Preventing The Double-Spending Problem.

What Does The Bitcoin Whitepaper Say?

Preventing The Double-Spending Problem.
January 9, 2024
Eduardo Próspero

One could argue that Bitcoin’s solution to the double-spending problem is Satoshi Nakamoto’s most important accomplishment. The proof is in the pudding, the Bitcoin Whitepaper’s main concern is to explain how this then-nascent network would solve it using a triple-entry accounting system, a blockchain, and the Proof-Of-Work consensus mechanism. In the following paragraphs, we’ll dissect both the problem and the solution using quotes from the now-historic Bitcoin Whitepaper. As early as the introduction, the document states:

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model.”

In the physical world, the double-spending problem doesn’t exist. A bill or a gold coin can only exist in one place. If person A gives it to person B to pay for something, then person A can’t spend it again because person B has it. In the digital world, rules are different because making a copy is just one or two clicks away. Transactions, bitcoin, a movie, and a song are just one and zeroes to computers; and one of computing’s main goals is to reproduce information easily and fast. Plus, computers can carry out several tasks simultaneously which further complicates the situation.  

The Previous Solution to the Double-Spending Problem

Prior to Bitcoin, the only solution to the double-spending problem was to trust a central entity that verified every transaction. That’s how credit cards and online payments work. Each banking institution keeps a private ledger with rules of its own, and people have no option but to trust the institution to participate in their network. That system carries with it an inherent problem, however. Back to the Whitepaper:

“Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads.”

In contrast, the Bitcoin ledger is decentralized and public. That fact, mixed with the Proof-Of-Work consensus mechanism allows the Bitcoin network to solve the double-spending problem in a trustless manner and achieve final settlement in minutes. 

How Do Nodes Prevent Double-Spending?

The Bitcoin Whitepaper addresses the theoretical 51% attack right away:

“In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.”

So, the blockchain archives transactions chronologically in a public ledger. Nodes have access to every transaction and validate the blockchain’s history every ten minutes on average. Every day that passes, more nodes run bitcoin and an attack becomes more unlikely and impractical. Nevertheless, if an entity somehow gains control of 51% of the network it could theoretically “generate an alternate chain faster than the honest chain.” What could the attacking party do with its newly acquired superpowers?

“Even if this is accomplished, it does not throw the system open to arbitrary changes, such as creating value out of thin air or taking money that never belonged to the attacker. Nodes are not going to accept an invalid transaction as payment, and honest nodes will never accept a block containing them. An attacker can only try to change one of his own transactions to take back money he recently spent.”

That means that the attacking party could only double-spend its bitcoin. This is a problem, sure, but performing a 51% attack would be “computationally impractical” anyway.

Unconfirmed Transactions are a Vulnerability

All transactions are time-stamped and inextricably linked to the one before, that “computational proof” makes them unforgeable and allows the Bitcoin network to achieve final settlement in minutes. However, the double-spending problem is still a risk for people who dare to receive “unconfirmed” transactions. To get “confirmed,” a miner has to add a transaction to a block. After that, every block added on top of it is considered an additional “confirmation” for all past transactions. After six confirmations, it’s highly unlikely that a transaction can be overrun. 

Also, Bitcoin has additional protection against the double-spending problem. When person A sends Bitcoin to person B, the network publicly destroys person A’s coins and creates new coins in person B’s wallet. So, Satoshi Nakamoto’s solution to the double-spending problem is solid. The Bitcoin Network is almost 15 years old and there are no reports of double-spending incidents. 

The Whitepaper states that “the network is robust in its unstructured simplicity,” and time has proven it to be right.

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