A search-theoretic model of double-spending fraud

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. (C) 2021 Elsevier B.V. All rights reserved.