What is crypto on-chain analytics? If you are new to crypto and wondering what on-chain analytics is all about and how it can help you in your crypto journey, then you are in the right place.
In this article you will find everything that is necessary to know about on-chain analytics and deploy it to know the economic activities on the blockchain.
Knowing how it works and its significance in the crypto world along with some notable use cases, it will surely make your crypto journey much smoother and more productive.
On-chain or blockchain analytics is a method in which information related to any crypto transaction is tracked.
The primary objective of on-chain analytics is to analyze the behavior, truthfulness, and cognitive functionality in representing a particular crypto transaction.
This is an enormous task because the blockchain itself is enormous.
However, things are made easier with the application of data science. Along with that, it also reduces the cost involved in such operations.
It offers a much higher promise as compared to any other digital data. In a blockchain, typically, several different entities participate at the same time to perform several different economic activities.
On-chain analytics helps in understanding these economic activities in a much more meaningful manner so that different aspects of the crypto network can be understood.
It allows monitoring several different economic indicators for crypto as well as the native protocol of the blockchain itself. Blockchain analytics, as of now, is one of the most potent applications of data science.
What is Crypto on-Chain Analytics?
As you may know, a blockchain is a cryptographic distributed ledger that can be viewed by all.
In simple words, on-chain analytics is a process that involves identifying, analyzing, and grouping data on a blockchain.
Along with that, on-chain analytics also models and represents data visually.
This makes it much easier to identify the major information regarding a transaction as well as the users making these transactions.
The primary objective of doing all these is to prevent any illegal transaction on the blockchain such as fraud and money laundering from being carried out on the blockchain.
These types of analytics are usually done by private companies.
They typically ‘scrape’ the data on a blockchain to find out more about a transaction that is intrinsically anonymous in order to match that specific transaction with a company or any person.
On-chain analytics is a process followed to make the crypto transactions and the market on the whole safer to use by everyone.
The list of ‘everyone’ includes and is not limited to:
- Healthcare industry for sharing patient data securely between providers, doctors, patients, and insurers with more accuracy
- Retail and manufacturing industry for better quality control and product movement within the assembly line
- Complex supply chains for tracking products and improving services to keep the consumers and purchasers happy and satisfied
- Banking industry for keeping track of suspicious transactions and cash flow to reduce fraud and better their working process
- Global payments systems for assuring safer and quicker transfer of funds in a global scale through a single payment process
- Commercial real estate industry for better communication regarding title and preparing home deeds and settlement
- Transportation companies for keeping track of the routes and coordinating with the modes of transportation across cities and ensuring smoother transitions and multimode routes
- Insurance companies for evaluating smart contracts and ensure smart and fast claims processing reducing chances of making fraudulent claims and allowing insurers, insurance providers and customers to see accurate claim updates at the same time and
- Developing countries for providing smoother and better financial services to unbanked people without fees in the absence of a traditional financial system.
So, the requirement of a fully functional blockchain and safer transaction is huge and it can only be assured through accurate on-chain analytics.
The Working process
If you want to understand how exactly on-chain analytics work, you will first need to understand how blockchain and crypto wallets work.
Ideally, all crypto transactions are made through the wallets. This is actually a digital address to send and receive payments.
These wallets are usually set up after you go through the Know Your Customer or KYC process.
When you transact crypto, the details are recorded on the blockchain forever. It cannot be changed or deleted and therefore prevents fraud.
However, this does not mean a blockchain is foolproof and there is lots of evidence of unscrupulous activities due to poor data practices and sloppy security.
It is these details that are ‘scraped’ during on-chain analytics to find out whether the transaction was legal or illegal.
It is done through several signifiers and is given a risk score. If it is high, it is red flagged.
Sometimes, further investigation on a specific crypto transaction may be required.
In that case the on-chain analytics provider will forward the information to the pertinent law enforcement authorities.
These authorities will then look into the matter and try to match the identity of the users with the anonymous wallet or transaction using the Suspicious Activity Report or SAR.
Ideally, when you make a transaction on a blockchain, it creates an end-to-end trail.
This is because the data in the wallet correspond to all transactions made related to the particular cryptocurrency used in the transaction.
If there is any illegal activity suspected against any crypto wallet, the on-chain analytics provider usually tags it with a ‘typology.’
This will help it to flag it in the future transactions.
If there are similar typologies for several wallets involved in a specific crypto transaction, the analytics provider will then create a ‘heuristic’ as well. This will help to group all those wallets that are supposedly involved in some sort of illegal transactions.
All these help the law enforcement to determine whether or not all the transactions are made by one person using different crypto wallets that actually belong to the same place or person.
This is a continuous process since crypto blockchain works all the time.
Therefore, on-chain analytics is a key process in determining the line of defense and creating a legal and fair crypto environment for all.
While analyzing the data of a blockchain, there are actually two types of data that are analyzed. These are:
- Data at rest – This is the static data, just as the name signifies, that exists in the data store of the immutable blockchain already.
- Data in motion – This is referred to the data that is being produced whenever a transaction is made on the blockchain.
Analyzing the static blockchain data allows reviewing several different transaction characteristics, the trends, and segments.
It helps in predicting the future events and at the same time in identifying the relationships, if any, between any other data sources and the blockchain.
When such data is analyzed it helps in customer intelligence, anti-money laundering, revenue forecasting, fraud finding, and new services creation.
On the other hand, analyzing the data in motion on a blockchain refers to the streaming analytics.
This offers added opportunities for a better analysis. This can help in a lot of things in real-time including the changes in the activities on the blockchain.
This helps the authorities to respond immediately and address them while the transactions occur.
However, with the combination of the analysis of data in motion and static data better analytic models can be developed to ensure authenticity and integrity of a blockchain.
The working of the on-chain analytics is typically based on big data analytics but is much more efficient than that.
This is because there is a huge amount of data streamed continuously that needs to be analyzed quickly which the traditional methods may not be able to handle efficiently.
This may not be possible even by the supervisory staff within the organization, which is where on-chain analytics can be of great help.
Typically, big data analysis involves three major components namely, mass, granularity or scope, and timing.
This means that it can extract huge amounts of data stored on the blockchain and use the database to process different types of structured and unstructured data information.
However, on-chain analytics is much more focused than this because the mass or data streams per transaction can be fewer.
This helps in extracting logical patterns from the events that are time-stamped.
This means far superior accuracy in the analysis with less low-quality input data.
This eventually helps the companies using blockchain to make better decisions on a much quicker timescale.
Given today’s scenario when you need to be compliant with the strict regulations that are already in place and with those that are coming up, the role of on-chain analytics is immense.
Typically every company related to crypto and blockchain should abide by these rules strictly and diligently or face both legal and fiscal consequences. On-chain or blockchain analytics will only help you to pursue your compliance efforts in the best way possible.
And, in that process, it will reduce the overall costs and redundant tasks.
When you use blockchain analytics, it will be much easier for you as well as the relevant compliance departments to identify illicit or fraudulent activities on the blockchain almost as instantly as it happens.
On-chain analytics will protect you and your organization from the risks of paying penalties and to create more transparency and trust within the system. This will in turn help you to maximize your profitability and growth.
For multinational companies, on-chain analytics is something that is hard to ignore.
This will allow them to improve their real-time management as well as become more efficient to have a competitive advantage over other competitors.
This is the primary reason why blockchain analytics is such a vital element to bring about a digital revolution in e-commerce.
It also has the potential to change the reporting process in traditional financing.
It is also very helpful for the retailers to know and provide information about their customers in real-time, right from the moment they walk into the store till they complete a purchase.
This will increase their efficiency and revenue as well as satisfy their customers in an entirely new way when it comes to interacting with them.
Today, with its huge potential and usefulness, on-chain analytics will spread beyond the crypto industry and retailers.
It will prove to be useful for fast-food chains, healthcare industry, and transportation and even in smart card applications because it can be an effective alternative to central PIN processing systems.
Different Use Cases
There are several use cases of blockchain or on-chain analytics. While some of them are already mentioned earlier, here are the others.
- Investment analysis – There may be different limitations in the investment opportunities provided by crypto and other monetary assets. On-chain analytics will provide insights to understand the performance, workings and economics of the networks.
- Decentralized Finance analytics – This ecosystem deals with lending, liquidity mining, staking, and more that are all enabled by smart contract protocols. On-chain analytics will help in determining the health of these protocols with respect to the metrics of the particular protocol design.
- Market assessment – On-chain analytics can help you understand the macro trends of the industry and with analytical metrics such as asset distribution, active addresses, and transaction volume data you can ascertain the growth potential and the overall health of the market or industry..
- Research – Especially in the field of crypto, blockchain technology is still considered to be in the nascent stage. Therefore, more research is necessary on the economic as well as the technical aspects of it and on-chain analytics will provide the necessary and valuable insights for the same and allow you to understand things better.
- Internet of Things – Connecting IoT devices such as doorbell cameras, refrigerators, remote temperature sensors, vehicle components, undersea oil leak detectors, and more, the secure data can be sent more easily with on-chain analytics. This increases the scalability and reduces bottlenecks by the smart contracts in blockchain networks.
- Data and document integrity and authenticity – This is best ensured by on-chain analytics in this era where fraud and deep fakes in documentation are so prevalent. On-chain analytics can identify such misuse and fraud easily and quickly. It is very helpful for those industries where data integrity is the key.
- Tracking – The supply chains find on-chain analytics to be very helpful in tracking their items in transit both forward and backward. This helps them to improve their services and productivity with no human errors or human-related delays in processes.
- FDA – The US Food and Drug Administration, FDA, is planning to use this technology to identify and track counterfeit prescription drugs. This will also help them to identify the paths the criminals use to get these drugs and deliver them to the market.
- Predictive analytics – On-chain analytics can help predict the behavior of a product or anything else at a lower cost and without relying on localized data. Companies can do it simply based on the analysis of the past observations stored permanently on the blockchain.
- Business strategists – The business strategists will have a lot of help when they use on-chain analytics to formulate a suitable strategy for companies, big and small, and provide value by identifying the latent sources of ROI based on the market data.
Therefore, blockchain or on-chain analytics will help the data analysts and other data consumers to collaborate more easily in comparison to the more conventional data repositories.
It will standardize the collaboration forms and will even lead to more competent and productive process automation.
Most importantly, it will reduce the time required for data management and cleaning significantly.
Apart from the several use cases, there are lots of benefits offered by on-chain analytics.
It will be of great help in areas of operation where traditional database management systems and online databases fail to perform well and match the expectations. Some of these areas are email services, content marketing and managing social media posts.
On-chain analytics will also help businesses to identify their target audiences and at the same time make sure that they are real.
It will help in streamlining the quantitative analysis of data by using more user-friendly tools.
This will, in turn, result in operational advantage because the time to reach the market is effectively reduced thereby increasing profitability.
And, when the businesses know what they cannot do as well as what they can do, it will make them more powerful while dealing with the regulatory aspects which will eventually reduce the settlement costs.
The future prospects of on-chain analytics is quite bright in spite of the fact that most countries in the world have not been able to design specific laws yet in accord with crypto.
On-chain analytics will regulate and govern crypto, which, as of now, is the most significant challenge it faces.
Now that the US government has led the way to offer regulation on cryptocurrencies, more countries are following suit, which will make on-chain analytics flourish and be an indispensable element to ensure safety in crypto transactions.
Since preventing fraud and illegal transfer of money through crypto is the primary objective of the governments all over the world, on-chain analytics is the only way to ensure that. This makes it quite a prospective element for the future.
Some Top On-Chain Analytics Companies
There are a large number of companies that offer blockchain analytics solutions of the institutional grade. Here are a few of them that you can consider hiring.
Coin Metrics – This is one of the leading blockchain analytics solution providers that use more than 250 different metrics for over 60 assets. Some of the metrics used are on-chain exchange flows, realized caps, wealth bands, transaction breakdowns, coinage metrics, and more.
They also offer their exclusive index calc agent services that can benchmark crypto assets.
Bitquery – Also known as Bloxy, they offer in-depth on-chain analytics and reporting. Their reports include DeFi analytics, smart contract analytics, ICO, and macro Ethereum data analytics.
They also provide GraphQL API to query blockchain data and create solutions such as reporting, monitoring, and custom analytics with support over 20 blockchain networks. Their Bitquery explorer is unique which allows visualizing different blockchain data metrics on it.
Glassnode – They offer crypto analytics and reporting services using more than 200 metrics for numerous crypto assets.
These metrics include transactions, address, UTXO or unspent transaction output, fees, blocks, indicators, supply, distribution, mining, and market analytics. Different charts are also used to visualize blockchain data and compare with different crypto based on the multiple metrics.
Dune Analytics – They allow writing MySQL queries as well as creating custom metrics. As of now, they only support Ethereum blockchain but you can also get some valuable insights regarding the DeFi space.
Aleth – They also provide Ethereum blockchain data analysis and solutions that include analytics, reporting, and monitoring. They also provide rest APIs for accessing blockchain data and also allow visualizing DeFi analytics and decentralized exchange analytics.
Santiment – With a special focus on the behavior analytics of the crypto platforms, they also provide sourcing on-chain, development, and social information on more than 900 crypto coins. In addition to blockchain analytics, they will also provide useful market data, development analytics, and sentiment analytics.
Chainalysis – This is the leading crypto and blockchain analytics and transaction monitoring company. They work for different government agencies, financial institutions, and exchanges spread over 40 countries all over the globe.
Their Chainalysis Reactor provides valuable insights on movement of funds all over the globe. Their Chainalysis KYT or Know Your Transaction and Chainalysis Kryptos are used by Square, Europol, Barclays, United Nations Office on Drugs and Crime, and several organizations over 44 countries all over the world.
Elliptic – This analytics company provides risk management solutions for crypto assets for several financial institutions and blockchain businesses all over the world.
They assess risks involved in a transaction and have uncovered several activities related to money laundering, fraud, terrorist fundraising, and other illegal financial activities.
They are recognized as World Economic Forum Technology Pioneer and use a large dataset prepared from both private and public sources of information.
They combine this database with their core graph data engine. This offers instant insights that help in making compliance decisions.
CipherTrace – This is the first blockchain analytics firm of the world that protects financial institutions from money laundering and threats related to crypto.
They actually de-anonymize funds flow based on data points that are collected actively every week. They also implement machine learning technology in order to find out legit and criminal activities and use their blockchain intelligence API product.
They are known for creating AML, blockchain threat intelligence and crypto forensics solutions for banks, big exchanges, crypto firms and regulators.
They are so good that initially DARPA or Defense Advanced Research Projects Agency and The US Department of Homeland Security Science and Technology funded them.
Elementus – This New York based company provides valuable insights on blockchain data to financial service companies, asset managers, and government agencies.
The blockchain index methodology makes their detection most accurate. They are the first universal blockchain search engine that provides crypto forensic solutions by indexing the non-private blockchain networks.
Their modern search engine offers easy-to-navigate internet of value and their analytics minimizes risks and cost and protects the reputation of a crypto related business.
Their analytics also help in making proper investment decisions and perform thorough diligence as well as obtain business intelligence from the blockchain.
Traditional valuation metrics are not enough to analyze crypto networks to know the economics activities. You will need to deploy on-chain analytics for it. In case you are alien to it, this article must have cleared all your doubts and queries.