Cryptocurrency and Double Spending History: Transactions with Zero Confirmation

Abstract

We develop a general equilibrium model of cryptocurrency to study a double spending prevention mechanism without payment confirmations. Agents trade cryptocurrency using a digital wallet, and the cryptocurrency system provides a means to verify a wallet's double spending history. A digital wallet may obtain a good reputation for no double spending attempts based on its transaction history. If a buyer makes a payment with a digital wallet that does not have a good reputation, sellers provide goods after payment confirmations in the blockchain to prevent a double spending attack. On the other hand, sellers deliver goods immediately without payment confirmations if the payment is made through a digital wallet with a good reputation as long as the cost of losing a good reputation outweighs the short-run gain from double spending. As the time required for each confirmation increases, the utility loss from delayed delivery of goods increases so double spending incentives decrease.

Keywords: Blockchain, Cryptocurrency, Delivery Lag, Double Spending, Trade History

JEL Classification: D86, E40, E50, G10