The Double-Spending Problem

A blockchain is a shared record of transactions maintained by thousands of computers instead of a single bank or company—no single entity controls it, and anyone can verify the entire history. But before this technology could work, it had to solve a problem that stumped computer scientists for decades: if digital files copy for free, how can digital money exist at all?

Traditional systems prevent double-spending by trusting a bank to check your balance. Digital money without banks seemed impossible because digital files copy infinitely. When you send a photo, you keep the original. That works for photos but breaks for money.

Why Digital Ownership Is Hard

Physical objects have natural scarcity. Hand someone a $20 bill and you no longer have it. The bill can only exist in one place at once.

Digital files work differently. When you send someone an MP3, both of you have it. You can copy, paste, email, or upload it endlessly at zero cost. This makes information abundant but digital ownership impossible.

For software, photos, or documents, copies are fine—even useful. Money is different. You need a way to prove each coin exists only once. If anyone can copy money, the money is worthless.

The Double-Spending Problem

Without physical constraints, nothing prevents someone from spending the same digital money twice.

Alice has one digital coin worth $100. She sends it to Bob for a new laptop. Bob ships the laptop. Five minutes later, Alice sends the same coin to Carol for concert tickets. Carol accepts the payment. Both Bob and Carol believe they received $100, but only one coin existed. One of them loses everything.

The coin is just data—a number in a file. Alice copied that data and sent it twice. Without someone tracking ownership, digital money cannot work.

Banks solve this by maintaining ledgers that track who owns what. When Alice pays Bob, the bank checks her balance, deducts $100, and credits Bob's account. The bank ensures Alice cannot spend money she does not have. This works, but it requires trusting the bank.

The Costs of Centralization

Banks and payment processors prevent double-spending, but they extract costs.

Every transaction comes with fees. Banks charge for transfers. Credit card companies take 2-3% of every purchase. Payment processors add their own cut. These costs compound, making small transactions impractical—international transfers can cost more in fees than the amount sent.

Central authorities see every transaction. They know what you buy and where, building a detailed picture of your financial life. That data gets sold to advertisers and eventually leaked in breaches. Financial privacy barely exists when every payment routes through a company that logs it.

Over a billion people lack bank accounts because they lack the documentation or stability that banks require. Without a bank account, you cannot participate in the digital economy.

Central authorities can be hacked, corrupted, or shut down. Cyprus seized bank deposits in 2013 to prevent financial collapse. Four years later, Equifax leaked financial data for 147 million people. When the intermediary fails, everyone depending on it loses access to their money.

Banks can freeze accounts, block transactions, or seize funds. Sometimes that power prevents fraud. Other times it silences dissent or punishes disfavored groups.

Central authorities work, but they hold too much power and take a cut of everything. Digital money needed to work without them.

The Impossible Problem

Computer scientists spent decades failing to build digital cash without a central authority.

Everyone needs to agree on who owns what. Banks solve this by being the single source of truth. They maintain the ledger, resolve disputes, and enforce the rules.

Without a central authority, how do thousands of computers agree on the state of the ledger when anyone can propose transactions, some participants might lie to benefit themselves, network messages can be delayed or corrupted, and no one trusts anyone else?

This is the distributed consensus problem. For decades, permissionless consensus—where anyone can participate without approval—appeared impossible. You either needed a central authority or a small, trusted group.

Every attempt at digital cash before 2008 failed. DigiCash went bankrupt. E-gold was shut down by regulators. BitGold never launched. Liberty Reserve became a money laundering operation. They all relied on central points of control, which became targets for failure, attack, or regulation.

Nobody could figure out how to make thousands of strangers agree on a shared ledger without appointing someone in charge. Then in 2008, a pseudonymous developer named Satoshi Nakamoto published a solution.