When you talk about cryptocurrency, the first thing to come to mind is Bitcoin. It’s the original and easily the most popular digital currency you can find.
Many have tried to best it over the year, such as Litecoin, Ethereum, and Bitcoin Cash. But Bitcoin, being the first-ever cryptocurrency to launch on the market, has had the most market share in both the crypto space and in popular culture.
But what’s the need for a virtual currency like Bitcoin anyway? Doesn’t our current paper money and credit/debit card system work well enough? Well, not really. Especially when you compare it to Bitcoin and the advantages it offers.
Since Bitcoin is decentralized, you can easily make Bitcoin transactions from anywhere you want. You deal directly with the other person in most cases, but your identities are kept secret.
The whole process is fast and straightforward, and it trumps having to go to the bank. Also, you won’t have to pay extra transaction fees.
Does Bitcoin Give You Real Money?
If you’re wondering how exactly you’re going to use a virtual currency like Bitcoin to make purchases or if Bitcoin is worth any ‘real’ money, it’s understandable.
People are often confused about Bitcoin’s actual value because the cost is quite volatile and continuously changing. If you have a Bitcoin and want to exchange it for a fiat currency of your choice, you can visit a trusted and reliable exchange platform such as NeuronEx.
Making purchases in Bitcoin is a little different than what you’re used to with paper cash. Let’s illustrate this with a quick example.
If you buy a cup of coffee from Starbucks and pay in cash, when you hand over your bill to the barista, you can’t ever use that particular bill again for future purchases. Makes sense, right? However, with Bitcoin, it is possible to do this, and the term used to describe it is ‘double-spending.’
What is the Double Spending Problem in Digital Cash?
Let’s continue the above example. If you find that you accidentally forgot your wallet at home, you don’t have to drive back. That is, of course, if you have some Bitcoin in your digital wallet.
You can use Bitcoin to pay for your coffee at Starbucks and enjoy your day. But here’s where the issue arises. Since Bitcoin can be boiled down to a series of unique numbers in the virtual space, it is possible to duplicate a Bitcoin or ‘spend it again’ by copy the unique series from a previous transaction and use it for a future one.
You could buy two coffees for the price of one. That doesn’t sound that bad, but when the amount being duplicated is in the tens of thousands, that’s when you’ll wish Bitcoin had taken some steps to fix this double-spending issue. Luckily, it has.
How Does Bitcoin Solve Double Spending?
It is challenging to ensure that payments are not double spent in an economy without any regulatory body. Equally influential users need to cooperate around a set of guidelines that discourage forgery and allow all consumers to behave sincerely.
The main eureka moment outlined in the Bitcoin white paper was the answer to the double-spending issue. Satoshi Nakamoto, the creator of Bitcoin, suggested a computer framework now commonly recognized as a blockchain.
A blockchain is just a ledger with certain distinctive functions. The users of the network are called nodes, and they run advanced software that allows them to connect their copy of the ledger with other users on the blockchain.
As a result, the whole system can verify the transaction data going back to the very first block in the entire system. By making the blockchain publicly visible, it’s easier to track and avoid illegal conduct, such as payments that attempt to double-spend.
When an individual is relaying a transfer of funds, it is not instantly hooked up to the blockchain. It has to be added to the block by mining first. Due to this, the receiver should recognize the payment to be genuine only when its block has been connected to the chain.
If they don’t, they could be potentially throwing away their coins and the source may use those coins somewhere else as well. If the payment has been verified, coins cannot be double-spent since possession is transferred to a new person, and this can be checked by everyone in the system.
For this reason, lots of people suggest asking for several verifications before you can consider a transaction to be complete. Every following block helps increase the amount of time and resources needed to change or modify the blockchain.
Let’s go back to the coffee example. You visit Starbucks again, but this time instead of paying in cash, you pay by Bitcoin.
If you want to double-spend, you can do so by first paying for your coffee as usual, then transferring that same payment to your address. Due to the short time, it takes to verify the transaction on the blockchain, you can get away with a free coffee without having spent a dime.
But if the Starbucks cashier is aware, he can prevent double-spending. To do this, he will have to wait for at least four or five confirmations about your payment before letting you leave the shop.
This way, the receiver can ensure that the amount has indeed been transferred and that double spending has not occurred.
What is a Double Spending Attack?
Bitcoin is intentionally created to avoid double-spending attacks, at least while the system is being used as intended.
In other words, if users make sure to wait for transfers to be verified in a block, there is no straightforward way for the source to reuse them. Once the transaction has been confirmed, the sender will have to “reset” the blockchain, which needs an extraordinary amount of computing power.
Still, some individuals are not careful about accepting unverified payments and this makes them open to double-spending attacks. In the case of low-value transactions, for example, a vendor may not be willing to dedicate the time and sit tight for transfers to be verified in a block.
A hectic coffee shop business may not be able to stand by while the system inputs every order. So if an establishment allows for “instant” transactions, it exposes itself to double-spending.
Double spending attacks can be divided into three main types. 51 percent attacks occur where a sole person or group tries to access more than 50 percent of the hash rate, which enables them to remove or change the arrangement of exchanges.
This type of attack on Bitcoin is pretty doubtful, but it has occurred in other cryptocurrency blockchains. through the same coin. Race attacks are where two competing payments are transmitted in conjunction, by using the same coin for both, but only one payment is verified.
The attacker aims to discredit the transaction by only verifying the payment that favors them. For instance, to transfer those coins to an address that they have control over. Race attacks depend on the receiver to recognize an unverified payment as genuine.
Finney attacks are when an intruder pre-configures a block transaction without automatically sending it to the system. Instead, they pay the same amount in another exchange and then transfer the already generated block, which will also nullify the previous transaction.
Bitcoin has been designed from the very beginning to be transparent and offer a level of security that our current financial systems and institutions cannot. However, the possibility to manipulate the system in one’s favor still exists.
The most significant threat to a coin’s value is if the blockchain is somehow reversed, and as we discussed above, anyone who controls the majority of the nodes in a system can make that happen. However, Bitcoin’s design also has another failsafe to discourage this.
If by some miracle a party does manage to control more than 50 percent of the Bitcoin blockchain and reverse transaction data, the coin’s value would be reduced to zero. This is because the whole purpose of a secure cryptocurrency is defeated if this happens. Also, the person who will reverse this is the person with the most Bitcoin, and they will incur the most losses as a result.