DEFINITION of 'Double-Spending'

The risk that a digital currency can be spent twice. Double-spending is a potential problem unique to digital currencies because digital information can be reproduced relatively easily. Physical currencies do not have this issue because they cannot be easily replicated, and the parties involved in a transaction can immediately verify the bona fides of the physical currency. With digital currency, there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original. This was a concern initially with Bitcoin, the most popular digital currency or "cryptocurrency," since it is a decentralized currency with no central agency to verify that it is spent only once. However, Bitcoin has a mechanism based on transaction logs to verify the authenticity of each transaction and prevent double-counting.

BREAKING DOWN 'Double-Spending'

Bitcoin requires that all transactions, without exception, be included in a shared public transaction log known as a "block chain." This mechanism ensures that the party spending the bitcoins really owns them, and also prevents double-counting and other fraud. The block chain of verified transactions is built up over time as more and more transactions are added to it. Bitcoin transactions take some time to verify because the process involves intensive number-crunching and complex algorithms that take up a great deal of computing power. It is, therefore, exceedingly difficult to duplicate or falsify the block chain because of the immense amount of computing power that would be required to do so.

Hackers have tried to get around the Bitcoin verification system by using methods such as out-computing the block chain security mechanism, or using a double-spending technique that involves sending a fraudulent transaction log to a seller and another to the rest of the Bitcoin network. These ploys have met with only limited success. In fact, most Bitcoin thefts so far have not involved double-counting, but rather have been due to users storing bitcoins without adequate safety measures.

The greatest risk for double-spending comes in the form of a 51% attack, which can occur if a user controls more than 50% of the computing power maintaining the distributed ledgers of a cryptocurrency. If this user controls the blockchain they will be able to process transfer bitcoins to their wallet multiple times by reversing the blockchain ledger as though the initial transactions had never occurred.

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