The shift to digital currencies saw the emergence of the double-spending problem, a problem not applicable to cash. For example, if you pay for a burger with a $10 bill, you cannot use the same bill for a separate purchase.
But without proper measures, digital cash can be replicated and used more than once. Imagine if you could copy and paste BTC tokens multiple times or send the same token to two recipients at once — the system would simply not work.
As such, there must be mechanisms in place to prevent this behavior so digital money (or any blockchain token) can function. This lesson will explain double-spending problem and how blockchains prevent it.
You can also read these lessons to understand blockchains and tokens better:
What is double-spending?
Double-spending allows users of an electronic cash system to make two payments with the same currency to prevent the recipient from receiving their due payment. The solutions to the double-spending problem are found in various centralized systems, and thanks to Bitcoin and other blockchains, also in decentralized systems.
Double-spending is problematic for numerous reasons, including two major ones: firstly, it creates an inconsistency between the expenditure and available amounts of a currency. Secondly, it affects how the currency is distributed — even if a small percentage of users engage in double-spending, they could acquire enormous amounts for themselves.
When you make an online payment, you are trusting a third party to ensure your payment is sent to the recipient. Third parties such as your bank, payment processor, or credit card company validate the transaction and eliminate the possibility of double-spending.
Unlike centralized systems, blockchains and their native tokens do not have intermediaries to validate transactions. Instead, when you send tokens through blockchains, the automated and cryptographically secured system manages the transaction and sends the right amount to the recipient. The absence of third parties also means you don’t need permission from anyone to send the transaction, and no one can restrict you from making a transaction.
How do blockchains prevent double-spending of tokens?
As the global cryptocurrency market cap is close to $2 trillion, there is great incentive to double-spend tokens. Bitcoin was the first blockchain to solve this problem in decentralized systems, and it has, since its inception, inspired thousands of other cryptocurrency projects to follow in its footsteps.
At its inception, the solution had not been named but the underlying technology has since gained recognition as what is now termed ‘blockchain’.
A blockchain, to put it simply, is a database. Due to its unique properties, its features include high transparency, traceability and security. It is transparent and traceable because anybody in the network can audit the transaction history, all the way back to the genesis block. This also means attempts to double-spend, along with other fraudulent activities, are easily exposed in publicly viewable environments.
New blocks containing the latest transaction data are added to the blockchain through a process called mining. 2 parties who transact on a blockchain receive confirmation on a specific block once their transaction is approved. Therefore, both parties can verify the transaction after it’s been added to the chain because the blockchains are immutable (in other words, unalterable).
This way, the tokens can’t be double-spent, as the transfer of their ownership to a new user must be verified by the entire network.