We know how financial whales can influence markets, especially in the crypto community where the market is easily swayed by pumps and dumps. Now, that being said, let’s take a look at how a whale could possibly incentivize forks on the blockchain in order to perform a double spend transaction. 

The core innovation of Bitcoin is its solution to prevent double spending called Nakamoto consensus. This is a way to ensure that double spending won’t occur once the transaction is sufficiently deep in the blockchain.

During the mining process, different versions of the same blockchain known as forks or branches may form. Miners look to resolve this by mining on the longest chain, which is ultimately viewed as the original blockchain. The other branches are ‘orphaned’ and transactions on them are invalidated. 

This unlocks the potential for an attacker to cause a double spend if his transaction ends up on the orphaned branch. Due to which payees will not normally accept a transaction until it is incorporated in a block that is several layers (generally 6 blocks) deep in the blockchain. The only way for him to accomplish this is to amass enough computational power on the network, so that the probability of a branch being orphaned reduces exponentially. 

This could take place in the following way:

  1. The attacker performs a transaction with the vendor and waits for the transaction to be deep enough in the blockchain to ensure that the vendor sends him the necessary goods that was purchased by the attacker.
  2. The attacker then attempts to undo the transaction by inducing a fork in the blockchain before the original transaction was confirmed. 
  3. Even though the fork initiated by the attacker is going to be smaller than the main chain, he will try and ‘bribe’ the other miners to mine his fork. 
  4. This bribe will be executed by performing a whale transaction [a transaction with an enormous transaction fee] on the forked chain and it will only be available there. 

Even if it seems like it would be difficult to get miners onto the attackers fork, we need to keep in mind the rationality of the miner too. If it is more profitable for them to mine on the fork, especially since mining on the fork gives them a higher probability to mine a new block compared to mining on the original chain and higher rewards. This could play a pivotal role in influencing miners to mine the fork, especially since it gets more difficult to mine on the main chain due to the complexity of the increasing mathematical problem as more blocks are mined. 

Although this is just a proof of concept, it still shows a possibility for a whale to carry out this kind of malicious fork to suit his interests. Given that the security of a blockchain relies on the assumption that the miners will behave honestly.

Citations

Liao, K., & Katz, J. (n.d.). Incentivizing Blockchain Forks via Whale Transactions. Retrieved from http://fc17.ifca.ai/bitcoin/papers/bitcoin17-final26.pdf

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