Blockchain Analysis: What it is, how it works, what it reveals!

A brief introduction into the topic 'Blockchain Analysis'; and why you might consider using PriFi solutions such as Navcoin. Also we are taking a closer look at one of Mashinsky's ETH wallets!

Are you aware that you are sharing lots of information with every BTC or ETH transaction that you perform? Do you know what data exactly this might be? How easy it is to get and how far transactions can be traced back? Well, if you don’t know, fasten your seat belts!

Because ‘blockchain analysis’ is serious. This business became bigger and bigger over the years, with blockchain analysis companies raising more than $80M already. It is often done by individuals or private companies which, however, also work for government bodies i.e. Chainalysis for the IRS & DEA. Over the past years U.S. Agencies already spent $6M on it.

In this article I am gonna explain to you what blockchain analysis is, what purpose/use cases it has, how it works and what non-private blockchains are revealing about your financial transactions - thus, why you should dig into PriFi (private finance) solutions such as Navcoin.

Blockchain Analysis

What is Blockchain Analysis? 

Blockchain analysis is an important piece of information in order to understand the implications of using public blockchains. It includes every measure taken in order to inspect and identify wallets, trace back transactions, create visuals representing on-chain data, and gather information about anyone using a certain blockchain; such as Bitcoin or Ethereum.

What is The Purpose of Blockchain Analysis?  

‘Blockchain Analysis’ is a tool. A tool that can be used for different purposes, such as identifying frauds and suspicious activities, even in real time, making cryptocurrency exchanges and wallet services a bigger part of their client base. However, it could also be used for malicious purposes such as monitoring the cryptocurrency activities of the average citizen. 

How Does Blockchain Analysis Work? 

As you already know by now, a big part of blockchain analysis is analyzing transactions and trace funds. For that purpose, such companies analyse each transaction on any non-private blockchain, classify and group wallet IDs. If there is any suspicious activity an alert is set. Also it is possible for them to present the flow of funds in a transparent way. Something that is not that easy when transactions are linked to thousands of wallets. 

In short, the blockchain analysis process contains three steps: 

1. Address Classification: Connect pseudonymous blockchain address with real-world entities

2. Transaction Risk Scoring: Machine learning giving a score to every transaction

3. Investigation: Further investigation & visualization; a good overview of common visualization types can be found here.

What Companies Offer Those Services? 

The probably most well-known company in this space is Chainalysis. Founded in 2014, they raised more than $40M and have a lot of ‘heavy weight’ clients, including the IRS, FBI, DEA or also exchanges like Binance. They are monitoring more than 80 blockchains, and work together with hundreds of companies. Besides Chainalysis there are many more analysis companies, such as CipherTrace, CoinMetric, Elliptic or Elementus.

Benefits in Overview

To contract a blockchain analysis service can have multiple reasons for different kinds of businesses and organizations. Here some of the benefits and use cases: 

• Safeguarding data integrity

• Comprehensive control over data

• Assurance of data security 

• Faster audits

• Seamless access to data through different data exchanges

• No more intermediaries

• New approaches for data monetization

But in this article it is not about what blockchain analysis can do for institutions, big centralized crypto exchanges or anything similar - but more so to show you through blockchain analysis what the problem with Bitcoins pseudonimity is. Let’s get to it!

What the Blockchain Reveals About You

Through blockchain analysis, one can find out really a lot about a certain wallet, even if one is just an amateur using block explorer. However, ‘blockchain analysis’ conducted by companies such as Chainalysis who just got recently ‘featured’ on Bloomberg, means really something else. 

To show you what I mean we will use Ethereum, starting point being a wallet address. All data shown in the following comes from ScoreChain, a blockchain analysis service provider from Luxembourg, whom I thank again very much for their help!

The Ethereum wallet in place, 0xc3319....1e08ef6, belongs to Alex Mashinsky, the infamous (former) CEO of Celsius Network. Blockchain analysis can show you directly different indicators such as geographical background, if it was used within a mixer or is suspicious for any other reason. 

This is important, as certain centralized exchanges could block deposits when it turns out it comes from a ‘suspicious source’; the two results ‘Incoming’ and ‘Outgoing’ Score give you an idea of the risk potential:  

More details about the historical ETH/USD balance, data about received and spend ETH, as well as the amount of transactions: 

Here a more detailed look on the general data from the first overview, with a list of all indicators that gave a match with the specific wallet: 

More details of incoming funds needed? No problem - Entity name, Account and countervalue, Percent, Entity Type and Score: 

Let’s not forget about the outgoing funds: 

&

Also available, more detailed VASP (Virtual Asset Service Provider) overviews; ‘VASPs’ being basically regulated exchanges for virtual assets and fiat currencies, most of the time subject to the same AML/CTF and KYC requirements as TradFi institutions:

Public vs. Private Blockchains: If You Want Privacy Use The Latter

Bitcoin and Ethereum are both groundbreaking innovations. Puzzling together already known technological approaches, add own ideas/make it work - this is something big that both Satoshi Nakamoto and the Ethereum developers achieved. Bitcoin: Digital cash/SoV as Blockchain 1.0, Ethereum enabling to program decentralized applications on their ‘Blockchain 2.0’. 

One thing, however, that does not get much attention nowadays when talking about those prime examples is the topic ‘privacy’. Even Satoshi knew about this becoming an issue in the future.

Yes, there are ways to transact i.e. Bitcoin anonymously - but the effort is immense and just one mistake can destroy all your efforts..

ᴜɴᴛʀᴀᴄᴇᴀʙʟᴇ @DontTraceMeBruh

Using #Bitcoin privately "All it takes is one mistake."

 

Meaning: If you want to store wealth in cryptocurrency, transacting cryptocurrency, private and in a convenient way, you might have to look for other solutions. The PriFi (Private Finance) sector is growing and growing, with lots of idealistic developers and rather small, but equally strong communities. 

Privacy coins have special specifications and features that make it possible to avoid showing and recording this transaction data. For example Stealth addresses, Ring Signatures and RingCT are taking care to dissociate accounts participating in Monero transactions, mixing identities with decoy identities and obscure the transaction amounts.

Navcoin: We Are Building A PriFi Ecosystem

We at Navcoin developed our very own privacy solution in the form of the blsCT-protocol, running on a PoS-consensus. We already delivered ground-breaking releases such as Private Tokens and Private NFTs. Soon, Navcoin will operate on a fully private blockchain, making any action/transaction private. 

It is solutions like those that will become more and more important over the next few years, with blockchain analysis efforts and regulatory pressure on market participants increasing. 

We believe that privacy is a human right and we are ready to fight for it, no matter what!

If you share the same mindset feel free to drop by in our Discord and follow us on Twitter