What Is On-Chain Analysis And Why Is It So Important?

Advisor’s Takeaway – On-Chain Analysis – Your preferred tools to KYC, where their crypto assets are today, where the assets came from and where the assets are headed.

Savvy on-chain analysts watched as millions of dollars in value worth of bitcoin disappear during the sudden demise of the cryptocurrency exchange FTX. For better or worse, the blockchain offers financial transparency unmatched by anything else, giving portfolio managers, financial analysts, investors, and more an ally in the battle to establish the legitimacy of digital assets.

Blockchain analytics, or on-chain analysis, emerged to leverage blockchain technology’s advantages over its traditional counterpart. It involves extracting, analyzing and interpreting blockchain data. With access to the right tools and data sources, financial analysts, compliance officers and law enforcement investigators can harness the power of blockchain analytics to gain valuable insights into the transactions made by their subjects and clients.

TripleA’s estimate for the worldwide number of individuals who use cryptocurrency was more than 420 million at the start of 2023, and this is a significant average global ownership rate of 4.2%. The insight from blockchain analytics is generally becoming increasingly important as more investors and businesses adopt crypto. 

That insight can be used for regulatory compliance, detecting suspicious activities and avoiding risk and legal liabilities. By leveraging blockchain analytics, businesses can improve the efficiency and transparency of their operations, as well as gain a competitive edge in various industries.

The Different Types of Blockchain Data

Understanding the different types of data associated with the blockchain is essential to tracing and analyzing crypto transactions effectively. Investigators specializing in blockchain investigation often rely on multiple data types to carry out their work.

The two most common types of available data are on-chain and off-chain data. 

On-chain data mainly includes transaction inputs and outputs, block times, transaction counts and fees associated with the transactions. On-chain data provides a record of all transactions on the blockchain ledger.

What Is On-chain Analysis?

On-chain analysis is a subset of blockchain analysis focusing on interpreting on-chain data. From a risk management standpoint, on-chain analysis is a must-have and can be powerful when used to uncover potential money laundering or fraud schemes.

The process involves analyzing blockchain transactions and the wealth of data surrounding them, including the addresses that send and receive the money and the network nodes responsible for processing those transactions.

At first glance, the world of cryptocurrencies and blockchain technology may feel (and look) confusing and chaotic. It’s natural to feel that way, as the amount of data available is vast. Fortunately, On-chain analysis provides a way to make sense of the data and better understand what’s going on. 

Why Do You Need On-Chain Analysis?

Investigators, Compliance, AML and financial analysts must detect potential risks and threats before they become problematic. With on-chain analysis, this is possible:

1. 1. Detect fraudulent activity: On-chain analysis can help to detect this type of activity by tracing the movement of funds and identifying suspicious patterns of transactions.
   2. Prevent market manipulation: On-chain analysis can help to monitor transactions designed to influence the market and mitigate their impact.
   3. Avoid compliance and regulatory risks: On-chain analysis can help businesses and enterprises achieve compliance with regulatory requirements and avoid penalties for non-compliance.

Despite its many benefits, on-chain analysis can be challenging. One of the biggest challenges while analyzing blockchain data is the sheer volume of data available. Additionally, some data can be challenging to interpret or correlate, requiring specialized skills and training.

To summarize, On-chain analysis may seem complex and daunting at first; however, as the industry continues to grow and evolve, innovative tools are developing to reduce complexity and make this process more accessible and user-friendly.

Testimonials

Kyeson Utley, Cyber Intelligence & Operations of SpookyGood LLC, a private investigation firm specializing in cybercrimes, cyber investigations, blockchain forensics, & cybersecurity consulting uses on-chain analysis to investigate and close crypto fraud cases for a variety of firms, individuals, and U.S. Government and Law Enforcement bodies.

Mr. Utley said, “By adding QLUE to our investigations, & leveraging our tailored intelligence tactics, not only were we able to locate a wallet address totaling near 1 million dollars of stolen digital assets from a complex romance scam & fraudulent exchange platform; we were able to identify the country of origin and the true identity of the bad actor involved. Once determined, we were able to negotiate with the bad actor directly to have their platform taken down, & the safe return of our client’s funds immediately. QLUE is absolutely vital to our blockchain investigations, & we are proud to use them exclusively.” 

“In two instances so far we’ve brought forensic evidence to the court using QLUE and I’ve successfully managed to get what we call a preservation order granted by the court based on my forensic report in the QLUE outputs, and that’s a first in South African case law. So, what that means is all future cases that are blockchain related where there are funds to be seized will then reference that case. In both instances, the court granted the order based on the QLUE outputs, “ said Thor Pedersen, ACFE Fraud Investigator, TCG Forensics, South Africa

What is Off-chain Analysis?

Off-chain data, such as social media posts and KYC information, can be used to reduce the anonymity of individuals or entities behind specific crypto transactions. This analysis is especially useful when understanding the motivations and intent behind individual entities or groups of investors.

We can reduce the likelihood of disruptions, liabilities and time loss by leveraging data on-chain and off-chain, using appropriate tools and taking proactive measures to mitigate risk.

Example Of An On-Chain Analysis Tool Set

QLUE™ is an essential cutting-edge blockchain analytics tool that is specifically designed to support investigators in their work. QLUE™ gives investigators the ability to access a wealth of information on the blockchain with just a few clicks, making it easier for them to track transactions and build their cases.

QLUE™ leverages on-chain data to provide a complete picture of the flow of funds, and using verified attribution data, it helps investigators in law enforcement and financial institutions quickly find leads and close cases. 

It also strengthens an investigator’s case in court by providing a clear and irrefutable record of transactions. In 2022, QLUE™ evidence helped win 10s of millions in digital assets in 2 court cases. 

Powerful Visualization

Blockchain transactions are faster and easier to perform than their traditional counterpart. They allow for fast, secure and cross-border transactions without the need for intermediaries. Investigators and compliance officers need to expect a relatively higher volume of transactions per case while analyzing crime involving crypto transactions.

QLUE™’s powerful visualization features make cryptocurrency investigations easier and more efficient. Its ability to graph and customize data helps investigators quickly identify and track criminal activities, even over large volumes of transactions. 

This can be especially helpful when criminals attempt to obfuscate the trace of funds or move them cross-chain.

Data Extraction and Analysis

Running advanced analysis on transaction data is an essential technique that financial analysts and investigators use to get an in-depth insight into financial activity. QLUE™ enables this in cryptocurrency transactions with capable data extraction features that cover transaction value, volume, start and end points, and more. 

Financial analysts can look through transaction history data to find trends, outliers and possible risks that may have an influence on the business’s financial health. By looking at transaction data, investigators can spot potentially fraudulent behaviors including odd volumes or unexpected transaction patterns.

Moreover, in the case of financial crime or legal problems, the transaction data may be utilized as evidence in court and legal actions.

On-chain analysis success checklist

When a cryptocurrency case is at hand, it’s vital to identify the different blockchains involved. The infrastructure of each blockchain and the transaction procedures of their native currencies and tokens may different from one blockchain to another.

To efficiently perform analysis on crypto transactions and leverage the set of on-chain analysis tools available to you, there’s a number of questions that need to be considered.

• • What chains am I investigating?

• • Does my on-chain analysis tool support those blockchains?

• • Does it have sufficient attribution data?

• • Does it assess the risk of fraud, scam or non-compliance behind each transaction?

Those are essential questions that your on-chain analysis strategy ought to answer in order for your analysis to have solid results.

Trading in cryptocurrencies comes with significant risks, including volatile market price swings or flash crashes, market manipulation, cybersecurity risks and the risk of losing the principal or all of your investment. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures or foreign exchange investing.

Learn more at www.qlue.io