Letter #4: Bitcoin "Double Spend" - To Be or Not To Be?

Dear Readers,

The Bitcoin community was rocked this week by the news that a dreaded “double spend” transaction had occurred on the blockchain. It was impossible. It wasn’t supposed to happen, not to Bitcoin anyway. But the media wanted everyone to believe that it had happened. And a lot of people seemingly believed the hype, as Bitcoin went on to lose nearly 20 percent of its value in the 24 hours following the transaction. But what is a “double spend”? And did such a transaction really get processed earlier this week?

Blockchain and Digital Scarcity

Bitcoin runs on a software called a blockchain. In its simplest form, a blockchain groups transactions into a “block”, processes the transactions in that block, and then adds the block to a chain of other blocks.

At face value, perhaps that doesn’t sound like a big deal. After all, a number of companies in traditional finance are great at processing transactions. But those companies extract a high price for their services. For example, payment processors charge about 3% to facilitate payments. Your bank on the other hand, charges you by paying little or no interest on your deposits and possibly by levying high account fees as well. Those companies also have complete control over the money you leave with them. If they don’t want to process your transaction, or if a government tells them not to, they won’t, and you’ll suffer because of it.

The promise of Bitcoin is that anyone can access the network, regardless of who they are or what they do. But since no one controls the blockchain, proper verification of transactions is a whole different ball game. There needs to be a way for everyone to know without a doubt that no one is cheating the system.

The blockchain’s purpose, in the case of Bitcoin, is to prove digital scarcity. In other words, the Bitcoin blockchain helps ensure that no one can create additional Bitcoin and that no one can spend the same Bitcoin twice.