A recent study from the Bank of Canada found that double spending in blockchain is ‘unrealistic’, showing that even central banks are starting to warm up to the security that blockchain and distributed ledger technology provides.
Proof of Work Works
The study looks at how a Proof-of-Work consensus protocol, confirmation delays, and a rewards system such as those used in the Bitcoin network prevents ‘double spending’ of digital assets. Double spending refers to the fact that since cryptocurrencies are digital, in theory transactions can be copied or reused unlike physical assets or cash.
In traditional digital transactions users trust a third party such as their bank or Paypal or Visa to keep track of transactions and account balances to prevent double spending. However, since blockchain systems and cryptocurrencies are decentralized and transactions are processed by a network of miners who act as ‘potentially anonymous validators’, it’s important the protocol used to govern the validation prevent double spending.
Through an economic analysis, the paper from Canada’s central bank goes on to determine that a Proof-of-Work protocol along with sufficient confirmation delays and a rewards system for the anonymous validators makes double spending ‘unrealistic’.
Specifically, it cites that although double spending would be possible in such a system, the attacker would need to control a majority of the validation computational power (i.e. 51%) to be assured the attack would be successful. This would necessitate that they have ‘deep pockets and [are] risk neutral’. The study goes on to state:
Bank of Canada’s History of Blockchain Research
This conclusion won’t come as news to many who follow the emerging field of blockchain and cryptocurrency. It’s the entire basis behind the advent of Bitcoin and the primary revelation of the whitepaper by Satoshi Nakamoto from 2008.
The study and its outcomes are notable however since they come from a central bank who has had mixed views on blockchain and cryptocurrency in the past.
The Bank of Canada is no stranger to the world of digital assets and blockchain technology as they kicked off their own project using the technology for digital payments and securities clearing back in the summer of 2016 — Project Jasper, which was first announced by the central bank’s senior deputy governor, Carolyn Wilkins, as part of an overall effort to look at technology innovations in the financial ecosystem.
However, Stephen Poloz, governor of the Bank of Canada, told CNBC in an interview in January that “There is no intrinsic value for something like bitcoin so it’s not really an asset one can analyze.”
Yet now the Bank of Canada releases a study that precisely analyzes the underlying working of a system akin to Bitcoin.
Both the paper and Project Jasper seem to be more in line with statements in March from Wilkins, who appears to be leading the charge of the central bank’s modernization efforts with respect to digital currencies: