A search-theoretic model of double-spending fraud

Yiting Li and Chien-Chiang Wang

Journal of Economic Dynamics and Control, 2022, vol. 142, issue C

Abstract: We study double-spending attacks in a digital payment system, such as cryptocurrency, wherein agents send transaction messages to facilitate the transfers of digital currencies. The system is imperfect such that the payer can send a double-spending message to transfer the currency to another account owned by herself after the original message is sent, and the payment system may recognize the double-spending message instead of the original one as the real transaction. If this occurs, the seller will not receive the payment, and the payer may retract the payment but keep the merchandise. We consider multiple mechanisms that can be applied to deter double-spending attempts, including a cost to send a message, a currency deposit, and currency deletions. However, applying the above mechanisms is costly. If the probability of detecting fraudulent activity is low, employing fraud deterrents may not be ideal, and allowing for double spending may instead reflect an optimal equilibrium.

Keywords: Cryptocurrency; Money; Search; Imperfect information; Fraud (search for similar items in EconPapers)
JEL-codes: D80 E40 G10 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:142:y:2022:i:c:s0165188921000920

DOI: 10.1016/j.jedc.2021.104157

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