On-chain surveillance: Is publicizing financial transactions a good idea?

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  Quantumrun Foresight
• February 1, 2023

Insight summary

Cryptocurrencies (crypto) need a public ledger of all transactions to operate, so everything done in the network is visible to everyone. However, this method offers no financial privacy. With the total market capitalization for cryptocurrencies getting close to USD $3 trillion (2021), more people are motivated to watch what’s happening on the chain.

On-chain surveillance context

On-chain analysis or surveillance has become popular because people want to follow potentially lucrative investments in blockchain platforms. This analysis uses data from a blockchain ledger to gauge market sentiment. To do this, analysts look at transaction data and crypto wallet balances, which can be useful in deciding whether or not to invest. For example, if few people are trading a token and most of its circulating supply is controlled by just a few large holders (known as whales), it’s probably not worth investing in.

Blockchain explorers, such as EtherScan for Ethereum and SnowTrace for Avalanche, enable anyone to look up any wallet address or smart contract. However, these tools don’t assemble data or provide insights to make sense of data points. In response to this gap, several platforms have popped up that each offer charts and dashboards to better assist users in visualizing blockchain data and tracking crypto investments and movements.

An example is Glassnode, which offers detailed metrics on on-chain investments in Bitcoin, the largest crypto platform. Some metrics include open interest in futures trading, mining difficulty, and realized market cap. For tracking smart contracts, there’s Nansen, which analyzes “smart money” or any capital controlled by professional investment firms. Nansen offers a feature called “Hot DeFi Contracts,” which lists liquidity pools getting a lot of activity.

Disruptive impact

While monitoring public financial transactions has its advantages, there have been some questionable practices. For example, in 2021, the media site BuzzFeed quickly discovered the Venmo (digital wallet) accounts of US President Joe Biden and First Lady Dr. Jill Biden. Venmo, a payment app owned by PayPal, allows for easy money exchanges between contacts. By default, transactions are public but can be set to private. However, even if payments are personal, contact lists remain visible. In Biden’s case, his payments were set to private.

BuzzFeed said it took them less than 10 minutes to find Biden’s account by utilizing the app’s built-in search tool and public friends feature. In addition, they found nearly a dozen other family members of Biden. They mapped out a social web that includes the president’s children, grandchildren, senior White House officials, and everyone they’re connected with on Venmo. After BuzzFeed’s report was published, Venmo removed the president’s and first lady’s accounts.

Nonetheless, companies offering on-chain analysis, like Chainalysis, said blockchain surveillance can be useful for national security and law enforcement. In 2021, cryptocurrency addresses received USD $14 billion from illegal sources. The people behind those accounts were more diverse than in any other year. They included ransomware groups in Russia, state-sponsored hackers in North Korea, drug cartels in Latin America, and thousands of scammers and fraudsters worldwide.

Implications of on-chain surveillance

Wider implications of on-chain surveillance may include: 

• Crypto investors using on-chain or blockchain analytics to determine investment trends and receive the latest blockchain information. This practice can turn blockchain platforms into financial social media.
• The rise of crypto influencers who curate the most lucrative investment activities, amassing thousands of followers.
• More startups offering on-chain surveillance and analysis tools, including providing training on how to use these dashboards.
• Increasing concerns about privacy violations, resulting in pressure for digital wallets and platforms to mask transactions. However, this defeats the purpose of public ledgers.
• National law enforcement agencies using blockchain analysis to determine financial criminal activity, particularly money laundering and terrorist financing.

Questions to consider

• If you are investing in crypto, do you follow public digital wallets? Do you find it beneficial?
• What are the other potential dangers and benefits of publicly listing financial transactions?