Lately someone launched Finney attacks as a service (BitUndo). As a
reminder for newcomers, Finney attacks are where a miner secretly works on
a block containing a double spend. When they eventually find a block, they
run to the merchant and pay, then broadcast the block. In a simpler variant
of this attack you make purchases as normal with a modified wallet that
always submits a double spend to the service, and then N% of the time where
N is the percentage of overall hash power the dishonest miners have, you
get your money back minus their fee.

N does not need to be very high to render Bitcoin much less useful. Real
time transactions are very important. Although I never expected it when I
first started using Bitcoin, nowadays most of my purchases with it are for
food and drink. If Bitcoin could not support such purchases, I would use it
much less.
Even with their woeful security many merchants see <1-2% credit card
chargeback rates, and chargebacks can be disputed. In fact merchants win
about 40% of chargeback disputes. So if N was only, say, 5%, and there was
a large enough population of users who were systematically trying to
defraud merchants, we'd already be having worse security than magstripe
credit cards. EMV transactions have loss rates in the noise, so for
merchants who take those Bitcoin would be dramatically less secure.

The idea of discouraging blocks that perform Finney attacks by having
honest miners refuse to build on them has been proposed. But it has a
couple of problems:

   1. It's hard to automatically detect Finney attacks. Looking for blocks
   that contain unseen transactions that override the mempool doesn't work -
   the dishonest users could broadcast all their double spends once a Finney
   block was found and then broadcast the block immediately afterwards, thus
   making the block look like any other would in the presence of double spends.

   2. If they could be automatically identified, it possibly could be
   converted into a DoS on the network by broadcasting double spends in such a
   way that the system races, and every miner produces a block that looks like
   a Finney attack to some of the others. The chain would stop advancing.

   3. Miners who want to vote "no" on a block take a big risk, they could
   be on the losing side of the fork and end up wasting their work.

We can resolve these problems with a couple of tweaks:

   1. Dishonest blocks can be identified out of band, by having honest
   miners submit double spends against themselves to the service anonymously
   using a separate tool. When their own double spend appears they know the
   block is bad.

   2. Miners can vote to reallocate the coinbase value of bad blocks before
   they mature. If a majority of blocks leading up to maturity vote for
   reallocation, the value goes into a pot that subsequent blocks are allowed
   to claim for themselves. Thus there is no risk to voting "no" on a block,
   the work done by the Finney attacker is not wasted, and users do not have
   to suffer through huge reorgs.

This may seem a radical suggestion, but I think it's much less radical than
some of the others being thrown around.

The above approach works as long as the majority of hashpower is honest,
defined to mean, working to stop double spending. This is the same security
property as described in the white paper, thus this introduces no new
security assumptions. Note that assuming *all* miners are dishonest and are
willing to double spend automatically resolves the Bitcoin experiment as a
failure, because that would invalidate the entire theory upon which the
system is built. That doesn't mean the assumption is wrong! It may be that
an entirely unregulated market for double spending prevention cannot work
and the participants eventually all end up trashing the commons - but the
hope is that smart incentives can replace the traditional reliance on law
and regulation to avoid this.

The voting mechanism would only apply to coinbases, not arbitrary
transactions, thus it cannot be used to steal arbitrary users bitcoins. A
majority of miners can already reallocate coinbases by forking them out,
but this wastes energy and work presenting a significant discouragement to
vote unless you already know via some out of band mechanism that you have a
solid majority. Placing votes into the coinbase scriptSig as is done with
other things avoids that problem.

The identification of Finney blocks relies on miners to take explicit
action, like downloading and running a tool that submits votes via RPC. It
can be expected that double spending services would try to identify and
block the sentinel transactions, which is why it's better to have the code
that fights this arms race be out of process and developed externally to
Bitcoin Core itself, which should ultimately just enforce the new (forking)
rule change.
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