Blockchain - Double Spending
Think about the situation shown in image −
Clearly, Bob is exchanging a $10 bill for a book with Lisa. Once Lisa receives the physical $10 bill, Bob can no longer use it for any other transaction since the physical currency has now been transferred to her.
Imagine a situation where the money is paid digitally. This is illustrated in the image below.
Since the format of money exchange is digital, it is essentially a binary physical file on Bob's device. Once Bob gives Lisa this file, he can also give Alice a copy of it. Both now believe that they have received the money without having any means of authenticating the digital coin and will therefore deliver their respective goods to Bob. In double-spending, the sender spends the same money at more than one place to obtain services or goods from different vendors.
In order to avoid double-spending, one would need a centralized authority to monitor all transactions.
The centralized authority, which in common terms is your bank, maintains a ledger book recording all the transactions. Bob must send his digital money to the bank, who would then make an entry deducting Bob's account from its ledger. Once Bob has enough balance to pay for the digital money he wants to send, he would credit Lisa's account in its ledger after sending the money.
In this case, Bob will not be able to spend the money twice. If all digital transactions are routed through a centralized authority like this, the problem of double spending will be eliminated. As an added benefit, it can validate the authenticity of the coins (digital money) it receives. This would allow the fake money (duplicate money, as in Bob paying Alice with a copy) to be detected and eradicated.
In addition to solving the double-spending problem, centralized authority introduces another major issue - the cost of creating and maintaining it.
As banks need money for their operations, they start cutting commissions on each currency transaction they do for their clients as they need money for their operations. If multiple agents (banks) are involved in the entire transfer of money overseas, this can become very costly.
Before diving into Bitcoin's design and architecture, I'd like to give you a brief overview of what Bitcoin is and how it solves all the above problems.