends to double spend or if some other irregularity occurs in the network, this collateral will be confiscated and the damage done to the blockchain will be compensated. It goes without saying that validators also make a profit by locking their assets on the network. Networks like Ethereum have considered the PoS system to confirm their transactions.

NO; To protect a blockchain network from the risk of double spending, many techniques are used, including cryptography; But all these techniques generally work as a spice with PoW and PoS mechanisms. Some of them are as follows:

Multiple confirmation - Multiple confirmation

Once a block is recorded on the blockchain network, its validation does not stop. For this block to become a valid block, it must be approved by several subsequent blocks. The number of subsequent blocks that must be confirmed to complete a transaction largely depends on the security policies of the blockchain.

Decentralized consensus - Decentralized consensus

Another method used by many blockchains to ensure their security and avoid double spending is to perform decentralized verification. With this technique, each of the transactions made must be confirmed by several different nodes across the network. These nodes can be located anywhere on the network, hence this method is called decentralized verification.

Double-spending attacks

Since blockchains have avoided the problem of double-spending cryptocurrencies by using PoW and PoS mechanisms, double-spending cannot be performed normally. This is only possible if it is possible to disrupt the operation of the network or take advantage of the user’s ignorance. Hackers who want to double-spend use several methods to achieve this; but the most dangerous and difficult method to implement is to take control of 51% of the blockchain.

If a user represents 51% of the blockchain, it means that he has approved more than half of the transactions and owns the blocks. In this case, you can easily create double-spending transactions and confirm them. Of course, it should be kept in mind that controlling more than 51% of the blockchain is possible only if the network is not very large. In fact, this task is practically impossible for large networks like Bitcoin or Ethereum.

Two other common attacks that are easy to execute but have a very low chance of success are the Finney and Race attacks. In the Finney attack, a digital currency miner mines a block but does not send it to the network. In the meantime, he sends a double-spend transaction to the recipient, and once the recipient accepts this transaction, he sends the mined block to the network.

In a Race attack, a user sends two simultaneous transactions, one to a recipient and one to the miners. A Race attack succeeds when a transaction sent to the miners is confirmed before a transaction sent to a normal recipient occurs.

It is worth noting that the Race and Finney attacks do not require control of 51% of the network and can be carried out by a normal user or a miner. The main prey for these attacks are users who are unaware of how digital currencies work and accept transactions before they are approved by the network.

Avoid Double Spending as a Digital Currency User

To avoid the risk of double spending, there are a few things you should keep in mind as a regular digital currency user. The most important ones are:

Do not accept unconfirmed transactions

Since most current blockchain networks are too large to control more than 51% and create verified transactions, most people who intend to use their cryptocurrency for dual use usually have approved transactions verified by unauthorized verifiers. Please note that you should never accept transactions that have not been approved.

Some cryptocurrency wallets do not automatically accept transactions that are not verified by the network; but others are not susceptible to this problem. We recommend that you check your digital wallet settings to make sure.

Using Traditional Cryptocurrencies

Avoiding double spending is directly related to blockchain security. Cryptocurrencies such as Bitcoin and Ethereum, which enjoy high levels of adoption and use advanced and extensive networks, are considered the best options not only for everyday use but also for investments. Cryptocurrencies that have just entered the market and whose security has not yet been evaluated are not good trading options.

Use cryptocurrencies with a high hash rate

When we talk about controlling more than 51% of the blockchain network, we are actually referring to owning more than half of the hash rate. The hash rate is a measure of the computing power of a network. If the hash rate is high, it means that the computing power of the network is high and it is difficult or impossible to cover half of it. For this reason, it is better to choose cryptocurrencies with a high hash rate.

Summary

In this article, we try to create a general familiarity with double spending and its solutions. Blockchain networks still face many challenges, the resolution of which requires in-depth domain knowledge. Double-spending is one of the oldest problems in blockchains, which has been solved in the best possible way through PoW and PoS mechanisms. It is important to note that avoiding double-spending does not only affect miners and other members of the blockchain, but regular users can also avoid it by following a few tips.