What is Blockchain Analytics, and How Does It Work?

Salomon Kisters

Jun 16, 2022

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You might have heard of data analytics before. But what is blockchain analytics, and how does it work?

Blockchain analytics is the process of analyzing, identifying, and ‘clustering’ data on the blockchain, which is a public cryptographic distributed ledger. In order to identify key information about users and transactions, blockchain analytics models and visually represents data.

We have more data generated per second in our digital space today than the information going through the internet only twenty years ago. From the time when the internet started getting commonplace in the late 90s, our entire lives have dramatically changed.

We are rapidly shifting to online platforms, which are immeasurably affecting how we work, learn, and live. From shopping to meetings to communicating with people around the world, we do everything these days through the internet.

Since all our online activities are being recorded on a second-by-second basis, we are generating a mind-boggling amount of information. This customer data is captured on servers and recorded, stored, and studied by companies all around the world for predictive analysis.

Mega corporations like Google, Meta, and Amazon formulate their marketing strategies after carefully analyzing the data of different users.

Similarly, many service providers use big data to figure out flaws in their business models to provide a better experience for customers.

Unfortunately, our traditional data management practices keep us from using this data to its full potential. Currently, almost all of the world’s data is stored on centralized hard disks. This leads to several scalability issues and makes it impossible for everyone to access it.

However, with the rise of blockchain technology and its growing popularity in different industries - from Fintech to entertainment to healthcare - we can unleash the power of the data captured to offer valuable insights that will transform customer-company relationships forever.

Harnessing the true potential of big data through blockchain analytics can deliver life-altering experiences for customers, employees, and communities.

With the use of blockchain analytics, not only can we use data in a number of groundbreaking ways, it is available to every network participant around the globe – revolutionizing every facet of our personal and professional lives.

What is Blockchain Analytics?

To understand what blockchain analytics is, we first need to know how a blockchain works.

A blockchain is a decentralized database that acts as a digital ledger, also known as a cryptographic-distributed ledger accessible to all. The decentralized nature of the blockchain makes the technology completely different and unlike the traditional financial system that is governed by one central authority.

Being decentralized also means that there is no single entity controlling or managing the system. In fact, the entire blockchain database is distributed among thousands of network participants from all around the globe, optimizing resource distribution, data reconciliation, and a lower risk of systematic failure.

On top of that, everything stored on a blockchain is immutable and indestructible. This means that the data on a blockchain is much more reliable and safer from incurring costly human errors. All public blockchains, like Ethereum and Bitcoin, are truly transparent, allowing anyone to see the ongoing transactions and benefit from them.

Blockchain analytics is, in a nutshell, the process of collecting, identifying, interpreting, analyzing, and visualizing this data. Doing so helps regulators, developers, law enforcers, and users understand the historical and current events in real-time.

This level of functionality in data management and analysis is not possible with traditional databases. That’s mainly because only a very limited number of people can get access to centralized servers.

Without exaggeration, therefore, blockchain analytics offers numerous advantages over the centralized network, especially in a constantly-changing world with fluctuating exchange rates, unpredictable financial markets, and ever-tightening financial regulations.

Why is Blockchain Analytics Important?

Every company using blockchain technology in its business model, irrespective of the industry or nature of business, needs a clear and complete picture of everything going on in the ecosystem. This is crucial for maintaining the efficiency and compliance of the system.

If a component or network participant is not performing as expected or is involved in any illicit activity, it can be easily identified and removed using the on-chain data to protect the rest of the system.

In this way, blockchain analytics allows companies and businesses to improvise as they move towards a highly connected future, saving vast amounts of resources and time.

How Does Blockchain Analytics Work?

Although businesses incorporating blockchain technology into their system will have more accurate, better organized, and precise records, interpreting them may not be as simple or straightforward.

Suppose a retail store sells different types of products in a locality. All the transactions customers carry out to buy those items can be recorded on a spreadsheet or ERP file database for accounting purposes. When the seller wants to recheck the validity of these payments, she can easily do so by tracking the data stored in the records.

In the case of blockchain, in contrast, first, the data will have to be extracted from the blocks. Then it will be converted into a more convenient format, such as CSV. For this purpose, there are several dedicated blockchain analytical companies offering such services.

Not only do these solutions help you interpret the blockchain transaction records, but they also provide helpful visual presentations for better understanding. For example, Ethereum ETL - an open-source blockchain project - converts records on the Ethereum blockchain into easily interpretable formats.

However, blockchain analytical platforms like Nansen take it a step further by labeling different crypto wallets, making it easier to trace the activities of any particular user.

Where is Blockchain Analytics Used?

The use cases of blockchain analytics are endless. Following are some of the most important examples for your review.

Controlling Illicit Activities

Law enforcement agencies were among the earliest adopters of blockchain analytics.

The faulty perception of complete anonymity in the blockchain network often leads the criminals to use cryptocurrency for several illegal activities, including drug smuggling and terrorist financing. In 2021 alone, the illicit crypto wallet addresses received $14 billion, almost a 45% increase from 2020.

When law enforcement noticed the enormous surge in illegal activities in the crypto space and started investigating the matter, they realized that tracking down criminals on a blockchain is not that hard. All it requires is a little effort and proper use of blockchain analytics.

Analytics providers like Chainalysis specialize in identifying wallets that may possibly be linked to any illegal activity. When a wallet or transaction is flagged as illicit, the information is given to legal authorities for investigation purposes.

Verifying Authenticity

Blockchains are immutable and transparent. Any digital data that once became a part of any blockchain ecosystem stays on it forever. It can neither be changed nor destroyed.

Moreover, using some simple blockchain analytics, anyone can easily trace its journey from one owner to the other.

These features make blockchains the perfect tool for authenticity verification. Despite the ever-evolving methods of deep fakes, photo manipulation, and forging documents, any information recorded on the decentralized digital ledger is safe from all kinds of criminal attacks.

Internet of Things

The term internet of things (IoT) refers to the collection of digital devices that need some sort of human interaction to function and are connected to the internet.

These include your smart refrigerator, remote temperature sensors, doorbell cameras, home security devices, smart home OS, and whatnot. As of 2022, about 18 billion IoT devices are connected to the internet.

Each IoT device produces and consumes incredible amounts of data. Though most of these devices are designed to work autonomously, all need a management server to send and receive the required data. The current centralized working model for IoT seriously limits its scalability potential.

Since a centralized server can have only a limited amount of storage, managing IoT data can prove to be a challenge. Implementing blockchain technology for IoT will not only solve the scalability issues with the centralized database but will also help companies improve their business performance.

Handling and understanding such large amounts of data is almost impossible without the proper use of blockchain analytics.

Several IoT companies are already working on integrating their database with blockchain technology, looking for ways to implement smart contracts with these devices.

Educated Investment Decisions

Analytics on the blockchain is also massively helpful in making speculations in the crypto space. Cryptocurrencies, Bitcoin and Ethereum, are the fastest-growing investment sectors today.

However, since the industry is still in its nascent stages, investors need tools and techniques they can use to make better decisions.

Moreover, since launching a new crypto project is not very difficult, we see dozens of new coins coming out each week. Currently, there are about 12,000 active cryptocurrency projects you could invest in.

However, most of these projects are either pump & dump tokens or provide no real value to the users. One has to be, therefore, extra careful when investing in a cryptocurrency or a new blockchain project.

An easy and effective way to discover good projects with strong fundamentals is using blockchain analytics. It allows you to keep track of the money flow on the blockchain.

Supply Chain Solutions

Lenovo Group Ltd. is a Chinese multinational company ranked among the most prominent manufacturers and distributors of electronic devices and computers in the world.

In 2017, during a business performance review, the company discovered several flaws in its supply chain network, which led to a waste of a slew of business resources.

After studying the problem from all angles, the company decided to integrate blockchain technology into its operational mechanism. Lenovo even went on to publish a paper highlighting its efforts and results: “Blockchain Technology for Business: A Lenovo Point of View.”

According to the research, Lenovo replaced manual record-keeping with automated smart contracts and structured its management model around blockchain technology. As a result, the margin for human errors and unnecessary delays is reduced drastically.

Similarly, by using blockchain analytics to track items within the supply network, it became easier for the firm to conduct a detailed inspection of the system at any time, reducing the chances of potential problems in the future.

Like Lenovo, several companies from different industries can incorporate blockchain technology into their business model to improve visibility, autonomy, and consistency.

Conclusion

The importance and relevance of blockchain analytics will continue to grow as more and more businesses and corporations adopt blockchain technology.

It allows us to see beyond the artificial price movements or incomplete financial information and help us to understand what actually is happening on the blockchain.

These data analysis techniques are necessary for ensuring successful regulations, error minimization, and the overall well-being of the system.

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