Below is a guest post from BowTiedPickle. I read an article he wrote and learned a lot from it, so I decided to invite him to write an article here. Please read carefully!
Transparency is one of the key attributes of blockchain.
Anyone who wants to view the history of the blockchain can verify the entire blockchain state from the genesis block to the present by looking at the data held by a node. You can view transactions in real time, see the full balance of the account, and even see a transaction before it by watching the mempool.
This kind of visibility into the underlying data flow of finance is something ordinary people have never had access to before. One of the friendliest things about looking at blockchain history is that it’s free, you don’t need a $30,000 monthly subscription, and you don’t need a Bloomberg client.
Part of participating in DeFi (decentralized finance) as a responsible user is knowing the basics of browsing freely available information. Hopefully you already know how to use block explorers like Etherscan or Ethtx.info.
Today we will introduce:
- Fundamentals of Money Flow
- How do you track the flow of money
- And how users try to disguise their actions (money flow).
Why do you need to know this knowledge?
In fact, tracking funds can be used for a variety of purposes, including copying whale transactions, shorting VC holdings, avoiding scammer projects, or tracking down the hackers who stole your wallet.
You don’t have to be an on-chain analyst or cybersecurity expert to do a little due diligence.
One of the key requirements of a blockchain, whether on Bitcoin, Ethereum, or other chains, is the ability to trace state changes through time.
This ensures that the state is provably correct and no double spends or other situations occur. A side effect of this is that the nature of the blockchain makes it difficult for people to obscure the flow of funds.
In the real world, if I give $100 in cash to my friend and he passes it on to his friend, we have virtually no way of tracking where the money is: we have little way of knowing where it is Under his friend’s mattress, it was already in another person’s bank account, still in an IKEA cash register. Tracing traditional funds is a huge detective effort, and one may really not be able to trace all of them.
And if you want to track funds on the blockchain, just call up Etherscan and look at a series of “to” fields.
If you’re too lazy to do that, there are even various tools now that can generate nice little diagrams for you. Due to the transparency of the blockchain, it is absolutely impossible to change the traces of transactions that have taken place without taking some additional steps.
How to hide and disguise the flow of money
To address this, users can employ several different strategies. The most important of which are:
- Transfer funds to a centralized exchange (CEX)
- Use Privacy Mixer
- Cross-chain recharge of property to a privacy coin network
1. Centralized exchange transfer
Wait, you might say, use a centralized exchange for privacy? Does this sound a little ironic? Yes, centralized exchanges are not suitable for money laundering. For legitimate users, such as whales trying to escape wallet watchers, centralized exchanges represent an opportunity to break the on-chain connection between wallets.
This is due to the fact that centralized exchanges process all transactions within their systems internally. This means that when you trade assets on a centralized exchange, those transactions don’t actually happen on-chain, just balance changes in the centralized exchange’s database. Then, when you withdraw money on-chain, you just transfer it to a different wallet, and the centralized exchange’s hot wallet will happily transfer your assets to the new address.
This approach can make the flow of funds murky to casual observers like wallet watchers. As an ordinary person, you have no way to track it in a centralized exchange. However, the exchanges themselves, or government authorities who can subpoena the exchanges, can see where the money is going.
2. Privacy Mixer
The way a privacy mixer works is simple: it masks the connection between “from” and “to”. The exact technology used for privacy mixers depends on different blockchains. Bitcoin uses a A technique called coinjoins to break the history of a particular coin.
The most popular hidden protocol on Ethereum, Tornado Cash, allows users to withdraw their funds from different accounts by using zero-knowledge proofs.
In both cases, the transaction chain was not completely interrupted. Let us now introduce the concept of anonymity sets. In the case of Tornado Cash, the anonymity set, or the set of users to which funds may flow, is only as large as the set of users withdrawn from Tornado Cash after the traced funds enter the washing machine. In the case of coinjoin, the anonymity set is restricted to a set of addresses defined in the coinjoin transaction.
For the average user, it’s nearly impossible, but not impossible, to track the flow of money using a silkscreen mixer. You can search the entire anonymity set for transactions in hopes of finding a clue, or have some sophisticated money flow analyst help you with your search.
Forensics firms like Chainalysis have demonstrated the ability to cryptographically unravel some coinjoin transactions. Techniques like IP tracking or exploiting poor user privacy practices could also allow these sophisticated companies to track users in Tornado Cash or similar protocols.
3. Privacy coins
The last major way to hide the flow of money is to trade directly over-the-counter, or through a centralized exchange for a privacy-enhancing cryptocurrency like Monero. Monero uses technologies such as ring signatures and zero-knowledge proofs to mask addresses and transactions, while still providing a decentralized ledger.
If the transactions of these privacy coins can be carried out in a secure manner, there is absolutely no possibility for ordinary users to track the flow of funds. Perhaps some sophisticated entity now has the ability to unravel them, but no relevant information has been disclosed yet.
You might say, yes, but how can I track the flow of these funds myself? Basic analysis using a block explorer is enough to reveal where money is going, such as Sifu’s suspicious transactions around the Wonderland Finance treasury.
Ps: If you are indeed struggling to mine on-chain addresses on this issue, please PM me.
You can easily observe the disgraced former Treasury manager laundering money through Tornado Cash.
For longer or more complex transaction flows, there are tools like CertiK SkyTrace that provide charts and visual exploration. For example, you can see all the transactions surrounding Opensea phishing attackers.
Other tools can provide additional information. Western Gate provides an interesting real-time tracking of arbitrage bot activity. The preceding examples illustrate that we can find useful information from publicly available free information. Of course, you can also build your own custom tool and utilize many sources of information, including The Graph or raw blockchain information.
I’ll leave you with a special Easter egg here: you can monitor Gnosis Safes, the most common multi-signature wallet, by going into the gnosis safe app and entering an address. If the wallet uses the centralized Gnosis Safe off-chain relay, accessing the app will allow you to see outstanding transactions. It also displays transaction history, including the signers of each transaction. For example, here is the Gnosis Safe for Wonderland Money’s DAO multisig on the ETH mainnet.
You might find it somewhat difficult to start tracking the flow of money on-chain at first, but it doesn’t have to be complicated. You can discover a lot with a simple trace of public money flows and transactions: watch that NFT influencer’s wallet to see what they’re minting before they tweet; watch the Tetranode mobile marketplace and watch how Daniele Sesta is putting hundreds of million dollars transferred to a centralized exchange.
We need to know that you are participating in a movement that offers you access to the most open and transparent financial system the world has ever seen.
This is the first time in history that ordinary people (retail investors) can see the same data as whales and venture capital firms. If you don’t take advantage of it, even minimally, you’re putting yourself at a disadvantage.
Opportunities are equal to everyone, and results are bound to be unequal.
This is a guest post by BowTiedPickle.
He’s a chemical engineer working part-time as a Solidity developer.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/this-article-teaches-you-how-to-track-the-flow-of-funds-on-the-chain/
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