What is Blockchain Analytics?
In order to understand what blockchain analytics is and how it works, we need to understand the principles of what a blockchain itself is and how it functions.
A blockchain is a decentralised database – a digital ledger – and is also referred to as a cryptographic-distributed ledger. In stark contrast to traditional financial systems, the blockchain is completely decentralised and is not governed by a central authority. Rather, the entire blockchain database is distributed among network participants, wherever they may be.
There are a number of advantages of this approach – it optimises resource distribution, data reconciliation, and has a far lower risk of systematic failure. In addition to this, all data stored on the blockchain is immutable, which makes it a reliable source of information that is free from the potential of human error.
Blockchain analytics is the name given to the process of collecting, identifying, interpreting, analysing, and visualising this data.
Blockchain analytics, particularly forensic-grade analytics, are frequently used as evidence in court cases involving missing or misappropriated crypto funds.
How Does Blockchain Analytics Work?
Blockchain analytics works by analysing and visually displaying data to help users find important details about individuals and transactions through evaluating, locating, and clustering data on the blockchain.
This process is not usually available to most users with traditional finance databases – most people do not have access to them.
What is Clustering in Blockchain Analytics and How Does Clustering Work?
Blockchain clustering is the process of aggregating blockchain data to reveal addresses that belong to the same owner. This method can identify an unlimited number of addresses based on one address that has been confirmed to belong to a certain individual or entity. It is essentially a process that deanonymises blockchain data. It works by using advanced algorithms.
Why use blockchain analytics?
Blockchain analytics can have a potentially endless number of applications. Here are some common use cases:
- Monitoring Illicit Activities
Law enforcement agencies are among the earliest and most prolific users of blockchain analytics. Many bad actors believe – erroneously – that blockchain is completely anonymous, and use it to channel funds gained from or to be used in illicit activities like the sale of narcotics and weapons, human trafficking, and financing terrorism. Blockchain analytics is an effective way of proving source of funds, demonstrating fund flows and patterns.
- Verifying Authenticity
Once added to the blockchain ecosystem, blockchain data cannot be changed or destroyed (unless the particular blockchain is programmed to do so). This means that blockchains are a very reliable tool for data authentication and identity verification – despite the increasing sophistication of techniques used by criminals.
- Making Educated Investment Decisions
Blockchain analytics allows interested parties to track money flows on the blockchain, making it an indispensable tool for anyone wishing to make informed decisions regarding investment and speculation. Given the relative novelty and potential volatility of crypto assets, investors must be particularly careful when choosing where to invest their hard-earned cash. Enter blockchain analytics.
Blockchain analytics are frequently used by governmental agencies to demonstrate that a given participant in the crypto ecosystem is abiding by the appropriate regulations.