Cracking the Code: Blockchain for Comprehensive Transaction Analysis
Blockchain technology is practically unbreakable – a supercomputer hasn’t yet been built that would have the processing power to hack it – and it is now forming the backbone of the most secure encryption systems in the world.
But what exactly is blockchain, and how is blockchain monitoring and analysis connected with the future of finance?
Blockchain Technology
Most people associate blockchain with cryptocurrency, and while it’s true that the blockchain was initially devised to manage bitcoin, it has grown far beyond its original crypto starting point.
Blockchain basics: What is blockchain?
The blockchain allows digitized information (data) to be passed between communication points, or nodes (essentially points A and B) in a secure format using an automated method. The data isn’t “copied” from A and sent to B, but rather “distributed.” This distribution is called a “transaction.” Each transaction forms a “block” in the “chain,” which can’t be moved or altered once set. The blockchain is an unchangeable series of events – a permanent history.
Each block, or event, in this history is timestamped, encrypted, and recorded in a ledger. No single entity holds this process. Blockchain is administered across a cluster of computers. That means the unique record of the unique history of each block is a distributed public ledger – anyone can view it, no one controls it. Since the blockchain network has no central authority, it is transparent by its very nature.
When one party initiates a transaction by creating a block, the block is verified by millions of computers (called nodes) before being added to the chain. This is what is known as a consensus protocol.
It is impossible to falsify a block without having to falsify all of those millions of verifications. This is what makes the blockchain so hard to crack.
While blockchain was initially designed to encrypt, protect, and track bitcoin transactions, the technology can be adapted to encrypt and protect all kinds of data or track all sorts of transactions. The three pillars of the blockchain present opportunities for managing various data types.
- A decides to send money to B
- This transaction is represented online by a block
- This block is broadcasted to all participants in the network (known as nodes)
- The network verifies and approves the transaction
- This transaction ‘block’ is added to the existing chain of blocks; transparent and immutable
- B receives money from A (Transaction is complete)}
The three pillars of blockchain
Blockchain is supported by three pillars, which maintain its strength and security.
Decentralization
Centralized systems, like banks, put an enormous amount of power in the hands of a single entity. To conduct a transaction, you must deal with the system containing all data, follow its rules, and pay its fees.
The weakness of a centralized system is that the data is vulnerable. It can be hacked, compromised, or shut down; its access is denied or lost. If this happens, the system grinds to a halt, resulting in complete chaos.
Decentralization spreads out the data, making it simultaneously both safer and more accessible. The information is stored across a vast network, with everyone in the network owning all of the data. You can use the information to conduct a transaction for free. The network verifies the transaction, providing the ultimate form of transparency.
Transparency
The biggest myth about blockchain is that it isn’t actually transparent. This is due to the blockchain’s pseudo-anonymity and its separation from traditional identity verification systems. Within the blockchain, a person’s identity is hidden (via complex cryptography) but represented by their public “address.”
An individual’s transaction history wouldn’t read “David sent a payment” but instead read something like “4BGxNb0atlA7rSpfdOknFV8slrpi5b1UdGrDoXdc9kf sent a payment”. David’s identity is secure, but anyone in the network can view the transaction. This is a level of transactional history transparency previously unused in financial systems, which adds to the immutability of the decentralized system.
Immutability
Immutability means the inability to be changed.
In life, linear history is immutable: you cannot go back in time and change the outfit you wore to senior prom, no matter how much you might want to.
The blockchain is also immutable in that no one can go back and change a transaction’s history. The cryptographic hash function achieves immutability in the blockchain, meaning that any input is assigned a standardized output. This output is delivered as a “string” or a hash and is represented by an alphanumeric sequence, much like Molly’s identity above.
Each transaction generates a block with its own hash, containing the transactional data and a pointer connecting it to the previous block in the chain. Every change in data generates an entirely new hash. Any attempts to change previously input data would affect the entire blockchain by altering all of the data-related hashes. Since the information in previous blocks is already verified by consensus protocol, the blockchain is the most secure system.
How Can Blockchain Be Used for Transaction Analysis?
Since the blockchain is decentralized, transparent, and immutable, all transactions can be monitored, tracked, and analyzed. This has enormous implications for “de-anonymizing” and “de-risking” cryptocurrency for Money Service Businesses (MSBs).
MSBs have had difficulty achieving mainstream because virtual currency transactions are often considered to be completely untraceable.
The blockchain provides all the information necessary to trace any transaction; transaction analysis can reveal user identities. A blockchain analysis partner can help MSBs reach compliance with rules and regulations governing currencies and help achieve legitimacy, acceptance, and adoption.
Blockchain monitoring and management
By monitoring transparent blockchain histories, MSBs can understand chain activity, watch for (and report) suspicious activities, receive alerts & warnings when critical issues arise, and maintain chain health.
Real-time information
A monitored blockchain delivers information and insights in real time, providing full visibility into all chain activity while allowing Distributed Ledger Technologies (DLTs) to be continually reviewed and analyzed. MSBs can connect custom automation to blockchain data, tracking the bigger picture while investigating individual chain nodes, transactions, or identities.
Powerful analysis tools
Powerful tools can provide real-time blockchain data and events analysis, identify a problematic pattern and mitigate risks associated with chain and node health, validations speeds, transaction volumes, smart contract usage, and more. Blockchain data analysis can provide even more transparency without data corruption risk.
AML and KYC
Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations apply to traditional currencies (fiat) and Financial Institutions (FIs) as well as forms of cryptocurrency/fiat transactions managed by MSBs. Rising AML/KYC costs and the difficulties experienced when applying methods used for an identity-based system to a transactional-based system have slowed cryptocurrency adoption.
However, with blockchain monitoring and analysis solutions, AML/KYC compliance can be made possible and stronger and more cost-effective. If real-world customer identities can be encrypted into transaction blocks, the biggest hurdle facing MSBs can be deftly handled with decentralized systems becoming more widely adopted.
Blockchain in KYC/Identity Uses
Currently, customer data identification is siloed by various institutions (and sometimes within different departments of a single institution.) This requires constant re-verification at a crippling cost level. Blockchain can decentralize customer identification data, allowing the initial, independent verification of a client by one organization to be accessed by other organizations.
Blockchain and Data Security
Successfully deploying a blockchain solution means assuring users that the data is protected. Restricted data access and data quality validation can accomplish this.
Restricting data access
Privacy concerns have been the biggest objection to adding individual identity verification to the blockchain. One of cryptocurrency’s main appeals was always the pseudo-anonymity it provided users. The blockchain’s ability to encrypt must be leveraged to provide a layer of restriction that is not easily accessed, protecting personally identifying information (PII) within the blockchain.
Pre-validating data quality
Data must be verified before it enters the blockchain. The most significant vulnerability in the blockchain framework is the quality of input data; pre-blockchain data validation is critical. Processes must be implemented to ensure this step is completed before any new user is added to the blockchain.
Blockchain can help prevent access fraud
Blockchain’s decentralized nature offers a unique ability to protect data and restrict access. Most password systems rely on a centralized system or Central Authority (CA). This means an increased vulnerability due to Public Key Infrastructure (PKI), which pairs all private keys with a public key, giving the CA ultimate control. That ultimate control also creates a massive vulnerability for all private keys if the CA is hacked.
With blockchain encryption, a distributed PKI model can be created; instead of paired keys, all data is encrypted and stored in the blockchain, with public and private keys kept separate. There is no single, centralized point of entry for hackers to exploit.
Blockchain can help deter certain cyberattacks
A common way to crash and hack a system is through DDoS (distributed denial of service) attacks, which can divert resources from security and expose vulnerabilities. Websites are vulnerable to attack due to the Domain Name System (DNS) being stored in only a partially decentralized system.
Hackers can crash websites by targeting the specific IP address and hammering at this single point of access with blockchain and a fully decentralized system. A hacker would have to attack multiple nodes simultaneously, making DDoS cyberattacks highly improbable and thwarted. This concept can apply to other kinds of cyberattacks as well.
Blockchain can make it harder to tamper with data
Since the blockchain is a history, data can never be removed. Any changes or edits form a new digital signature and time stamp, become part of the history. Each block in the chain is verified so quickly by millions of computers that attempt to input false data and are immediately detected and rejected.
Hoarding the data
Centralized systems designed to hoard data are incredibly vulnerable, as illustrated above. When data is stored in a box, a tiny hole in the defense system is all it takes to allow access or data leakage for use in unauthorized ways (think identity theft.) When data itself is used to construct a chain with no single link weaker than the next, it is virtually indestructible.
Instead of hoarding data in a centralized system, organizations can leverage DLTs to distribute, encrypt, and secure their data across an unhackable network. Each user will control their own data, instead of large companies holding sway over it, putting it at increased risk.
Blockchain technology for data storage
When the blockchain is used to store large amounts of data, the data is “sharded,” that is, fractured into many small pieces. Each piece is encrypted, duplicated, and distributed across the Peer-to-Peer (P2P) network.
Each shard is hosted by a “farmer” who allows the use of their personal network for storage in return for compensation generated by the entire network, usually in the form of cryptocurrency. Farmers pledge collateral through a smart contract guaranteeing data safety.
This type of distributed storage and blockchain technology is much cheaper than building your own data storage solution or depending on a data warehousing option like cloud storage in a data lake or silo. Distributed data storage can cost ten times less per terabyte than traditional data storage options and provides a level of security unmatched by any cloud-based solution.
User-controlled privacy
One of the most attractive things about blockchain technology is that users stay in control instead of CAs. Blockchain provides a fixed, unalterable record of all transactions, allowing users to permit case-by-case access to PII and other sensitive information (used for transaction validation purposes only and does not form part of a transaction itself).
