Blockchain has often been mistakenly associated with illicit economic activities by skeptics, primarily due to its capacity to maintain user anonymity behind a series of hash codes. From the darknet to mixer products, crypto’s inherent anonymity appears to create more ambiguity and confusion for the traditional world and regulators.

Interestingly, we have also observed that within the crypto realm, when major institutions plan to move significant amounts of tokens, they often announce their intentions publicly on Twitter to avoid unnecessary speculation and unease among market participants. This level of transparency and openness to public scrutiny was rarely seen before the advent of cryptocurrencies.

So here arise some questions on blockchain data:

This article aims to explore these questions and provide insights into the complex relationship between blockchain and data transparency.

I. Difference between traditional and on-chain data analytics

Conventional and on-chain cryptocurrency data analytics aim to extract meaningful information from data sets.

Nonetheless, the distinctions in data source characteristics, data transparency, availability, and the unique challenges in each field differentiate these two approaches.

Traditional data analytics primarily deals with data generated from various sources, such as social media platforms, customer transactions, proprietary sources, or desktop research. This data often resides in centralized databases, and access to it might be limited or controlled by specific entities.

On the other hand, on-chain crypto data analytics focuses on analyzing data generated and stored on blockchain networks. Blockchain data is inherently transparent, immutable, and publicly accessible, allowing anyone to monitor the transactions and interactions taking place within the network.

This unique feature enables on-chain analytics to easily trace the movement of assets, monitor ecosystem health, and identify patterns that may reveal market trends or potential security vulnerabilities.

II. Problems that On-chain Analytics Can Solve

On-chain analytics can help in two main areas, with vastly different natures. One is for counter-terrorism and ensuring the health and safety of transactions, and the other is for data-driven investment decisions. By analyzing blockchain data, retail investors, organizations, and authorities can better understand and address market trends, security, and compliance issues.

Investment purposes

On the investment side, on-chain analytics offers valuable insights for investors, traders, and market analysts, with companies like Dune Analytics and Glassnode leading the way in providing these tools. These platforms help identify trends, patterns, and potential opportunities in the cryptocurrency market. For example, on-chain metrics such as transaction volumes, token distribution, or exchange inflows and outflows enable investors to assess market sentiment and make well-informed investment decisions.

Furthermore, on-chain analytics can uncover the behavior of large investors or “whales,” offering hints about potential market movements. This information allows traders to develop strategies accordingly. Companies such as Nansen provide specialized analytics focused on whale activities, giving investors an edge in understanding how these market movers might impact the overall market dynamics.

Here is a summary of the frequently used metrics that offer valuable insights into the behaviors of blockchain networks and their users:

AML purposes

AML stands for Anti-Money Laundering, and it’s all about stopping bad guys from making illegally earned money look legit. Governments and financial institutions use AML rules to monitor who’s doing what with their money. Cryptocurrency companies must follow these rules to keep things transparent and secure.

Why is it important? Banks are getting increasingly stringent about robust AML requirements for compliance and risk management purposes for cryptocurrency companies.

When crypto companies seek traditional banking services, such as opening an account, banks often mandate AML checks, including using on-chain analytics tools to scrutinize their clients’ transactional history and risk profiles. Financial institutions and regulators, such as the Office of Foreign Assets Control (OFAC) in the United States, are increasingly adopting these tools to monitor and enforce compliance with AML regulations.

OFAC regularly updates its sanctions list to keep up with global security threats and ensure financial institutions remain compliant. Staying up-to-date with these changes is crucial for businesses to maintain compliance and avoid penalties for inadvertently dealing with sanctioned parties.

Companies like Chainalysis, Oklink, and TRM Labs provide specialized AML solutions for financial institutions and regulators to ensure compliance with AML regulations. By detecting and addressing these activities, financial institutions can mitigate risks, maintain their reputations, and avoid substantial fines or sanctions from regulatory bodies like OFAC, FinCEN, and other global authorities.

Related concepts concerning AML(Anti-Mondy Laundering) and CTF (Counter Terrorism Financing) include KYT (Know Your Transaction), KYC (Know Your Customer), and EDD (Enhanced Due Diligence).

KYT (Know Your Transactions): This process helps detect potential money laundering, terrorist financing, or other illicit activities by examining transaction details, such as the origin, destination, amount, and frequency.

KYC (Know Your Customers): KYC procedures typically involve collecting personal information, such as name, address, date of birth, and identification documents, to confirm a customer’s identity.

EDD (Enhanced Due Diligence): EDD is a more in-depth investigation of customers who are considered high-risk due to their activities, geographic location, or connections to politically exposed persons (PEPs).

III. Selected Examples for On-chain Analytics Tools

Dune Analytics

Dune Analytics is a community-based platform that helps people analyze and visualize data from different blockchain networks, such as Ethereum. It provides a user-friendly interface for querying and exploring blockchain data, allowing users to gain insights into how these networks are being used and changing over time.

The primary target audience for Dune Analytics is data analysts, data scientists, and developers who work in the crypto industry. It starts by collecting on-chain data from various blockchains, including Ethereum, Polygon, BSC, and others. Data analysts can then use the Dune Analytics interface to write queries that retrieve specific data from these networks using SQL.

Once users have retrieved the data they need, they can use dune’s visualization tools to create charts, graphs, and other visualizations to help them develop insights from the data.

Dune Analytics is an open-source platform, which means its source code is freely available to the public. It encourages community contributions to its development by contributing code, data, bug reports, and other forms of support. As a result, it runs on a freemium model, meaning it offers free services to its users but premium features to paid users and enterprise services. To date, Dune Analytics is one of the industry’s largest and most crypto-native data analytics platforms. It reached a $1B valuation in 2022.

Nansen

Nansen offers real-time data updates, which can be particularly useful for investors and traders who need up-to-date information to inform their investment decisions. This can include tracking large transfers of tokens or monitoring changes in trading volumes. On the other hand, Nansen is firm regarding data analysis of ERC-20. It allows users to track token ownership, flows, and other vital metrics.

Nansen’s target audience is more people who may not have a data science background. Its user-friendly interface is handy for individuals or investment firms who need quick and easy access to visualized insights into blockchain data. Its clientele includes cryptocurrency-focused funds such as Polychain, Pantera, and Defiance Capital.

DappRadar

DappRadar is an excellent example of a data analytics and visualization tool for a specific sub-sector of blockchain. Its focus on tracking dApps differentiates it from Nansen and Dune Analytics, and has gained a considerable user base.

While tracking dApps and tokens all involve analyzing data on a blockchain network, they involve different focus and data sources, providing different insights into the performance of the networks. Tracking dApps consists in analyzing data related to their usages, such as the number of daily or monthly wallets (a Web3 equivalent of users), the frequency of transactions, and the nature of the transactions that are taking place inside dapp ecosystems. This can help investors and developers understand which dApps are gaining more traction, growth opportunities, and popularity. On the other hand, focusing on tokens like Nansen does involves analyzing data related to their ownership, transfer, and use, such as the number of tokens in circulation, the number of transfers, and the trading volumes.

DappRadar also offers a Token explorer tied to each unique dapp ecosystem. DappRadar’s Token explorer is currently compatible with Ethereum, Binance, and Polygon-based tokens. In addition, DappRadar users can track their Ethereum wallet holdings, NFT portfolio, and DeFi positions with its Portfolio Tracking Tool.

DappRadar’s user-friendly interface, real-time data updates, and dApp ranking make it easy to access and stay up-to-date with the latest developments in the dapp ecosystem, further strengthening its appeal to investors and developers alike.

IV. Selected Examples for On-chain Safety Tools

OKLink

As one of the earliest companies involved in blockchain, OKLink stands out for its capabilities in three ways: fundamental on-chain data, AML solutions, and on-chain data analysis.

The recorded on-chain data exceeds 1020 TB, enabling full-node data analysis of more than 30 public chains. The transaction data on the chain is as high as 63 billion, with multi-dimensional address and address label data exceeding 2.7 billion.

OKLink has enabled complete data analysis for over 30 blockchains, providing various on-chain data services such as query, retrieval, and verification. The platform presents data to users more intuitively and concisely, utilizing labels, block resolution, contract resolution, and other advanced capabilities.

In addition to its data and analytics tools, OKLink offers AML and KYC compliance tools to ensure the safety and security of its users. These compliance tools include wallet address monitoring, real-time transaction tracking, and identifying and verifying users’ identities.

OKLink’s comprehensive suite of products and services, combined with its long history in the industry, make it a valuable resource for anyone looking to engage with the blockchain ecosystem.

Chainanalysis

Chainalysis is a famous on-chain safety tool for cryptocurrency users. It’s known for providing reliable and accurate data on blockchain networks and cryptocurrencies, from tracking transactions to monitoring network activity and analyzing market trends.

One of the reasons why Chainalysis is so popular is because of its advanced AML and KYC compliance tools. These tools are used by many businesses and financial institutions to ensure that the parties involved in transactions are compliant with regulatory requirements.

Chainalysis KYT supports over 25 blockchains and produces numerous address labels like ATM, Darknet Market, DEX contract, Fraud Shop, and more.

Chainalysis offers a suite of products, including Playbook and Kryptos. Playbook’s Address Screening tool is a key feature that allows businesses to screen cryptocurrency wallet addresses against various blacklists and watchlists.

Kryptos is a cryptocurrency tracking tool integrated into the Chainalysis Playbook platform. It allows organizations to monitor the use of specific cryptocurrencies across different blockchain networks, helping them identify investment opportunities and mitigate potential risks.

TRM Labs

TRM Labs has extensive experience working with crypto businesses and the public sector. For example, law enforcement and regulators use the tool to graph the flow of funds and cross-chain analytics on the blockchain. On the other hand, it services many financial institutions, such as banks and hedge funds, as these institutions need compliance tools to monitor and manage the risks of their cryptocurrency activities. TRM is also deep in proprietary data analytics, research, and risk attribution work.

The “Know-Your-VASP” product from TRM Labs is in high demand among financial institutions because it helps them comply with AML and KYC regulations when they deal with virtual asset service providers.

In February 2022, JP Morgan invested in TRM Labs as part of their efforts to build safer blockchain products. As TRM Labs’ founder Esteban Castaño commented on this investment during an interview, “A big bank could pull a report from TRM to get the overall risk profile of, say, a large cryptocurrency exchange, and then decide if they want to serve that exchange.”

V. Conclusion and Challenges

On-chain analytics tools are mushrooming to meet the growing demand for data and insights related to blockchain networks. Other popular tools include CoinGecko, CoinMetrics, and Etherscan, each offering unique features for tracking the performance of cryptocurrencies and blockchain networks.

Two significant challenges to on-chain analytics and safety tools that are remained unsolved are mixer attacks and Sybil attacks.

Mixer attacks mix cryptocurrencies from different sources, making it hard for on-chain analytics tools to track where funds are coming from or going. People can use this technique to hide illegal activities such as money laundering or financing terrorism.

On the other hand, Sybil attacks involve creating fake identities or nodes to control the network and make false transactions. These tricks on-chain analytics tools into believing that some transactions are real when they’re not.

These attacks are a real pain for on-chain analytics and safety tools that need reliable data to spot potential risks or stop fraud. To combat these emerging challenges, on-chain analytics and safety tools must continuously evolve and develop new techniques to detect and prevent these attacks. This requires ongoing research and development and collaboration with industry experts to stay ahead of emerging threats and ensure the safety and security of the blockchain ecosystem.

This article is written by Paige Xu (OKX Ventures Investment Manager), with key contributions from Abby Li (OKLink BD manager), Pedro Herrera (Head of Research and Analytics at DappRadar), and Claire Xie (Data Scientist at Dune Analytics).

Read more: https://medium.com/@okxventures/decoding-blockchain-data-enigmas-with-on-chain-analytics-and-safety-tools-c8c463ce5d0a