Cryptocurrencies are a very young group of assets. The first one, Bitcoin (BTC), was launched in 2009 as a form of innovative digital money, and since then, the crypto community has exploded in size, with thousands of altcoins being developed in all parts of the world. The most popular altcoins like Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) all have multi-billion dollar market caps and represent financial assets that have value and impact in the real world.
Millions of individuals, developers, and companies are already using digital currency as a part of their financial portfolio, and increasing numbers of services, like Paypal, have begun to accept selected cryptos as a payment method. This widespread popularity of cryptocurrencies also has its dangers and threats, since cryptos don’t exist physically and malicious individuals look at these digital assets as a great opportunity for scams and fraud.
Let’s take a look at the most common crypto scam called double-spending and the different types of double-spending cyber attacks.
Cryptocurrency Double Spending
The fact that cryptos are virtual digital assets and can’t be physically kept in a wallet is a great advantage because you can’t get your crypto funds stolen from your pocket or otherwise compromised. On the other hand, however, this fact can pose a threat for individuals and businesses that deal with cryptos because hackers and malicious agents can try to trick them and get financial gains from fraudulent activities such as the double-spending problem.
The term “double-spending” refers to the possibility of spending the same funds twice, effectively gaining non-existent financial benefits by tricking the other party. Every transaction of cryptos needs to be verified by system nodes (miners) in order to get processed through the blockchain public ledger and reach its final destination. Scammers try to manipulate the system by spending the same assets twice or even multiple times and trying to use the delay between the moment they send funds and the moment they are verified to trick the system.
Fortunately, blockchain technology isn’t easily tricked and such scams are prevented by the proof-of-work (PoW) algorithm that makes sure no one can double spend the same funds. This means that every transaction has to be verified by multiple, independent system nodes that make sure every transaction is legit by reaching a consensus and using computational power to prove that the funds are being spent only once. When this verification process is finished, a transaction is completed and added to the blockchain.
The Example of the Bitcoin Blockchain
The BTC blockchain is the first crypto-supporting network, and it was launched in 2009 by Satoshi Nakamoto after the publication of the Bitcoin whitepaper. Amongst other things, it served as an example for the creation of future blockchains. Many altcoin developer teams built their blockchains based on the BTC network. The Bitcoin network acts as a distributed public transaction ledger that notes all the transfers that ever happened on the network. With the help of miners and their computers, bitcoins are transferred through the blockchain and used as digital cash or store of value by people across the world.
The usual transfer time for Bitcoin transactions is 5 to 10 minutes and this is the time needed for network nodes to verify that a transaction is real and that it doesn’t involve any type of fraudulent behavior. The consensus algorithm is responsible for preventing people from spending the same funds twice.
Double-Spend Attack Types
Since blockchains use impeccable security measures to verify each and every transaction, it is pointless for an individual to just try and spend the same funds twice, because sooner or later, their transaction will be rejected – it will be obvious that they attempted to spend the same funds twice. Let’s take a look at the different types of double-spend attacks
51% Spend Attack
A 51% spend attack is a common type of complex cyber attack that aims to gain control of at least 51% of system nodes of the blockchain of a certain cryptocurrency. By gaining control over more than half of the network nodes of a cryptocurrency’s blockchain, hackers can manipulate the majority-based consensus mechanism for verifying transactions. This way the malicious actors can approve fake transactions that aim to double spend the same funds, effectively manipulating the whole system and even reversing whole transactions by editing the data of the digital files in the blocks.
This is a complex operation that requires large amounts of computing power and logistics and it is generally attempted by organized hacker groups that aim to steal large amounts of cryptos. So far, the most well-known blockchains like Bitcoin and Ethereum have resisted such attacks but famous crypto forks like Bitcoin Gold and Ethereum Classic have unfortunately been hacked this way and large amounts of coins have been stolen.
A Finney attack is another type of double-spending attack that aims to trick merchants that don’t wait for their funds to arrive before sending their products. The attack is named after Bitcoin enthusiast Hal Finney who came up with the concept in 2011.
A hacker needs to have their own system node up and running. Then the hacker initiates transactions between their own crypto wallets and includes these transfers in new blocks, generated by their system node. This way, the funds sent by the hacker can be double-spent and a merchant can be tricked into sending products thinking they will receive the required cost for the item. This is possible because the transfers within these blocks will have higher verification priority and they will be registered on the blockchain as legit transactions.
Race attacks are extremely fast-paced cyber attacks when hackers try to send a certain amount of cryptos to a vendor and to their own wallet basically at the same time. The hacker first sends the funds to the person who wants to buy the funds, and immediately afterwards, the hacker sends them to their own wallet. If the malicious individual or hacker group controls a system node, they can use it to reject the first transaction on purpose. This will make the second transaction a priority that is sent out to the rest of the network and the other system nodes will verify this second transfer instead of the first one.
This is a prime scam method for tricking people into sending products/other currencies as if they were bought before the transaction is confirmed, and then retaining the funds by sending them to the hacker’s own wallet instead of the vendor’s address. In order to avoid such attacks, people should connect only to trusted system nodes or send out purchased products only after they receive payment.
A Few Words Before You Go…
Blockchain technology is generally very safe and transferring funds through these sorts of networks is one of the most trustworthy methods to make quick and reliable transactions. However, hackers and cybercriminals are constantly trying to trick blockchain technology.
These are some of the most common types of double-spending attacks hackers use when trying to compromise crypto assets, but there is essentially no need to worry because developer teams are constantly upgrading crypto blockchain in order to make them resilient to cyber-attacks.