Business Deals and Transactions
It’s not easy to do business. Two parties, each wanting to get as much money as they can while having as little loss as possible, usually sit down together and strike a deal. This deal is usually sealed by a contract or other documentation that prevents either party from breaking it and taking all the money while giving nothing back.
A simple handshake can sometimes be enough to do business. Handshakes are simple and fast, but they also cost nothing. This arrangement does require a lot of trust and respect for your partner as there is no record of the deal. Your partner is likely to fulfill their part in the agreement, but your confidence can be misplaced. It’s possible that your partner will not deliver what they promised. You won’t be able to sue your partner for breaking the agreement because you didn’t confirm it in writing.
What is the Bitcoin equivalent of this?
Each Bitcoin transaction can be viewed as a simple business agreement between two parties. It must be entered into the Bitcoin blockchain in order to qualify as a business transaction. Each 10 minutes, a batch of new transactions are bundled into blocks and added to Bitcoin’s blockchain. Exchanges and merchants typically require at least six confirmations for a transaction to be considered valid. The 6 mandatory confirmations are the “contract” that ensures the validity of every blockchain transaction.
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On the other hand, zero confirmation transactions are transactions that haven’t had any confirmations yet. In a zero confirmation transaction, the person receiving Bitcoin doesn’t want to wait for the entire process of 6+ confirmations to go through. Similarly to a handshake, the transaction depends almost entirely on trust. The seller must have the utmost belief that the buyer will uphold his end of the bargain.
The Bitcoin mempool is a network that holds all the unconfirmed transactions. A zero confirmation transaction is technically any transaction broadcast for the first. The transaction may wait a few minutes or even a long time before receiving its first confirmation after the initial broadcast. A transaction that has a higher fee is usually confirmed more often than one with a lower fee. The miners also want to make money from their efforts. When a zero confirmation transaction has been added to the blockchain, it is now a transaction with a single confirmation.
These transactions are a source of concern for some Bitcoin miners, exchanges, and members of the Bitcoin Community. First, there is the concern of a possible double-spend attack. The first reason is that a malicious player can create two transactions with zero confirmation, broadcast them simultaneously and accept them before anyone knows. Since the window for transactions is so small, and since creating two transactions is more expensive than the benefit, such an attack is highly unlikely to happen.
Tom Harding, at a “Satoshi’s Vision Conference”, discussed Native Respend Resistance. This is an idea that works specifically within Bitcoin Cash to prevent double-spend attacks or what he refers to as respends. Harding says that Respond Relay, which is a system where digital wallets send out an alert in the event of a respend, is key. This is done by hesitating to confirm the transaction. When the transaction is picked, the network is monitored for a brief period of time in order to make sure that no respends have occurred. If this is true, then the payment will be accepted. Otherwise, it is rejected.
Harding also discusses the origin of this idea, which is referred to by Satoshi as a comment made in 2010 – the “snack machines” comment. It refers to problems associated with quick transactions. One of these is the ability to temporarily duplicate transactions to trick nodes into accepting refunds.
Harding highlights that there’s still a potential risk in bitcoin cash. Zero-confirmation transactions that are in limbo can be responded to. Harding said that the best solution is to give miners more incentives to stop these transactions making it to the blockchain. This was a proposal made by Hal Finney back in 2001.
Second, bad actors could control a large amount of hashrate and begin mining a forked blockchain and create orphaned blocks. Orphaned blocks are valid blocks that don’t belong to the main chain. Sometimes, two miners will produce the same blocks or an attacker can attack the network with enough hash to try and reverse transactions. In this scenario, an attacker starts a block chain forked and sends Bitcoins via broadcast to any address he chooses. He can make the Bitcoin blockchain obsolete by using enough hashing powers. His fork will then become the primary Bitcoin chain. In the event of such an attack, zero confirmation transactions are at risk. This is another 51% attack, but it is very unlikely that anyone would attempt this because the costs are too high.
Remember the phrase “Trust but verify” when you invest in crypto. While zero confirmation transactions are useful, they can also cause you headaches. Be on the lookout when purchasing crypto for sellers that are pushy, those who say they need your money urgently, or other scams. Keep in mind also the reputation of the vendor, since word spreads quickly about them. You can only trust someone if you are the one who is buying.