Not All Chains are Created Equal
Although every cryptocurrency has a blockchain behind it, not all blockchains are created equal. Little differences with how the blockchain is implemented can have large side effects. For example, Litecoin is almost exactly the same as Bitcoin (in the beginning) except it has 4 times the total supply, and ¼ of the block time. Other chains like Ethereum are drastically different. Ethereum is essentially a custom token platform, allowing many cryptocurrencies to exist on a single blockchain. In the context of knowing what is going on in the network, it’s how the cryptography is implemented that matters.
If you think the cryptography behind Bitcoin and Ethereum is complicated, then must not have heard of Monero, or Dash. The cryptography used in these networks has the ability to hide the details of all transactions that take place on the network. Bitcoin and Ethereum transactions are much more transparent in nature. You are able to see the public addresses that are associated with each transaction. Furthermore, all amounts associated with the transaction are viewable by the public. With a blockchain like Monero or Dash, both of these data points are obfuscated using complex cryptography. Both the sender, the receiver, and the amounts are unknowable. This makes blockchain forensics very difficult to conduct on networks such as Monero or Dash.
Bitcoin Is legitimized through Blockchain Forensics
Bitcoin has matured greatly in the short decade that it has been around. One of the factors that bring it closer to its mass adoption, is the ability to analyze the transactions on the blockchain. Without this, Bitcoin would have no hope at all in being accepted by regulatory institutions. Take Monero for example, the lack of auditability poses serious problems in the eyes of the law. No country is willing to adopt a cryptocurrency wherein law enforcement is unable to check for the existence of malicious transactions. The existence of cryptocurrencies such as Monero and Dash actually end up bolstering the legitimacy of Bitcoin. To the government, Bitcoin and Ethereum are the lesser of two evils. It seems clear that cryptocurrencies are here to stay. If governments and law enforcement had to pick, Bitcoin and Ethereum are an easy choice over privacy coins.
Quite frankly, cryptocurrencies can use as many legitimacy boosts as it can handle. It is not the technology that is causing the lag in adoption. It is the education, and the regulatory environment. Most people still think that Bitcoin transactions are anonymous. This lack of awareness and education is one of the massive barriers hindering its adoption.
How Does Blockchain Forensics Work?
The term that best describes how blockchain forensics works, is chain walking. This term is accurate to what happens because in order to make inferences about what has happened on the network, transactions, and blocks must be processed one after another. A transaction that occurs in block 100,000 doesn’t make sense unless you process every block proceeding it. Therefore, the job of blockchain forensics software is to start at the beginning, and walk through the chain, one block at a time. A separate database of meta information is built and kept alongside the actual blockchain itself.
Chain walking software can be used for a variety of different purposes. For example, the cryptocurrency ratings organization FCAS uses chain walking to pull secondary metrics from the blockchain. Some numbers that are not immediately available to the public can then be built, and used to derive meaning. For example, the total number of transactions ever, and total transactions in a particular address are examples of numbers that come out of a chain walking process.
Secondary Data Sources
Sources other than what is available on the blockchain essential to holding those who use cryptocurrency networks for malicious purposes accountable for their actions. Secondary sources include exchanges client data or social media posts containing addresses. By combining these secondary data sources with the data gleaned from chain walking, real world identities can be attributed to cryptocurrency addresses. As soon as an identity is attributed to an address on a blockchain, a number of other connections may be made. Using the auditability property of blockchain, the same identity associated with one address can be associated with others.
This identity map can be used to validate user’s identities. When signing up on any legitimate exchange, you typically must pass basic KYC (Know your customer) checks. This includes uploading a drivers license or passport. The exchange can then do a check against a forensic database to see if you have ever been identified in any malicious cryptocurrency transactions. While this is not ideal for the criminal underworld, this is what the path to mass adoption looks like.
Bring on the Legitimization
I for one, am all for the mainstream adoption of cryptocurrencies such as Bitcoin and Ethereum. I understand the need that governments, regulatory bodies, and exchanges have in making sure people aren’t using cryptocurrencies with bad intentions. Personally, I resonate with this mission as well. What this means is that if you’re seeking cryptocurrency, you’ll have to get a hold of Monero, zCash, or Dash. If you’re using Bitcoin, you can expect to have your identity sitting in a database connected to your bitcoin address. I think the pros far outweigh the cons of this side effect of adoption. If we are ever to expect Bitcoin to be truly adopted by the masses, then surveillance is something that comes along with that. It doesn’t mean that we won’t have privacy, it just means that we will have to go elsewhere to achieve it.