The term “double-spending” refers to the attempt to spend the same crypto funds twice by initiating more than one transaction with the same assets and trying to trick the blockchain. This is, of course, done by malicious individuals and scammers, aiming to manipulate the system and essentially profit from fraudulent transactions. To successfully conduct a double-spending attack, the scammers need to surpass the blockchain validation mechanism by one of several attack methods which we will describe in detail in this article.
Cryptocurrency Transactions and the Double-Spending Problem
Cryptocurrency transactions are cryptographic messages that travel through the blockchain between two public addresses. Because crypto only exists virtually on the blockchain, there needs to be a mechanism that ensures a crypto transaction is valid and not an attempt at double-spending.
Luckily, all blockchains have consensus mechanisms responsible for checking each transaction before approving it and processing it to its destination address. There are different consensus mechanisms, such as Proof-of-Work (PoW), Proof-of-Stake (PoS), and others, that use different methods to validate transactions and ensure that only legitimate transfers get added to the blockchain.
Consensus mechanisms use cryptographic algorithms to ensure the validity of blockchain transactions.
For a double-spending attempt to succeed, the scammers must trick the blockchain consensus mechanism. Because of this, it is vital for blockchains to have a well-designed consensus mechanism that can prevent double-spending attempts.
51% Attacks
The only way to alter already approved blockchain data blocks is by controlling at least 51% of the network nodes. If attackers manage to take control of 51% of the nodes, they can freely edit existing data blocks, approve double-spending transactions, and effectively manipulate the blockchain to steal assets. That’s why 51% attacks are one of the most common methods for pulling off double-spending scams.
The more nodes a blockchain has, the more difficult it is to pull a 51% attack. The 51% attacks are mostly done on smaller blockchains with fewer validators. It would be extremely difficult, if not impossible, to pull such an attack on blockchains like Bitcoin, which has thousands of validator nodes.
Race attacks
Race attacks are another popular form of double spending attempts. The attackers initiate two blockchain transactions with the same crypto funds. However, one transaction is sent to a valid address, for example to an e-commerce store owner as payment for a product, while the other one is sent to an address owned by the scammers.
The race attack aims to invalidate the transaction to the vendor and only validate the scam transfer by tricking the network to validate it as the legitimate transaction. The vendor will think that he received payment for his product and release the product to the scammer, while the actual funds were simply sent to another address controlled by the scammer. If the scam transaction is validated, the vendor won’t receive his payment and the scammer will successfully pull off a race attack. However, it’s important to note that only entities that accept payments with 0 confirmations may be affected with this type of attack.
Finney Attacks
The Finney attack is named after Hal Finney, one of the first Bitcoin advocates and the first person to accept a BTC transfer from Satoshi Nakamoto, the founder of Bitcoin. A Finney attack is specific for Proof-of-Work (PoW) cryptocurrencies that use miners to process transactions.
This attack requires the scammer to be a miner who pre-mined a transaction but didn’t broadcast it to the rest of the blockchain. The scammer then spends those same crypto assets again but broadcasts the pre-mined block to the network in order to trick it and invalidate the previous transaction, thus successfully spending the same funds twice.
How to prevent double-spending?
There are several measures blockchain developers can use to make it more difficult for hackers to succeed in double-spending attempts.
A strong consensus mechanism that thoroughly checks each transaction and consists of multiple layers of security is the primary barrier to double-spending.
Regular, independent blockchain consensus mechanism and smart contract audits by reputable blockchain security firms that thoroughly check the network for vulnerabilities and enable developers to patch them up if found.
Individual users such as merchants and service providers can prevent falling for double-spending scams by waiting for 3 blockchain transaction confirmations, in the case of Bitcoin, before fulfilling their end of the deal. After 3 confirmations, a BTC transaction is definitely processed through the network and added to the blockchain, which means that the consensus mechanism has validated it as a legitimate transfer. Also, it’s wroth noting that the number of confirmations required for a safe transaction can differ depending on the cryptocurrency.
