A double spend is an attack where the given set of coins is spent in more than one transaction. There are a couple of main ways to perform a double spend:
- Send two conflicting transactions in rapid succession into the Bitcoin network. This is called a race attack.
- Pre-mine one transaction into a block and spend the same coins before releasing the block to invalidate that transaction. This is called a Finney attack.
- Own 51+% of the total computing power of the Bitcoin network to reverse any transaction you feel like, as well as have total control of which transactions appear in blocks. This is called a 51% attack.
Traders and merchants who accept payment immediately on seeing “0/unconfirmed” are exposed to the transaction being reversed. An attempt at fraud could work that the fraudster sends a transaction paying the merchant directly to the merchant, and sends a conflicting transaction spending the coin to himself to the rest of the network. It is likely that the second conflicting transaction will be mined into a block and accepted by bitcoin nodes as genuine.
Merchants can take precautions (e.g., disable incoming connections, only connect to well-connected nodes) to lessen the risk of a race attack but the risk cannot be eliminated. Therefore, the cost/benefit of the risk needs to be considered when accepting payment on 0/unconfirmed when there is no recourse against the attacker.
The research paper Two Bitcoins at the Price of One finds that the protocol allows a high degree of success by an attacker in performing race attacks. The method studied in the research paper depends on access to the merchant’s Bitcoin node which is why that even prior to this paper, recommendations for merchants include disabling incoming connections and to choose specific outgoing connections.
Another attack the trader or merchant is exposed to when accepting payment on 0/unconfirmed. The Finney attack is a fraudulent double-spend that requires the participation of a miner once a block has been mined. The risk of a Finney attack cannot be eliminated regardless of the precautions taken by the merchant, but some miner hash power is required and a specific sequence of events must occur. Just like with the race attack, a trader or merchant should consider the cost/benefit when accepting payment on just one confirmation when there is no recourse against the attacker.
A Finney attack works as follows: Suppose the attacker is generating blocks occasionally. in each block he generates, he includes a transfer from address A to address B, both of which he controls. To cheat you, when he generates a block, he doesn’t broadcast it. Instead, he opens your store web page and makes a payment to your address C with his address A. You may wait a few seconds for double-spends, not hear anything, and then transfer the goods. He broadcasts his block now, and his transaction will take precedence over yours.
Also referred to as a one-confirmation attack, is a combination of the race attack and the Finney attack such that a transaction that even has one confirmation can still be reversed. The same protective action for the race attack (no incoming connections, explicit outgoing connection to a well-connected node) significantly reduces the risk of this occurring.
It is worth noting that a successful attack costs the attacker one block – they need to ‘sacrifice’ a block by not broadcasting it, and instead relaying it only to the attacked node.
See on BitcoinTalk or further example of an attack scenario.
Alternative history attack
This attack has a chance to work even if the merchant waits for some confirmations, but requires relatively high hashrate and risk of significant expense in wasted electricity to the attacking miner.
The attacker submits to the merchant/network a transaction which pays the merchant, while privately mining an alternative blockchain fork in which a fraudulent double-spending transaction is included instead. After waiting for n confirmations, the merchant sends the product. If the attacker happened to find more than n blocks at this point, he releases his fork and regains his coins; otherwise, he can try to continue extending his fork with the hope of being able to catch up with the network. If he never manages to do this then the attack fails, the attacker has wasted a significant amount of electricity and the payment to the merchant will go through.
The probability of success is a function of the attacker’s hashrate (as a proportion of the total network hashrate) and the number of confirmations the merchant waits for. An online calculator can be found here
For example, if the attacker controls 10% of the network hashrate but the merchant waits for 6 confirmations, the success probability is on the order of 0.1%. Because of the opportunity cost of this attack, it is only game-theory possible if the bitcoin amount traded is comparable to the block reward (but note that an attacking miner can attempt a brute force attack against several counterparties at once).
Also referred to as a 51% attack or >50% attack. If the attacker controls more than half of the network hashrate, the previously-mentioned Alternative history attack has a probability of 100% to succeed. Since the attacker can generate blocks faster than the rest of the network, he can simply persevere with his private fork until it becomes longer than the branch built by the honest network, from whatever disadvantage.
No amount of confirmations can prevent this attack; however, waiting for confirmations does increase the aggregate resource cost of performing the attack, which could potentially make it unprofitable or delay it long enough for the circumstances to change or slower-acting synchronization methods to kick in. Bitcoin’s security model relies on no single coalition of miners controlling more than half the mining power. A miner with more than 50% hash power is an incentive to reduce their mining power and reframe from attacking in order for their mining equipment and bitcoin income to retain its value.
This is not financial advice or investment advice. Everything we cover here is my experiences, opinions and what I would do. Please do your own research.