What Is a Digital Copy?

Digital copy in reference to cryptocurrency means a duplicate record of every confirmed transaction that has taken place over a peer-to-peer network, such as the bitcoin network.

A digital copy is a security feature of the bitcoin protocol intended to tackle the problem of double-spending.

Key Takeaways

  • Bitcoin transactions are not stored in a central database. Instead, thousands of digital copies of the blockchain are stored in bitcoin nodes, run by users around the world.
  • Since there is no single authority on blockchain transactions, it is impossible for a malicious actor to alter the transaction history without having access to each digital copy.
  • Although this system prevents double-spending, there are some circumstances in which bitcoins can be spent twice, such as in a 51% attack.

How a Digital Copy Works

The rise of cryptocurrencies began in 2009 with the introduction of bitcoin. One of the catalysts behind the creation of bitcoin was the desire for a digital currency that could not be controlled by any central authority and would not require a trusted third party to guarantee transactions.

Unlike bank transactions, there is no central record or database of bitcoin transactions. Instead, bitcoin operates through a decentralized network of independent computers, each of which maintains a separate record of all confirmed transactions. This type of distributed ledger is known as a blockchain.

The Double-Spending Problem

Transacting in digital currency using a decentralized system brought about a problem known as double-spending. Double-spending occurs when someone attempts to send the same coin to two different addresses.

In traditional currency, double-spending is prevented by institutions such as banks, clearinghouses, and online payment systems, which check account balances and transaction history and detect overdrafts. Older digital currency systems, such as eCash, did not have a satisfactory way to prevent double-spending and were unsuccessful.

In order to solve this problem, the inventor of bitcoin created a process whereby each legitimate transaction is independently shared and verified by multiple miners distributed across the network.

The Distributed Ledger and Multiple Digital Copies

Every bitcoin transaction is broadcast to a miner, which assembles hundreds of transactions into a block. When a new block is completed, the miner broadcasts the block to hundreds of other bitcoin nodes, each of which compares the new transactions to their own digital copy of the blockchain. If any node detects a double-spend, the new block is rejected. Otherwise, the nodes will relay the new block to other nodes and miners.

This system effectively prevents double-spending by rewarding honest behavior and punishing bad actors. Since miners are incentivized through block rewards, they have a financial interest in accepting only legitimate transactions. If a miner does not reject a double-spend, their block will not be shared by other nodes.

Other Issues with Double-Spending

While digital copies usually protect the bitcoin network, there are rare circumstances in which a double-spend could go undetected. This is because of the longest-chain rule: whenever there are two competing versions of the blockchain, the longest chain is considered to be the most authoritative.

The most well-known way to exploit this property is through a 51% attack. If a malicious actor controls the majority of the network's hashing power, they can secretly create a separate, longer version of the blockchain, with different transactions. When the second version of the blockchain is published, it effectively reverses any transactions which were executed on the shorter chain.

It is also possible for transactions to be inadvertently reversed, due to the probabilistic nature of the blockchain. If two miners separately discover new blocks at the same time, both versions will survive in the network until the next block is mined. When this happens, one version will be accepted by the network, and the other will be rejected as an orphan block.

For this reason, bitcoin transactions should not be considered truly 'final' until they are part of a chain with six more blocks mined after the transaction. This is because it is extremely unlikely for six blocks to be reversed. On at least one occasion, a bitcoin user was able to reuse bitcoins that had already been spent in an orphaned block.