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or service he obtained while the counterparty will be left empty handed. Hence, the possibility of such double-spending can undermine the trust in the cryptocurrency. A blockchain based on a PoW consensus protocol naturally deals with changing transaction history backwards. The blockchain has to be dynamically consistent in the sense that current transactions have to be linked to transactions in all previous blocks.11 Consequently, if a person attempts to revoke a transaction in the past, he has to propose an alternative blockchain (with that particular transaction removed) and perform the PoW for each of the newly proposed block. Therefore, it is very costly to rewrite the history of transactions backwards if the part of the chain that needs to be replaced is long. Hence, the “older” transactions are, the more users can trust them. Unfortunately, a blockchain does not automatically protect a cryptocurrency against a double- spending attack that is forward-looking. Figure 2.3 considers a spot trade between a buyer and a seller involving a cryptocurrency. The buyer instructs the miners to transfer a payment to the seller while the seller simultaneously delivers the goods. Notice that the buyer can always secretly mine an alternative history (or submit to some miners a different history) in which the fund is not transferred. The final outcome of the transaction depends on which payment instruction is incorporated into the blockchain first. If the former payment instruction is incorporated, then the double-spending attempt fails. The seller receives the payment and the buyer gets the goods. If the latter is accepted instead, then the double-spending attempt succeeds. In this case, the buyer gets the goods without paying the seller. Such a double spending attack can be discouraged by introducing a confirmation lag into the transactions. By waiting some blocks before completing the transaction (i.e., the seller delays the delivery of the goods), it becomes harder to alter transactions in a sequence of new blocks. Figure 2.4 illustrates how a confirmation lag of one block confirmation raises the secret mining burden of a double spender. The seller delivers the goods only after the payment is incorporated into the blockchain at least in one new block. Again, the buyer can secretly mine an alternative history in which the payment does not happen. How successful secret mining is depends on the mining competition and the length of the confirmation lag. some transactions that have been initiated by other people. With positive transaction fees, a miner does not have an incentive to remove other people’s transactions and lose such fees. 11For example, if someone transfers a balance d in block T, it must be the case that the person has received sufficient net flows from block 0 to block T − 1 so that the accumulated amount is at least d. 8PDF Image | The Economics of Cryptocurrencies Bitcoin and Beyond
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