Thieves have been around for all of time and that’s still the case today with modern cryptocurrencies like Bitcoin. In the realm of zeros and ones, imagine a bad actor spending the same bitcoin twice. This issue threatens the very fabric of financial trust that we put in Bitcoin and is called the Double Spending Problem. Let’s look at how this attack works, and how Satoshi finally solved it.
What Is The Double Spending Problem?
The double spending problem is the risk that someone might spend the same money twice and thus, effectively steal from one of the receivers. This is a problem that exists in all monetary systems such as gold, USD via online banking and cryptocurrencies.
What Is An Example Of Double-Spending?
The best way to understand the double spend problem is to see an example of it. So imagine you’re a fraudster with 1 bitcoin who wants to get something for free.
- You first find two different merchants, A and B
- You send both of them the same money at the same time
- Both merchants think they’ve been given valid money and send you your purchases
As you can see, there needs to be a way that people and companies that receive money can verify that what they’ve received is valid and that it hasn’t been spent or used elsewhere already.
Solving The Double Spend Problem
With physical cash or gold the double-spending problem is automatically solved as you cannot give a single $10 note to two people simultaneously, but in the digital realm it’s a big problem. It’s trivial to copy and paste any digital data a thousand times, which means it’s also possible for someone to send a digital money, be it cryptocurrencies or USD, to two people simultaneously.
Historically this problem was solved in the digital space by having a centralised trusted third party that controls and verifies the record of all money and transactions. These are institutions such as banks, payment processors and central banks.
If someone tries to do a fraudulent transaction such as paying two people with the same money, they would detect and stop it. With Bitcoin however, this isn’t possible as there is no company or person that controls or owns Bitcoin. It does away with all third parties.