What Is Blockchain Analytics: Definition, Tools and Techniques

A blockchain is a type of database that stores valuable transaction data in the form of cryptographically linked blocks on a shared ledger. As this technology continues to evolve and gain traction, copious amounts of data are being stored on blockchain networks and generated as more transactions are carried out. This phenomenon has given rise to a concept known as blockchain analytics, which involves using various analytical methods to uncover trends, patterns, and correlations in blockchain data. 

Blockchain analytics can have far-reaching impacts on a blockchain development company, inventors, regulators, and other players in the industry. It helps to uncover insights about users and transactions on a blockchain network with applications in fraud detection, risk management, market intelligence, and other use cases.

In this post, we will explore how blockchain analytics works, its benefits and challenges, and how it can be used across various industries. 

• A blockchain network generates copious amounts of data relating to transactions, wallet activities, smart contracts, and so on. Analyzing these numerous data points will help uncover valuable insights useful across various industries. 
• Blockchain analytics can help uncover trends, patterns, and valuable information that may be valuable to stakeholders in the blockchain ecosystem. 
• Blockchain analytics provides a clear view of all transactions on a blockchain network used for compliance, fraud detection, law enforcement, and informed decision-making.

Blockchain Analytics Fundamentals – What Is Blockchain Analytics?

Blockchain analytics refers to the process of inspecting, interpreting, understanding, and visualizing data generated in blockchain environments in order to derive valuable insights from them. This form of blockchain data analytics may involve monitoring and scrutinizing various aspects of blockchain networks including blockchain transaction data, user addresses, smart contracts, and a wide range of other activities. 

The goal of blockchain analytics is to uncover trends, patterns, and valuable information that may be useful to stakeholders in the blockchain ecosystem. A thorough blockchain analytics will uncover insights that may be otherwise obscured in the vast amount of data collected and stored unless they’re analyzed. 

How Does Blockchain Analytics Work?

Transactions are the foundation of all activities on a blockchain network and they’re the building blocks of the blockchain itself. Every transaction, which represents a transfer of value between participants on the blockchain network is stored on the blockchain after they have been validated by the network nodes and coded based on the blockchain protocols. 

The transparency of blockchain transactions is one of the key factors that makes blockchain analytics possible. Every transaction is stored on a public ledger visible to anyone who would like to view and verify the transactions. 

Analytics tools can be used to scrape these records and collect and examine their contents in a way that uncovers the connection between different blockchain wallets and shows transaction trends, patterns, and timings. The specific goals of the analytics project and the insights you intend to drive will determine how the data will be processed. This will also influence the type of data analytics techniques the data will be subjected to. 

Due to the sheer volume of blockchain data and the complexity of transactions, machine-scale analytics tools and advanced techniques are often applied to blockchain data. These can drill down on the data, and reorganize and analyze it to generate and present intelligible insights. 

For instance, heuristic analysis, which involves using predefined rules and algorithms to analyze data can be used to extract insights from historical data based on anticipated predictions. On the other hand, machine learning algorithms can help detect trends and patterns that you didn’t even know were there in the first place. 

Why Do You Need Blockchain Analytics?

Think of all the vast amounts of data stored on a blockchain network and generated by the second as transactions occur. The key to extracting any real value from all of these data is through blockchain analytics. 

Businesses operating within the blockchain industry are positioned to benefit from blockchain analytics in several ways. They could look to past trends and patterns to understand past behaviors in order to benefit from hindsight or identify anomalies. This is valuable in areas like fraud detection, network health reporting, and so on. 

On the flip side, blockchain analytics may also be in the form of predictive analysis which aims to use past data to predict or forecast future trends. This goes beyond merely screening past data to creating statistical models that will inform future action. Predictive analytics can be useful for risk assessment and mitigation, or market research for new projects such as blockchain app development. This makes it a valuable tool for informed decision-making. 

Thanks to new technologies such as streaming analytics, blockchain analytics can also be done in real time. This provides actual monitoring capabilities allowing for quick detection of erratic and suspicious activity, which can be useful for fast detection and remediation of suspicious transactions on a blockchain network. 

Benefits of Blockchain Analytics Tools

Blockchain analytics provides a clear view of all transactions, blocks, networks, and smart contract data on a blockchain. A closer look at these data points using complex blockchain analytics tools can help generate insights with different impacts on various sectors. Some of the most notable benefits of blockchain analytics include:

• Regulatory Compliance
• Preventing Fraud
• Managing Risks
• Detecting Criminal Activities
• Competitive Edge
• Increased Trust

Regulatory Compliance

Blockchain already has a reputation for being a transparent and immutable record of transitions. Blockchain analytics enables efficient monitoring of cryptocurrency transactions to identify and address potential regulatory compliance issues promptly. Analyzing blockchain data can also help organizations comply with data privacy regulations by ensuring secure data storage and access controls.

Preventing Fraud

Analytics tools can be used to analyze wallet addresses and their interactions for suspicious activity. This may uncover unusual transaction patterns that may indicate potential scams or fraudulent activities, flagging them before they occur.

Managing Risks

A thorough analysis of transactional data on cryptocurrency exchanges can help you get valuable insights into market trends, token performance, user preferences, and so on. These are insights that can guide decision-making for investors, and other stakeholders, so they make decisions that are more productive while avoiding risky transactions. 

Detecting Criminal Activities

Blockchain analytics is crucial for identifying and mitigating criminal activities on a blockchain network. By analyzing transaction patterns and trends, businesses can detect suspicious activities either before they occur or while they are ongoing.

This is particularly important for companies that handle sensitive transactional data where the impact of such malicious activities can be costly. Analyzing historical data generated in the crypto ecosystem can also help generate incident reports and insights on past illicit transactions, potentially apprehending the perpetrators. 

Competitive Edge

For businesses that operate on the blockchain, analytics can help them generate insights that will be valuable in staying ahead of competitors within the same industry. Analytics can provide information about details that might have been overlooked by competitors and help businesses make strategic data-driven decisions. 

Increased Trust

Frequently analyzing data and providing comprehensive reports about blockchain operations can help businesses build stronger relationships with stakeholders (customers, partners, and investors) thanks to increased trust. 

Challenges of Blockchain Analytics

Blockchain data analysis has become quite vital for businesses, developers, and investors that operate in the decentralized realm. However, blockchain technology is still evolving and there are a lot of challenges that stem from this. Some of these challenges include:  

• Data integrity and validation: Data integrity is one of the hallmarks of blockchain technology. Blockchains use various consensus mechanisms such as proof of work and proof of stake to ensure the immutability of data. However, this still doesn’t guarantee the accuracy and reliability of the data, especially in permissionless environments like public blockchains. This calls the quality of insights generated from such data into question. 
• Complexities of decentralization: While efforts are underway to ensure the interoperability of blockchain networks, the majority of blockchains still operate as isolated islands of some sort with different data structures and consensus protocols. This can complicate data analysis especially when you need to draw data from multiple blockchains. 
• Data privacy: Decentralized projects typically promise user privacy as one of their core attributes. While this is great because it protects the rights of users, it can pose difficulties for anyone seeking to access and analyze data from the blockchain to gain insights. 
• Compliance with regulatory standards: There are still a lot of uncertainties regarding the regulatory frameworks for the blockchain industry. The laws in most countries provide no context for handling blockchain data, creating uncertainties for businesses, investors, and developers who might be interested in analyzing blockchain data. 

Top Blockchain Analytics Tools

As blockchain analytics continues to evolve to keep up with the development of the crypto world, there has been a corresponding rise in the number of proprietary and open-source blockchain solutions available for blockchain analytics. Some of the biggest names in this segment of the industry include: 

Elliptic

Elliptic is a blockchain analytics and crypto compliance solution. This tool offers a wide range of services including wallet screening to generate risk profiles in real-time, fully automated transaction monitoring, crypto investigations, and virtual asset screening. So far, Elliptic serves over 100 customers across 29 countries including crypto firms, financial institutions, and regulators within the industry. 

TRM Labs 

TRM is a blockchain analytics provider with an intelligence platform that analyzes data to detect crypto crimes and conduct investigations. The company frequently partners with crypto businesses, financial institutions, and government agencies all over the world. TRM offers three software packages for blockchain analytics. This includes a forensics tool for crypto investigations (TRM Forensics), a virtual asset screening tool (TRM Know-Your-VASP), and a crypto transaction monitoring analytics tool that can help generate a suspicious activity report. TRM currently traces crypto flows across 23 blockchains and over a million assets across multiple wallets. 

Chainalysis

Chainalysis is a blockchain analytics provider with crypto compliance and blockchain intelligence capabilities with tools for transforming on-chain data into actionable insights. The company’s goal is to build a trusted knowledge graph for Web3 that’s equivalent to search engines for Web 2. The Chainalysis software currently maps over one billion addresses connected to real-world entities for effective monitoring and flagging.

Elementus

Elementus is a blockchain intelligence solution that helps companies make faster and better decisions based on blockchain data. It has an intelligence platform that provides an in-depth view into a wide range of on-chain data sets empowering organizations to make strategic decisions with data. Elementus also offers a market analysis solution that provides full visibility into on-chain activities in real time. The company focuses on enterprise-level crypto analytics providing insights to government agencies, financial service providers, and institutional asset managers.

Blockchain Analytics in Different Industries

As blockchain technology becomes more widely adopted, blockchain analytics will have a significant impact across a wide range of industries. Analyzing data is particularly important for industries with higher crime potentials such as financial institutions, insurance, retail, and so on. 

Finance

Given the popularity of the crypto economy and its potential impacts on the fiat economy, banks, insurance companies, and other related financial institutions need to invest in blockchain analysis to identify suspicious cryptocurrency transactions and money laundering activities that may be perpetuated using crypto channels. Analyzing crypto data will also help financial institutions assess the risks associated with specific entities or transactions. In the insurance industry, blockchain analytics work to identify patterns that may help prevent fraud and promote smart claims processing.

Healthcare

In the healthcare industry, blockchain enables the secure and private sharing of patient data among healthcare stakeholders. Blockchain analysis can help improve the security and efficiency of healthcare data storage and transmission. Real-time monitoring and continuous analysis of healthcare databases will make it easier to detect suspicious activities and mitigate them, maintaining the integrity of data.

Law Enforcement 

This is arguably the biggest industry application of blockchain analytics. The relative anonymity and security that blockchain offers is an inviting prospect for fraudsters and malicious actors. Fortunately, all transactions on a blockchain are recorded, and with in-depth analysis, law enforcement agencies can follow the trail to potentially identify criminals. Blockchain intelligence agencies like Chainalysis and Elliptic have assisted law enforcement agencies with various high-profile cases of fraud, hacks, extortion, and ransom kidnapping. 

Supply Chains

Blockchain analytics helps with product traceability in supply chain management, reducing the risk of counterfeit goods. By analyzing blockchain data, stakeholders in a supply chain can also identify areas of inefficiencies and optimize them accordingly. For instance, Walmart now uses IBM’s blockchain-based Food Trust platform to ensure transparency and traceability in its supply chain.

iGaming

Blockchain analytics enables iGaming operators to monitor transactions and gaming activities in real time. By analyzing blockchain data, iGaming platforms can verify the integrity of games, ensuring outcomes are provably fair and building trust among players. Additionally, blockchain’s immutable ledger provides a transparent record of all transactions, which is crucial for auditing and resolving disputes

Use Cases of Blockchain Analytics

Blockchain analytics has numerous potential use cases mostly aimed at securing blockchain networks, identifying breaches, and optimizing blockchain systems both from a security and efficiency point of view. Some of the potential use cases of blockchain include:

Link Analysis with Blockchain Data 

Law enforcement investigators use data graphs and other blockchain analytics tools to examine the link between blockchain transactions and real-world entities. This can be valuable for uncovering the parties involved in a wide range of illicit activities such as terrorist financing, fraud, ransom kidnapping, and so on, potentially bringing criminals to justice.

AML Compliance

Because Blockchain transactions are pseudonymous, criminals often use crypto wallets, exchanges, and other blockchain channels to hide their trail while laundering illicit funds or conducting other fraudulent activities. Investigators and law enforcement regulators can use data analytics tools to connect the dots and identify trends that may help uncover activities. Blockchain analytics makes it possible to know where the funds go, which can be quite helpful for the anti-money laundering efforts of corporate organizations and law enforcement agencies. 

Risk Analysis

As more organizations get involved with the blockchain thanks to the recent boom in decentralized finance, knowing which transactions are potentially risky will be very important for cryptocurrency businesses and investors who want to get involved in the industry. Transactions and crypto projects linked to criminal activities are incredibly risky even for investors or businesses who get involved with them unknowingly.

Analysts monitor market movements, track the activity of participants, and assess transactions to uncover potentially risky patterns and determine crypto risk exposure. This kind of comprehensive risk analysis will help avoid disastrous outcomes for players who want to participate in the industry. 

Market Activity Analysis

Blockchain analytics can help identify emerging trends and opportunities in crypto markets for new and existing businesses in the blockchain space. By analyzing historical data and generating real-time metrics on crypto transactions, investors can make informed decisions about which projects or blockchain implementation to invest in.

Crypto Trading 

The ability to monitor important data points in crypto transactions and uncover significant insights will be quite valuable for crypto traders. For instance, traders can analyze capital flows or scrutinize the trading activities of whales and big institutions in the crypto market to gain insights into the prevailing market sentiments, guiding their trading decisions. 

Future of Blockchain Analytics

As blockchain technology becomes an integral part of daily financial transactions, blockchain analytics will become even more significant to individual consumers, large organizations, and agencies of government. 

The growing impact of the blockchain industry has led to calls for more global crypto regulations that will provide oversight over the industry. One of the impacts of such regulatory frameworks is tighter financial regulations. Comprehensive data analytics will be one of the important action plans that organizations will need to enforce to operate within these increasing regulatory requirements. 

For instance, blockchain analytics is one of the core foundations of monitoring and anti-money laundering compliance. As calls for increased monitoring and compliance grow louder, organizations will have to adopt analytics solutions that will allow them to monitor cryptocurrency transactions and track virtual assets. 

Analytics will also play a significant role in reducing the risks associated with cryptocurrencies and increasing adoption both on personal and corporate levels. The increased efficiency of blockchain analytics and other related crypto risk management solutions will increase the confidence of governments, banks, and other institutions in crypto markets so they can participate more actively in it. 

However, advancements within the industry such as increased blockchain interoperability and the establishment of standardized protocols to connect will be crucial to the advancement of blockchain analytics. These will create an interconnected web of blockchain solutions where data can be transferred and integrated easily for efficient and comprehensive analysis. 

Conclusion

As the real-world usage of blockchain technology increases, blockchain analytics will become an integral part of the industry’s growth. Already, there’s an emergence of blockchain-as-a-service businesses focused on advancing data analytics and crypto intelligence. These blockchain analytics companies will help users and stakeholders within the industry see beyond the surface so they make data-informed decisions, mitigate risks, and prevent illicit activities on blockchain networks – fostering blockchain adoption in the long run.