Like diamonds, blockchain transactions are forever. A new breed of cyber sleuths examines every facet of blockchain transactions to investigate fraud, block risky transactions, and solve crypto mysteries. We discuss how blockchain analytics works and identify the top companies in the space.
What is Blockchain Analytics?
Blockchain analysis entails inspecting data generated on the blockchain to identify information about transactions. Different blockchains facilitate millions of transactions, making it difficult for the typical user to identify relevant information. Blockchain analytics is a process that makes it easier by applying sophisticated software and human input.
How Does Blockchain Analytics Work?Expand to learn more
The blockchain is a public cryptographic ledger, meaning all transactions facilitated through it are transparent for anyone to see. However, the available data only shows transactions between different wallet addresses that are usually anonymous. Cryptocurrencies have many legitimate use cases but they’re also abused to facilitate illicit activity. Hence, blockchain analytics providers attempt to trace wallet addresses and transactions to real-world identities to counter illicit use.
A common way that blockchain analytics providers trace wallets back to illicit activity is by checking if the wallet has previously transacted with another wallet linked to similar activity, e.g., a wallet address provided by a ransomware operator. If a wallet is found to transact large sums with a previously flagged wallet, it may signify that both wallets are owned by the same individual or group involved in the illicit activity.
Analytics providers also trace wallets by tying them to the know-your-customer (KYC) information provided to centralized exchanges; this applies only to custodial wallets. The provider usually assigns a risk score to each crypto wallet. Every business or financial institution working with the provider takes the risk score into account before authorizing any transaction with that wallet.
Blockchain Analytics Use Cases
- Blocking Risky Transactions: Financial institutions use the information provided by blockchain analytics providers to block transactions with any address tied to criminal activity in order to avoid legal liabilities.
- Identifying High-Risk Customers: Crypto exchanges employ blockchain analytics providers to identify wallet addresses tied to illicit activities and avoid authorizing transactions with the addresses via their platform.
- Due Diligence: Many crypto exchanges operate in areas with lax regulatory oversight. Blockchain analytics is useful for investors to confirm if exchanges actually hold the funds they claim to hold on behalf of customers and avoid getting in bed with dubious trading platforms.
- Fraud Investigations: Law enforcement agencies and regulators use the information provided by blockchain analytics firms to track the movement of stolen funds and retrieve them where possible.
- Suspicious Activity Reports (SARs): SARs are what crypto businesses and financial institutions are mandated by several countries, e.g., the US, to submit if they identify suspicious activity on their platforms. Such institutions employ blockchain analytics software to match wallet addresses to real-world identities and file more actionable reports.
Top Blockchain Analytics Companies
|Company||Year founded||Country of origin||Known customers||No. of employees|
|Chainalysis||2014||USA||Gemini, Luno, U.S. FBI||700|
|CipherTrace||2015||USA||Banks, crypto exchanges||<100|
|Nansen||2019||Singapore||Amber Group, DTC Capital||100|
|Coin Metrics||2017||USA||Goldman Sachs, BNY Mellon, Fidelity Investments||50|
|Elliptic||2013||UK||Santander, Coinbase, Revolut||100|
Chainalysis is the most well-known blockchain analytics provider. The company offers software called Reactor that enables users to visualize a complex web of transactions between different wallet addresses. Reactor maps addresses to real-world identities, enabling law enforcement to detect the source of illicit activities like darknet marketplaces and ransomware and even legal activities like mining pools and merchant services.
Chainalysis also offers a tool that assigns risk scores to transactions in real time and helps financial institutions identify potentially risky transactions. Likewise, the company has a team of analysts ready to trace transactions on-demand where the software alone won't suffice.
Chainalysis has the highest number of customers among all blockchain analytics providers, working with crypto exchanges, financial institutions, and law enforcement agencies around the globe.
CipherTrace is owned by Mastercard, a well-established payments processing company. It provides a repository of data that maps crypto wallet addresses to real-world identities, sanctioned entities, IP addresses, etc. This data repository helps financial and crypto institutions to decide which addresses to avoid transacting with.
Just like Chainalysis, CipherTrace also offers a tool that assigns a risk score to crypto transactions to enable users to avoid transacting with risky customers. CipherTrace has a smaller dataset than Chainalysis but is nonetheless growing its dataset with Mastercard’s help as time goes on.
Unlike Chainalysis and CipherTrace, Nansen is an analytics tool designed for everyday crypto investors. It offers a research portal that enables users to get relevant information concerning the mood of the crypto markets. For example, you can track gas usage to see which blockchains have the highest transactions at any given period, or you can track the top holders of a specific token or wallet.
Another noteworthy feature of Nansen is that you can get alerts when certain wallets move funds. This platform is best suited for investors seeking data to guide their investment decisions rather than law enforcement or institutions.
4. Coin Metrics
Coin Metrics offers a suite of products that lets users identify relevant information about the crypto markets. For example, you can find detailed information about trading activity on the top crypto exchanges, including quotes, order book snapshots, and specific trades. It also offers a risk management tool that enables users to identify abnormal transactions, e.g., an exchange signing hundreds of transactions per minute.
Both regulators, financial institutions, and crypto investors can use Coin Metrics to access a broad set of information concerning the crypto markets.
Elliptic offers a tool that creates visualizations of wallets and their corresponding transactions so that crypto exchanges and financial institutions can pinpoint suspicious wallets and block them. If you’re having problems determining whether a specific wallet address is suspicious or not, you can run the address through Elliptic Lens to identify the owner where possible and generate a risk profile.
Elliptic also offers a tool for law enforcement to trace transactions across blockchains in real-time and build actionable intelligence. Just like with Chainalysis, Elliptic’s customers can also work with the company’s team of analysts and data scientists to trace transactions.
To Sum it Up
Blockchain analytics represent an essential part of the crypto industry. Providers help keep the industry in check by enabling investors, exchanges, and financial institutions to avoid being implicated in illicit activity and drawing the ire of regulators. Analytics providers help increase trust and transparency in the whole crypto ecosystem.
Chainalysis is the most well-known blockchain analytics provider but it’s seeing increasing competition as of late from the likes of Elliptic, Nansen, and CipherTrace. We mentioned each of these platforms and what makes them unique to users.
Frequently Asked Questions
What does a blockchain analyst do?Expand to learn more
Blockchain analysts examine data on the blockchain to identify patterns such as related wallets and notable asset movements.
What are blockchain analytics tools?Expand to learn more
They are tools that enable investors, exchanges, and financial institutions to analyze blockchain networks and monitor transactions.
How do you analyze a blockchain?Expand to learn more
You analyze a blockchain by examining public transaction data and inferring patterns from them.
Are there any blockchain analytics courses?Expand to learn more
Yes, many online education platforms offer blockchain analytics courses, e.g., edX and Coursera.
How can you get a blockchain analytics job?Expand to learn more
Analytics companies like Chainalysis and Elliptic often post job openings on their websites, and you can apply from there.