Bitcoin and the chain analysis

Bitcoin and the chain analysis
Bitcoin and the chain analysis

Written by Massimo Musumeci


chain analysis bitcoin


 Bitcoin has a different approach to financial privacy than traditional centralized finance operators. Infact with traditional banking each transaction is associated to our identity but such transactions are visibile only to authorized financial intermediaries. With Bitcoin, instead, the situation is the opposite: all transactions are visible to all the world (being totally public) but they are not associated to our identity but just to public Bitcoin addresses. So it is not true that Bitcoin is anonymous and this is the reason why Bitcoin is called pseudonymous.

For these reasons disinformed people wrongly often refer to Bitcoin as something which is anonymous and therefore is used by criminals for illicit transactions. People forget that Bitcoin was born to provide possibility to transact freely between unknown persons without third parties interference of without the risk of the transactions being blocked or censored.

Blockchain analysis companies

In the name of such desire of a world without criminals, thinking that all criminals use bitcoin, many companies were born in order to track the blockchain and try to associate transactions to users identities. They are chain analysis companies. They develop algorithms (based on heuristic assumptions) in the hope that they services will become in the future mandatory for banks, exchangers and governments for tracking all transactions and therefore being able to reconstruct all the financial movements of each person. This chain analysis activity is against the privacy of private persons because aims to collect financial informations about all the people without discrimination.

Infact on the blockchain all transactions are chained together by inputs and outputs and so it is possible to walk back all the transactions starting from any point of the chain. 

First of all, we have to point out that chain analysis companies are only able to create heuristic suppositions and then deduct from them. For example they start from the assumption that all the inputs of a transactions belong to the same sending user. But this is not true for many kind of transactions and specially when many actors transact together with a coinjoin transaction for example. Chain analysis companies can therefore arrive to misleading informations and their conclusions cannot be considered affordable and cannot be used as valid objective proofs by a court for example.

Chain analysis companies start, for example, from the assumption that all the inputs of a transactions belong to the same sending user.

The evolution of Bitcoin, as we know, is a second layer in which the knowledge of transactions is no more something generally written on a public ledger, but is something known only to participants in transactions. This improves scalability and reduce the public ledger transactions only to certain (opening and closing a lightning channel for example). Such a second layer in Bitcoin is going to resolve the problem of scalability and in the same time to give the necessary privacy that we shall expect from a decentralized cash system. The anonymity set achieved from second layer transactions is therefore going to be more and more affordable and difficult to be overcome by chain analysis companies or government agencies which goal is to track and acquire privacy data about transacting people.


With Bitcoin second layer (lightning network) the transactions are visible only to involved parties and what remains on-chain is just a minimal part of all the transactions. In such a way chain analysis and monitoring services will become more and more useless. We have just to wait for LN to become more widely used.

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About The Author

Massimo Musumeci

Physicist (MSc), OS specialist, cryptography and security researcher, system administrator. I am partner of companies and public institutions for online business and new technologies development. I support and work to achieve a free, open, censorship-resistant and privacy-oriented technological and financial world. Reach exclusive contents on my patreon support page.

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