Digital Copy
What Is a Digital Copy?
In the context of cryptocurrency, a digital copy refers to a duplicate record of each confirmed transaction that occurred over a peer-to-peer network, such as the bitcoin network.
A digital copy is a security feature introduced by the bitcoin protocol to address the issue of double spending.
How a Digital Copy Works
With the introduction of bitcoin in 2009, the rise of cryptocurrencies began. One of the motivations for the creation of bitcoin was the desire for an uncontrollable digital currency that would not require a trusted third party to guarantee transactions. 1
Unlike bank transactions, bitcoin transactions are not recorded or stored centrally. Rather than that, bitcoin is a decentralized network of autonomous computers, each of which maintains its own record of all confirmed transactions. A blockchain is a particular type of distributed ledger.
The Double-Spending Problem
Double-spending occurred as a result of transacting in digital currency via a decentralized system. When someone attempts to send the same coin to two different addresses, this is referred to as double-spending.
Double spending is prevented in traditional currency by institutions such as banks, clearinghouses, and online payment systems that monitor account balances and transaction history and alert users to overdrafts. Earlier digital currency systems, such as eCash, lacked a satisfactory mechanism to prevent double spending and thus failed.
To address this issue, the inventor of bitcoin devised a process in which each legitimate transaction is independently shared and verified by a distributed network of miners.
The Distributed Ledger and Multiple Digital Copies
Each bitcoin transaction is broadcast to a miner, who groups hundreds of transactions together to form a block. When a new block is created, the miner broadcasts it to hundreds of other bitcoin nodes, which then compare the new transactions to their own digital copy of the blockchain. Any node that detects a double-spend rejects the new block. Otherwise, nodes will communicate the new block to other nodes and miners.
By rewarding honest behavior and punishing bad actors, this system effectively prevents double spending. Due to the fact that miners are compensated via block rewards, they have a financial incentive to accept only legitimate transactions. If a miner does not reject a double-spend, his or her block is not shared with other nodes.
Other Issues with Double-Spending
While digital copies typically safeguard the bitcoin network, there are rare instances when a double-spend goes undetected. This is due to the longest-chain rule, which states that whenever two competing blockchain versions exist, the longest chain is considered the most authoritative.
The most well-known method of exploiting this property is via a 51% attack. If a malicious actor obtains a majority of the network's hashing power, he or she can secretly create a longer version of the blockchain with different transactions. When the second version of the blockchain is published, any transactions that occurred on the shorter chain are effectively reversed.
Additionally, due to the probabilistic nature of the blockchain, transactions can be reversed inadvertently. If two miners independently discover new blocks, both versions will remain in the network until the next block is mined. When this occurs, the network will accept one version and reject the other as an orphan block.
As a result, bitcoin transactions are not truly 'final' until they are included in a chain with six additional blocks mined after the transaction. This is because it is highly improbable that six blocks will be reversed. At least once, a bitcoin user was able to reclaim bitcoins previously spent in an orphaned block.
