An Hawk-eyed Bitcoin technology nips double spending on the bud

Fredrick Awino

For the longest time, creating a purely virtual currency hit dead end because of challenges associated with autonomous  verification of transactions and risks of double spending. But since  bitcoin entered the market, it has  has made entry into new territories to the extent of being taken in as a legal tender in El Salvador and Central Africa Republic. It would really pay  for a  a trader to know how the bitcoin technological ecosystem has cured double- spending.

WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.

Double spending in and of its own may create an impression of describing people spending bitcoin twice. Yes, it describes situations in which a person uses their bitcoin ownings more than once. Remember, bitcoin transactions happen on a distributed ledger which then means once a coin is spent, swapped or sold, whichever the case, it shouldn’t be available again to the owner. In short, the system must be able to erase or transfer ownership of the bitcoin as per the  instructions initiated by the bitcoin owner.

A snapshot about bitcoin history and functioning

In 2008, the Bitcoin white paper introduced people to a peer-to-peer electronic cash system. Therefore, as much as Bitcoin is somehow successful, every economy has an issue with the organizations or people trying to manipulate money. One of the concerns affecting Bitcoin investors is double-spending.

Double spending is the challenge of verifying a digital token’s ownership. It involves spending a crypto unit twice. In short, it means that a legitimate, as well as false transaction, might take place. Additionally, in case double spending could take place successfully in Bitcoin, it would undermine the trust as well as security of the whole network. For the case of fiat currency, double spending is not possible, thus, it is not an issue.

In managing double spending, Bitcoin has implemented a blockchain. It is a universal ledger that is the same as a traditional cash monetary system. Its role is to act as a confirmation mechanism. Since its launch in 2009, Bitcoin has maintained a chronological ordered time-stamped transaction ledger.

Why Double Spending is Important in the Case of Digital Money

As you know, digital money is very different from cash. In digital currency, when you are making a transaction, you have to broadcast the transactions to all the network’s nodes. The nodes receive and confirm the transactions. However, this process takes time.

Double spending is important in digital money as it does not take place with fiat currency. For instance, you cannot go to the boutique to purchase goods worth $500 and then expect to use the same amount in another place. It cannot take place unless you steal $ from that supermarket.

The Way Double Spending Attack takes place

Double spending mainly takes place in two ways, race attack and attack 51%. In the race attack, the attacker sends the same amount of coin to one or even more varied addresses. If the merchant does not wait for the confirmation, there are high chances (50% probability) that he or she will get the double-spent coin.

The second way which is to attack 51% is where the attacker has control of over 51% of the network’s hash power and double spending takes place. The hash power refers to the computational power utilized in verifying blocks and transactions. It means that the attacker who gets control may reverse the transaction and even make a private Blockchain. The blockchain will appear real when in a real sense it is not.

The Way Bitcoin Stops Double Spending

When Bitcoin was launched, it was like they had gotten a solution to this problem. There are different ways of resolving this problem including having a central authority, stopping transaction reversal, and preventing fraudulent transactions.

Stopping Transaction Reversal

I have said earlier that the 51% attack takes place when one entity has over 50% of the mining power of the network. Therefore, the entity may control the version of the ledger that is legitimate. In such a case, the attacker may spend coins in one version and get goods and services for the payment. Alter, the attacker may develop another ledger version in which the original transaction does not exist. This, retrieving the payment to his possession.

The best way of preventing this 51% attack is to ensure that the network is decentralized. Also, one should ensure that the network has the required computational power in making it impossible to amass over 50% of the hash rate. Although the 51% is unlikely to take place in Bitcoin, it has taken place in the smaller coins.

Centralized Solution

In preventing double spending using a centralized solution, a trusted authority should be involved. The trusted authority is in charge of holding every investor’s record balance in the system. For instance, in case you send money to another party, the money can go through a central authority like a bank. The central authority will ensure that you have enough money to spend and then authorize the transaction.

Stopping Simultaneous Transactions

In this, you may ask yourself what happens in case the same coin is sent to two people simultaneously. For instance, when sending money to two people and 505 receives the first transaction while the other receives the other part of the transaction. In resolving this, the transaction which enters the ledger first is the one that is considered valid.

Due to the above issue, it is recommended that you wait for a confirmation before considering the transaction complete. Additionally, a consensus mechanism (Proof of Work) is used in deciding the order of transactions. It is this mechanism that describes the rules regarding the person that updates the Bitcoin transactions ledger.

The process is important as there is no central authority. The process of making updates in the ledger transactions is referred to as Bitcoin mining. Therefore, what happens in case mining occurs at the same time for two transactions? This may happen in case two miners manage to update the ledger at the same time.

If the above takes place, then there will be 2 branches of the blockchain (fork) as well as the next transaction blocks to be mined. They will determine in case the initial transaction was valid. In case two transactions are also mined simultaneously, then we wait for the next block.

Preventing the Fraudulent Transactions

Blockchain, the Bitcoin ledger of a transaction, is public and any person can view it. Also, anyone can inspect each Bitcoin transaction that has been made in the past as well as the balance. In short, this means that in case you send money to another party, each computer holding a copy of the transaction will verify your transaction history. The aim of this is to ensure that you have enough Bitcoin to spend. In case you try cheating, then you will be exposed by the people in the many nodes which validate transactions.

The Things that Take Place in case a Bitcoin is Double Spent

In explaining this, we may use purchasing a car as an example. In case you want to purchase a car online worth 1 BTC then you go ahead with the payment. On the other side, a hacker may also have access to your Bitcoin wallet and spend the 1BTC on purchasing another thing. You have to remember that both of you are using the same BTC. The miners will verify the transactions. However, later, it will be rejected. The reason is that there is no central authority that can report the fraud or launch a complaint. Therefore, Bitcoin will be gone forever.

The vendors try their best in ensuring that they are not selling to people who double spend a coin. They do this by ensuring any time a transaction is verified in the blockchain, after entering a block, it gains a confirmation. Besides, for every block entered after that, it gets one more confirmation. The vendors are also advised that before they release their goods, they need to wait for 6 confirmations. In case someone tries to change the transactions, then they will have to reverse the transactions in the 6 blocks. This is referred to as “computationally impossible.”

The other way double spending takes place is when a hacker gets over 50% control of the hash rate. Also, it may take place in case a miner mines a block. However, instead of broadcasting it on the Bitcoin network, it is spent elsewhere.

Author Fredrick Awino