Digital currency makes online transactions much more effective and efficient, but also poses new challenges and security risks. One of the key issues of reducing blockchain-based cryptocurrency is the issue of double spending, where one unit of token is used multiple times. The blockchain ecosystem has been able to mitigate the problem in most cases, but it continues to remain a possibility and, if not checked, could undermine the integrity of digital currency.
This article explains what the double spending issue is and explains the safeguards that crypto investors should take to stop themselves becoming victims.
What is the problem with double spending?
Bitcoin is widely considered the pinnacle cryptocurrency, but it is not the first. Many cryptocurrencies and blockchains preceded Bitcoin, but this is the main reason why Nakamoto At introduced the world to Bitcoin, and they failed to introduce the world due to important issues that cannot stop users from retrieving the tokens they have already spent.
This is a weakness affecting the digital currency system, likened to the forged physical currency, but with a slight twist. Forgery is the creation of fake money, but double spending refers to the simultaneously using the same unit’s digital currency in two locations.
Let me give you an example to better understand this. Suppose you have created two BTC transactions. One buys pizza at $10 worth of BTC, and at the same time you buy socks using the same Bitcoin. This means that you purchased two items using the same fund. This indicates that Bitcoin has doubled.
Types of double spending attacks
Bad actors can use a variety of means to use cryptocurrencies on the blockchain to make double the spending attack. Here is the most prominent method.
51% attack
Not all double spending attacks are due to code bugs or security breaches. It can also occur when replaying under blockchain ecosystem rules. Like Bitcoin and Litecoin, blockchains with Proof of Work (POW) consensus consist of networks of miners who agree to current versions of the network. If an individual or group controls more than 50% of the computing power or verification mechanism of the blockchain, it is possible to determine transaction consensus and control the currency supply. This is known as a 51% attack.
Proof-of-stake (POS) blockchains like Ethereum and Solana are also vulnerable to these attacks, but they are extremely rare. For a 51% attack to occur on the POS blockchain, attackers must control over 50% of the supply of native tokens and wager them based on the contract. However, this effort is extremely expensive, and blockchains are currently employing mechanisms that burn tokens of fraudulent validators.
Race or unconfirmed transaction attacks
Race attacks, also known as unconfirmed transactions, occur when an attacker attempts to send two quick, malicious transactions to the same person at the same time. The attacker creates one transaction to the unsuspecting recipient and a second transaction to another wallet they control. The recipient may accept the first transaction, but it does not receive the token as the blockchain first checks the sender’s second transaction, allowing the attacker to maintain the encryption themselves.
This technique is used to take advantage of network congestion and is very technical, and requires the sender to complete the timing and rely on a very specific set of events. However, by not accepting unconfirmed transactions, race attacks can be easily blocked.
Finny attack
Named after the famous Cypherpunk and recipient Hal Finney, the first Bitcoin transaction to discover weaknesses in the Bitcoin network in 2011, this Finney Attack is another variety of unconfirmed transactional attacks.
This includes miners who broadcast to the blockchain and create fake blocks without sending any encryption to their wallets. At the same time, a second transaction occurs to another party within the same block. Once the recipient accepts payment, the miner broadcasts the block to the mainnet only in the first transaction, essentially returning the amount sent to the other party, making it available for use again.
This attack is unlikely to occur on large blockchains such as Bitcoin and Ethereum, and can be prevented by using a wallet that can not accept unconfirmed transactions or detect malicious transactions.
Civil Attack
Civil attacks are similar to 51% attacks, with multiple nodes being created in the blockchain to influence the consensus mechanism. With sufficient fake nodes, attackers can overwhelm the network and confuse tokens that double the transaction validation process. These attacks are carried out as precursors of 51% attacks, and often target smaller blockchains.
How did the double spending problem be resolved?
The issue of spending twice as much as blockchains was solved through consensus mechanisms, timestamps, encryption, and network implementations of distributed nodes.
Nakamoto atoshi has presented a solution to connect them together with timestamp transactions using computationally encrypted proofs. This system ensured that each transaction was verified and recorded on the blockchain, preventing the same unit of cryptocurrency being spent multiple times. For the solution to work, a large, fast distributed network of nodes is required so that bad actors can prevent transactions from being modified.
Timestamps mark the time and date when the block was created, marking consensus mechanisms such as work proof and stake proof, making sure that all nodes or validators in the blockchain match the correct sequence of transactions, making it nearly impossible for an attacker to gain a majority attack via a 51% attack and modify the attack event.
Bitcoin has introduced a non-first transaction output (UTXO) system. Here, each transaction refers to a transaction that was not previously. This allows the blockchain to ensure that each output can only be used once. In most blockchains, when transactions are included in a block, they are considered final and irreversible, preventing bad actors from manipulating a series of events.
While most established blockchains are large and distributed enough to prevent double spending attacks on them, users need to take precautions and avoid accepting unconfirmed transactions. Modern crypto wallets are aware of these risks and have built-in mechanisms to flag suspicious transactions.
How can you prevent double spending attacks?
Below are some effective strategies to mitigate double spending attacks using cryptocurrencies.
Network Monitoring
Implement real-time monitoring tools to detect suspicious activity, such as malicious or conflicting transactions, and prevent potential double spending attacks.
Dispute detection
Nodes can now detect conflicting transactions and prevent them from being added to the chain. If an attacker attempts to send funds that are already being used in another transaction, it will be invalidated and rejected.
Multiple checks
Crypto recipients must wait for multiple node confirmations before considering transaction finals. This is important for individuals or groups to receive a large amount of tokens.
Avoid zero check transactions
Do not accept transactions with zero confirmation. Use an additional verification process to prevent your funds from doubled.
Isolated Witness
SEGWIT technology reduces the risk of accepting double spent tokens and greatly improves network efficiency and security by requiring multiple validations to store and verify transaction data across nodes.
Layer 2 Solution
Layer-2 networks help reduce main chain congestion by processing transactions in parallel layers, making blockchain faster and more efficient while maintaining security for on-chain transactions.
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Final Thoughts
Normally, double attacks will allow you to spend the same unit of cryptocurrency in multiple transactions without losing tokens when you control the blockchain consensus mechanism through 51%, Finney, or Sybil Attack.
Users can protect themselves from this threat by using a wallet that can not accept unconfirmed transactions or automatically flag suspicious activities. Blockchain implements technologies such as UTXOS, SEGWIT, and Layer-2 to protect against fraud and secure transactions.
Established blockchains such as Bitcoin, Ethereum, Litecoin, Solana are large, decentralized, and secure enough to prevent double spending attacks. However, unless it works as Layer-2 in the mainnet, a small or new chain is very sensitive to it. It is best to trade with cryptocurrencies with a higher market capitalization on a blockchain with a large network of independent, secure nodes.
