Double Spend: Fear for some, Opportunity for others!

Featured: Double Spend, Bitcoin, BitMEX, Replace by Fee, Stale block, Blockchain

On Jan 20, 2021, BitMEX Research mentioned on a Twitter post that their Fork Monitor has traced a Double Spend activity on the Bitcoin Blockchain. It could have been a catastrophic event in the history of the crypto ecosystem and could have marked the end of the crypto revolution if it was true in its originality. However, it can be argued that the double-spent occurred on a particular timestamp as the same transaction was placed in two different blocks leading to the formation of a stale block.

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What is Double-spend?

Double spending can be thought of as spending the same money twice, that is, transacting with $1 for buying a product and spending the same $1 somewhere else to make another purchase.

Double-spending is a potential threat with the digital currency as the transaction can be duplicated or it manifests itself as a valid transaction to the receiver until not confirmed by the blockchain. In traditional economies, it can be interpreted as counterfeit money which can lead to inflation. However, in the cryptocurrency realm, double spending can be interpreted by some as a 51% possible attack on the entire blockchain which means that someone is in control of the blockchain and can alter the records stored in the blockchain to its advantage.

Anecdote of the Double Spending event in the Bitcoin blockchain

On Jan 20, 2021, Fork Monitor of BitMEX tracked a potential double spend event in the Bitcoin blockchain. The series of events that laid the foundation for the double-spent are as follows-

  • On the 18th, a user broadcasted a transaction of BTC. His transaction was lined up in the mempool. Due to low fees, his transaction was not validated by the miners.
  • On the 19th, the user attached higher fees, often called as Replace by Fee (RBF) transaction wherein the user tied higher fees to get the transaction validated by miners.
  • On the 20th, the user again attached more fees. Therefore, the user has broadcasted 3 transactions till now.
  • By the time his third transaction was broadcasted, the fee had cooled down. Therefore, two miners simultaneously picked up the different version of the same transaction with a lower fee and higher fee respectively and placed it in the block to get it authenticated by the network. Therefore, the blockchain was split into 2 versions.
  • At this time, it looked like a malicious “double-spend” activity as the chain was split for that particular block. The low fee transaction ended up winning and was added to the main chain.
  • Thus, it can be argued that Double Spend did happen till the other block (Stale block) with the higher fee version of the transaction was rejected by the network.

Therefore, this event has highlighted the vulnerabilities that exist in the current Bitcoin blockchain. It is potentially a drawback as its mechanism adds the transaction with the maximum number of confirmations while the other will be discarded.

Thus, merchants should wait for 6 confirmations, that is, 6 consecutive blocks to be added after the block has been added to the chain to confirm that the transaction has been verified by the chain. It reflects the loopholes that could potentially serve as a hindrance to its worldwide adoption as digital cash.

Due to this news, Bitcoin on Jan 21, 2021, plunged ~15%. It reflects the fear and uncertainty in the retail audience that has triggered this selloff.

Conclusion

The well known institutional firms grabbed the opportunity with both hands. Grayscale Investment Holdings has accumulated in 3544 BTC in the last 24 hours as per the data from Bybt and Microstrategy has purchased approximately 314 BTC for $10 M in the last one day. It reflects that the financial institutions due to their conviction in the technology and adherence to their long term view bought at a discount while the retail investors got trapped in the shackles of FUD and sold their positions.

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