The digital asset economy relies on distributed and decentralized finance that, like conventional systems, can be exploited for nefarious purposes. Its vulnerabilities necessitate tools that help regulators and law enforcement monitor these new financial markets, build transparency, and thwart illicit use. Accurate blockchain data analysis is crucial for compliance — discover how it works in our guide.
What is blockchain analytics?
Data science deals with algorithms, mechanical processes, and statistical analysis techniques. Big data, a buzzword since the early 2000s, reflects the increasing diversity, volumes, and velocity of information handled by organizations. This phenomenon has given rise to new analytical methods that uncover trends, patterns, and correlations, detecting connections invisible to the naked eye.
In the crypto space, data analytics traces and evaluates transaction data and interconnections between wallets and real-world identities. Using on-chain tools, investigators, regulators, and compliance teams peer deep into the data generated on distributed ledgers. They gain insights revealing flows of funds and interrelationships between specific transfers.
Reasons to apply blockchain analytics
Crypto is an alternative financial universe that replaces centralized control with transparent and automated networks. Although blockchain technology is used beyond finance — in supply chain management, health data exchange, royalty accounting, and other domains — its role in finance is pivotal.
Blockchain analytics and crypto adoption are developing hand in hand. While digital assets have freed users from oppressive oversight, they have also created new avenues for crime. Combined with rising regulatory concerns, they underlie the spread of digital systems providing valuable insights into cryptocurrency transactions. This software helps federal agencies analyze data to keep up with the market's growth.
Furthermore, while the global regulatory landscape is fragmented, cybercrime is on the rise. According to Chainalysis, cryptocurrency theft saw a fivefold increase in 2021 to $3.2 billion year-over-year. Meanwhile, money laundering from ransomware and other attacks amounted to an additional $8.6 billion.
- Due to the sheer volume and complexity of crypto transactions, humans are incapable of monitoring blockchain activity with all its interwoven threats. Machine-scale analytics, in comparison, can drill down and organize data, analyze it, and present intelligible insights.
- While the crypto economy upends conventional regulatory processes, agencies need mechanisms to detect and prevent crime and ensure compliance with the existing statute. Data analytics builds their confidence in the crypto ecosystem.
How blockchain analytics works
Data stored on blockchain networks is coded and validated in shared and immutable public records. Analytics tools can scrape these records and organize their contents in a way that uncovers the links between different crypto wallets. This process can achieve several goals.
- Detect anomalies to reduce the risk for all system participants.
- Segment out specific types of transactions.
- Identify trends and reveal relationships with other data sources.
- Identify and flag payment fraud as it unfolds, enabling responsible parties to freeze suspicious transactions.
Aside from reports and tables, blockchain analytics uses graph database technology to illuminate connections. It turns nodes into data entities to show which wallets are connected to which wallets and how. When person A pays person B, their nodes intersect. As a relationship representation, graph databases are more relevant than charts.
How blockchain technology transforms data analytics
Blockchain analytics is highly practical. Bringing together analysts, developers, data owners, and end users facilitates efficient tracking and analysis of financial flows. Compared to standard analytics, this field has six key distinctions stemming from the characteristics of any public blockchain.
Relationships between different users are direct, peer-to-peer, while the transparency of ledger channels lets them trace data from the point of entry to the exit. As a result, all asset transfers on any network leave a detailed audit trail of transactions.
Real-time and predictive analytics
In conventional finance, real-time analysis is complicated. Blockchain analytics allows teams to examine transactions as they unfold and spot irregularities at any stage.
The combined power of computers in a blockchain network resembles a physical supercomputer. Companies of any size can access predictive insights — all they need is an internet connection and pay-per-use software.
Data on blockchains are stored in public or private nodes. Any input is scrutinized and cross-checked at the entry point, so only verified data appears in new blocks.
Smooth data sharing
Like a shared spreadsheet, blockchain data insights enable collaboration. Any number of employees can view, transfer, and access it in real time. Managing data without paper saves time and reduces costs, resulting in a smooth flow of information and streamlined administration.
Better data integrity
Blockchain analytics has given businesses new ways to protect and verify data. Unlike conventional systems, it lets them combine different sources without the risk of duplicates or errors. Data pulled from distributed ledgers is immune to distortions as authenticity is checked at every block.
Furthermore, this cross-checking involves multiple signatures. The need for an exact signature match at every step makes hacks and leaks less likely. Finally, all records are immutable — no one can delete or change a blockchain record once it has been created.
Every crypto transaction is recorded on a cryptographic distributed ledger. The use of sophisticated mathematical algorithms ensures security and fidelity — the crypto in cryptography. As all records are immutable and irreversible, they are also binding and impossible to forge.
Use cases of blockchain analytics
Like blockchain technology itself, this data analytics arsenal has many applications. It is used by traders, investors, exchanges, and state entities. Here are some of the biggest use cases on the federal level.
Criminals use crypto to hide their financial flows from prying eyes. Yet blockchain analytics can tell investigators who was talking to whom and what was the scope of their activities.
By connecting the dots via data graphs, agencies reveal links between parties involved in illicit operations, such as terrorist financing. Reliable insights into the economic activities of individuals and entire nations facilitate effective decision-making to ensure compliance and fight crime.
AML compliance and fraud detection
Blockchain analytics gives a complete picture of blockchain activities with the directions of all money flows. Knowing where and how the funds go helps corporate compliance and law enforcement's anti-money laundering efforts.
Criminals may use multiple wallets, non-compliant crypto exchanges, and other disguise techniques. Armed with analytics tools, investigators can spot and dissect such suspicious patterns. Furthermore, they can identify the actors behind dubious actions as cryptocurrencies are pseudonymous.
The volatility of the crypto market partly stems from perceived value and fragmented regulations. Given its fast evolution, it could theoretically reach a point where structural vulnerabilities and "increasing interconnectedness with the traditional financial system" threaten global financial stability, as noted by the Financial Stability Board.
Smart contracts, which are crucial for DeFi, are powerful but not foolproof. Criminals may exploit bugs or vulnerabilities in the code to steal funds. For instance, in October 2021, a hacker manipulated a crypto fund managed by Indexed Finance into conducting a trade that cost the firm $16 million.
Hence, analysts need to monitor market movements, track participants, and assess transaction fairness. Blockchain analytics uncovers trading patterns associated with smart contracts, enabling compliance tracking and enforcement.
Economic activity analysis
Data graphs illuminate crypto transfers across the world. As the Russia-Ukraine conflict has shown, regulators need tools for tracing and evaluating such cross-border transactions on a national level. Blockchain analytics helps them achieve this goal by giving a clear picture of crypto flows on a global macro scale.
Top 10 tools for blockchain analytics
Blockchain analytics is developing at breakneck speed to keep up with the crypto industry. While many companies merely expand on existing toolsets, the leaders focus on perpetual innovation to go beyond uncovering transaction patterns. Here are ten prominent names in the blockchain analytics industry.
Elliptic, a World Economic Forum Technology Pioneer, covers over 98% of global trading volume, serving over 100 customers in 29 countries. It has labeled over 1 billion crypto addresses and has an impressive track record in surfacing fraud, terrorist financing, money laundering, and other types of financial crime.
The company's services cater to crypto firms, financial institutions, and regulators. Using over 100 billion data points, Elliptic provides actionable insights for over 500 digital assets. Its holistic screening solution gives a single view of risk across all assets and blockchains. Aside from crypto investigations and wallet and transaction monitoring, it offers comprehensive screening of VASPs.
TRM serves financial entities, crypto businesses, and state agencies around the world, including Binance and Circle. Its graphs trace crypto flows across 23 blockchains and over a million assets, while the customizable risk-based rules engine is equipped with over 80 risk categories and instant alerts.
The company's analytics, available in three software packages, generates in-depth risk profiles for wallets, addresses, and entities. For example, TRM Forensics links suspicious transfers from wallet addresses to specific actors and real-world identities. Meanwhile, TRM Know-Your-VASP helps companies assess counterparties, and TRM Transaction Monitoring includes AML/CFT compliance solutions.
The Chainalysis software maps over one billion addresses and 16,000 entities for effective monitoring and flagging. It boasts nearly 1,000 customers, including government agencies, exchanges, and private institutions in over 70 countries. Giants like Barclays and BlockFi trust the company's investigation, compliance, and market intelligence software.
Chainalysis transforms on-chain data into actionable insights and connects transactions to real-world actors. The company has built "the world's most trusted blockchain knowledge graph for Web3, just as search engines did for Web2." Evidence of suspicious activities is verified through advanced research that involves automated intelligence, forensics, and "rigorous evaluation processes."
CipherTrace, initially funded by DARPA and the US Department of Homeland Security Science and Technology, focuses on crypto forensics and compliance. It protects financial firms from crypto-related threats, helps them enhance due diligence, detect fraud, and comply with sanctions, AML laws, and travel rules.
The CipherTrace tools de-anonymize cash flows using machine learning and multiple data points collected weekly. This company is trusted by crypto platforms, ATMs, major banks, wallets, and other Virtual Asset Service Providers (VASPs). CipherTrace offers four solutions: Armada (crypto risk and fraud control for financial institutions), Investigator (forensics), Sentry (AML), and Traveler (Travel Rule compliance).
This New York-based company focuses on enterprise-level crypto analytics, positioning itself as "the first universal blockchain search engine and institutional-grade crypto forensic solution." Its platform delivers insights to financial service providers, government agencies, and institutional asset managers.
Elementus uses a blockchain index methodology similar to Google's web crawler and indexing. Its data revelations in relation to the 2019 bankruptcy of QuadrigaCx, Canada's largest crypto exchange at the time, brought it global recognition. The company also provided insights into the hack of Cryptopia, a New Zealand CEX. Today, it offers three products: Radar for compliance, Echo for custom analytics, and Pulse for targeted investigations.
On Messari, users can trace the movements of specific trading pairs on dozens of exchanges in real time. Its daily insights concern the top crypto sectors, including DeFi, Web3, and NFTs. Messari's graphs visualize data based on customizable cryptoasset lists for trading, compliance, and general knowledge.
Messari Pro facilitates asset comparison with custom screeners and a broad catalog of time series metrics for hundreds of cryptocurrencies. Messari Enterprise streamlines team information flows by monitoring key sources, governance decisions, and communication channels. It covers leading base protocols, DeFi crypto, pre-launched networks, and more.
Dune Analytics lets users extract blockchain data for free, as it embodies the Web3 philosophy. It features dashboards for hundreds of projects, including DeFi protocols and NFT collections. Users turn raw blockchain data into easy-to-read charts to examine DEXs, lending protocols, L2 Ethereum solutions, and more.
The members of this community-owned environment can publish data and comment on it. As of now, the platform devotes most of its attention to DeFi, offering insights for Ethereum, Binance Smart Chain, and Gnosis Network. Users are not charged for querying blockchain data with SQL, creating dashboards, or sharing charts. The paid plan — Dune Pro — lets them keep queries and dashboards private, remove watermarks, and run more queries at once.
CryptoQuant is a community-driven source of analytics supplying on-chain and exchange data. To help investors make informed decisions, it pulls insights from blockchain networks and spot and derivatives exchanges, including Binance and Bybit. CryptoQuant's audience includes over a million users worldwide, and it has appeared on Bloomberg and Forbes.
Free data covers hundreds of digital assets with limited on-chain history. Paid plans suit the needs of professional traders, industry experts, and small or early-stage institutions. Advanced, Professional, and Premium unlock options for more insight, such as enhanced resolution and up-to-date data, both network and market-based.
Bitquery's Coinpath focuses on on-chain surveillance and traces money flows using a set of API endpoints. It can reveal account balances, aggregate transfers to addresses, and form data clusters via "advanced machine learning models and heuristics." Users can see the origin and destination of transfers, transaction amounts, and flow paths, including connections to different services and VASPs.
Primarily, Coinpath serves financial institutions, exchanges, businesses, law firms, and regulators. Its visualized overviews help them ensure compliance and detect terrorist financing, money laundering, and other financial crimes. Exchanges can monitor customer data — user deposits and withdrawals — for “tainted” coins.
This leading compliance tool and blockchain analytics provider was launched by former AML executives of the Royal Bank of Scotland. By tracing fund movements across over 920,000 protocols and 25,000 crypto entities, Coinfirm helps businesses and regulators. Its client base features more than 300 companies worldwide, including PKO BP (the largest bank in Poland), Cardano Foundation, and Binance.
Coinfirm enhances corporate due diligence with its diverse investigation software, including a source-of-funds tool and free sanctions screening. Aside from tracking transactions, it facilitates risk monitoring, AML, FATF, and travel rule compliance. In addition, the company supports financial inclusion projects and contributes to the fight against human trafficking.
Blockchain data analytics in 2022 and beyond
The term blockchain analytics refers to a wide array of state-of-the-art tools that enhance the transparency of the crypto space. By analyzing data on blockchains, businesses, regulators, and law enforcement can achieve a wide range of goals.
This software not only spots suspicious transactions but also links them to real-world entities, so users can determine the source of illicit funds, prevent financial crimes, and guarantee compliance. At the same time, as blockchain analytics is a nascent field, its full potential likely remains to be discovered.
subscribe to our newsletter.
The information provided by CoinLoan (“we,” “us,” or “our”) in this text is for general informational purposes only. All investment and financial opinions expressed by CoinLoan in this text are from the personal research and open information sources and are intended as educational material. All outlined information is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information in this text.