How Does Blockchain Forensics Work
Blockchain forensics utilizes specialized techniques and processes to analyze blockchain data and transactions to support criminal investigations and compliance efforts. This emerging field provides invaluable capabilities for monitoring and tracing cryptocurrency activities.
Identifying Wallets and Addresses
Being able to differentiate and track various cryptocurrency wallets and addresses is the first step in blockchain investigations.
Differentiating Wallets, Addresses, and Transactions in the Cryptocurrency Ecosystem
A crypto wallet is a secure digital wallet used to store, receive, and send cryptocurrency assets and tokens. Wallets contain one or more cryptocurrency addresses, which are alphanumeric identifiers that function similarly to bank account numbers.
Transactions occur between cryptocurrency addresses when assets are transferred. Transactions are recorded permanently on the blockchain as activity associated with the addresses involved.
What is a crypto wallet address and how do they work
A cryptocurrency address is a unique identifier made up of letters and numbers that represent a destination for a cryptocurrency payment. Addresses are derived from the public key part of a cryptographic key pair. Addresses do not store actual coins - they are pointers to where coins can be spent from or received.
An address is created through a wallet or exchange account, and can be shared with others to receive crypto payments. The matching private key is required to authorized sending cryptocurrency from an address to new destinations.
Different types of wallet addresses
Cryptocurrency addresses come in a few common formats:
- Bitcoin addresses start with 1, 3 or bc1 and contain 26-35 alphanumeric characters.
- Ethereum addresses contain '0x' followed by 40 hexadecimal characters.
- Litecoin addresses start with L or M and contain 26-35 alphanumeric characters.
Other cryptocurrencies have their own address formats, but share the common trait of being a unique alphanumeric string.
Transaction v Address level analysis
Blockchain analysis can be performed at both the transaction and address levels. Transaction analysis examines specific transactions, including senders, recipients, amounts transferred, timestamps and other details.
Address-level analysis looks at all activity associated with a cryptocurrency address over time to identify patterns and linkages. Address clustering groups related addresses.
Exploring Different Types of Wallets
There are two main categories of cryptocurrency wallets - hot wallets and cold wallets.
Hot wallets vs Cold Wallets
Hot wallets are connected to the internet to allow quick transactions. This includes software, web, mobile, and exchange hosted wallets. Cold wallets like paper and hardware wallets store keys offline for enhanced security.
Types of Hot Wallets
- Custodial hot wallets managed by a third party exchange or service provider. User does not control the private keys.
- Non-custodial hot wallets where users hold their own private keys. Includes software, web, and mobile wallets.
Types of Cold Wallets
- Paper wallets contain printed public and private key pairs. Keys must be manually entered online to send funds.
- Hardware wallets are special encrypted devices that store keys and sign transactions offline. Examples include Trezor and Ledger.
Understanding the Distinct Characteristics and Security Levels of Each Wallet Type
Hot wallets offer convenience but carry more risks of hacking, theft and loss of funds. Cold wallets provide offline security with some usability tradeoffs. Understanding these distinctions aids investigations.
Mapping the Blockchain Forensics Process
Conducting comprehensive blockchain analysis involves key phases:
Collecting relevant blockchain transaction data, metadata, and contextual information.
Collecting Relevant Blockchain Data: Blocks, Transactions, and Metadata
Raw data like blocks, transactions, timestamps, wallet balances, smart contract logs and token transfers are extracted from public blockchains.
Data Analysis Techniques
Applying various analytical strategies to uncover patterns and insights.
Tracing the flow of transactions between wallets and addresses to map funding flows.
Tracing cryptocurrency transactions
Transaction mapping visually reconstructs the flow of funds end-to-end across wallets and exchanges by analyzing blockchain records.
Identifying addresses and entities involved
Blockchain and off-chain data is combined to de-anonymize wallet addresses and tag real-world entity ownership.
Analyzing transaction patterns
Statistical analysis of transaction histories can detect money laundering typologies, structured transfers, suspicious timing, etc.
Employing Address Clustering and Transaction Graph Analysis to Identify Patterns
Link analysis techniques uncover relationships and associations between entities.
Grouping addresses belonging to the same entity
Advanced heuristics and Machine Learning models can accurately cluster multiple addresses controlled by a single entity or organization.
Establishing connections between addresses and individuals/organizations
Clustering analysis combined with off-chain data links addresses to known entities and reveals fuller network connections.
Mapping out networks and associations
Visual relationship graphs map the web of transactions and interactions between cryptocurrency users to illustrate ecosystems.
Utilizing Data Scraping, Network Analysis, and Machine Learning for Uncovering Links to Illegal Activity
Data scraping gathers additional details from open and dark web sources while network analysis and ML tools detect illegal patterns.
Presenting the gathered data and analytical results through charts, graphs, and diagrams.
Enhancing Understanding with Visual Representation: Charts, Network Diagrams, and Graphing.
Interactive visuals accelerate detection of criminal connections in the data and improve comprehension of complex blockchain forensics.
Presentation of Evidence
Preparing investigation results and blockchain intelligence for use in legal proceedings and compliance reporting.
How Blockchain Forensics Aids Law Enforcement Investigations
By leveraging these blockchain forensics processes and analysis techniques, law enforcement agencies gain significant benefits:
- Wallet clustering and transaction mapping quickly trace stolen funds and ransomware payments across multiple wallets and exchanges.
- Identifying high-risk accounts, exchanges, services, and jurisdictions through historical analytics.
- Uncovering connections between entities and mapping criminal networks through relationship graph analysis.
- Pattern recognition, anomaly detection, and typology discovery using advanced analytics techniques.
- Attribution analysis statistically links wallets and transactions back to real-world actors.
- Reconstructing detailed timelines of security incidents and fund flows.
- Presenting compelling investigatory evidence through visualizations and blockchain intelligence.
Equipped with these capabilities, agencies can overcome challenges posed by cryptocurrency pseudonymity and gain transparency into illicit activities. Blockchain forensics powers law enforcement’s response to the rising threat of crypto-enabled crimes.
This concludes Part 1 exploring the fundamentals of blockchain forensics processes. Stay tuned for Parts 2 and 3 where we will cover more advanced forensics capabilities and applications in cryptocrime investigations.