The bank of Canada (BoC), as at this month, published a research on the “Incentive Compatibility” of blockchain technology, discovering that double spending is an “unrealistic outcome.”
The “double spending” problem has long been a worry for crypto enthusiasts, and the BoC has moved to shed more light on this issue by embarking on a study with the sole focus on proof of work (PoW) protocol for blockchain technology.
The research noted the difference between the behaviors of an “honest” miner and a “dishonest” one in order to determine the probability of double spending.
The research brings to light the principal innovation of a digital ledger technology like blockchain is to ensure that users of this system are directly responsible for the protection of the system itself. For blockchain technology, the system accepts new transactions when An update is conceded upon by all users of the system.
How Double Spending Occurs
Basically, double spending can happen when a user spends a particular token multiple times. This is made possible by the digital nature of cryptocurrencies in which any ownership record can hypothetically be copied and reused several times. Centralized payment systems like PayPal often use trusted third party in order to run the ledger effectively, as a result curbing the problem of double spending. On the other hand, cryptocurrencies reckon decentralized ledgers, and they do not possess trusted central authorities to ratify the transactions.
More specifically, there is the danger of the “51% attack” where if a single miner controls 1% more than half of the computational power would hypothetically be able to embark on “double spending” where “Confirmation lags, in theory, lose their power in controlling double-spending incentives. The dishonest miner creates an arrival rate that is larger than those of the other honest miners combined […] and, thus, can always cheat by double spending.” a recent example was when Zencash fell victim to a double-spend attack earlier this year.
The Bank of Canada’s study further indicated that researchers designed a system for the purpose of exploring the possibility of been cheated into double spending by digital ledgers such as cryptocurrency and finally concluding that the possibility of a widespread double spending occurrence should be considered “unlikely”.
Additionally, the fact that the system is protected by the blockchain users themselves through validation of transactions was praised in the paper. Still, the study recognized the threat posed by this 51 % as mentioned above attacks. It also stated that for this 51% attacks to be possible, the “dishonest miner” must expend a vast amount of resources and have “deep pockets” to be able to take hold of the network. The study explained that:
“These assumptions tend to be unrealistic and, in practice, users have little economic incentives to launch such an attack, especially when the computational investment by other miners is large.”
The senior research director at the Bank of Canada’s funds’ management and banking department, James Chapman, had earlier raised doubts about the efficiency and security of using blockchain technology for banking. But on the bright side, larger blockchain platforms should, in theory, be near impossible to take over due to the impossibility of the computational Investment to be amassed.
Another research conducted by a large global consulting and management enterprise, Bain and company discovered that the utilization of distributed ledger technology such as blockchain “has the potential to revolutionize transaction banking.