Handbook of Blockchain Analytics

Table of Contents

1. Frontmatter

2. Introduction to Blockchain

   1. Frontmatter

   2. Understanding Blockchain Technology

      Min-Bin Lin, Daniel Traian Pele, Rui Ren

      Abstract

      Blockchain technology has gained great attention from academics and practitioners, and its implementation has been considered as a crucial component for the development of digital economy and finance. From a technical perspective, it is a secured database managed by a network of participants who follows a certain protocol to maintain a distributed ledger, ultimately substituting a centralized system through a consensus algorithm. Over the past 5 to 10 years, the industry has witnessed significant expansion in blockchain applications, particularly in the area of digital assets. More recent practices are in peer-to-peer lending, e-governance, healthcare, and supply chain management. These applications capitalize on the inherent features of blockchain, including decentralization and security, which are widely touted as key selling points. The technology, however, as any newly introduced instrument for today’s economy, has borne risks and chances due to the disequilibration between the hype and hope. Yet, blockchain technology has not been fully comprehended. In this chapter, we are not only focusing on cryptocurrencies, smart contracts, and non-fungible tokens but also its evolution and functionality.

3. Digital Assets in Blockchains

   1. Frontmatter

   2. NFTs and VizTech

      Bingling Wang, Min-Bin Lin, Wolfgang Karl Härdle

      Abstract

      Non-fungible tokens, or NFTs, have been in the focus of emerging digital asset transactions, have gained a lot of attention of art investors, and are among the fastest growing Web 3.0 and crypto products. The popularity of NFTs has started with a generative art collection—CryptoPunks from Larva Lab in 2017, and the total market capitalization has been over US$ 41 billion since 2021.

      We present a short history sketch of this NFT art phenomenon and investigate the properties of CryptoPunks via their flattened pixel vector. This leads to very high-dimensional data, which we represent via modern VizTech, in order to detect clusters and similarities among the digital assets. Employing the UMAP technique, we are able to attach to and patterns and elements. The Uniform Manifold Approximation and Projection (UMAP) is explained in detail and compared with other localizing techniques like t-SNE. The two-dimensional projections of UMAP disclose clusters among these CryptoPunks which one can associate with prices and traits.

   3. Cryptocurrency Liquidity Forecasting

      Ilyas Agakishiev, Wolfgang Karl Härdle, Daniel Traian Pele

      Abstract

      Market makers provide liquidity to small investors. To optimally provide liquidity and deal with potential demand spikes, it is important to know the liquidity required in advance. This chapter describes an algorithm that attempts to predict the liquidity for a 4-hour period using previous transaction data, return data, sentiment data, and macroeconomic data. One of the challenges to consider is the daily and weekly seasonality of order data. The main algorithm is based on LSTM, with data being preprocessed using a wavelet-based low-pass filter. As alternatives, SARIMAX and TBATS algorithms are considered, as they can also deal with seasonality. Experiments have shown that while all three algorithms capture seasonality well, the LSTM-based algorithm outperforms the other two overall, mostly by dealing slightly better with unusual situations. In addition to that, an ensemble model was built that combines the three approaches using a ridge regression, boosting the performance further. Data for experiments was provided by Nuri, a market maker in Berlin, Germany.

4. Cryptoeconomics

   1. Frontmatter

   2. Cryptocurrency Market Analysis: Insights from Metcalfe’s Law and Log-Periodic Power Laws

      Alexandra Ioana Conda, Andrei-Theodor Ginavar, Daniel Traian Pele, Miruna Mazurencu-Marinescu-Pele

      Abstract

      In this paper, we investigate the statistical properties of Bitcoin and the CRIX index using two layers of analysis: Metcalfe’s law and bubble behaviour through LPPL modelling. The results show that, in the medium to long run, Metcalfe’s law (which states that the value of a network is proportional to the square of the number of connected users) is valid for evaluating cryptocurrencies. However, in the short run, the validity of Metcalfe’s law for Bitcoin is questionable. The DS LPPLS methodology was used to capture the behaviour of Bitcoin exchange rates during an endogenous bubble and to predict the most probable time of regime switching. The main conclusion of this paper is that while Metcalfe’s law may be valid in the long run, its validity in the short run, across various data regimes, is highly debatable.

   3. Realized Cryptocurrency Volatility Forecasting with Jumps: An Empirical Study

      Meng-Jou Lu, Weiyu Kuo, Junjie Hu, Wolfgang Karl Härdle

      Abstract

      In this chapter, we examine the realized volatility of highly volatile cryptocurrencies by employing the threshold realized variance method to distinguish the jump component from the continuous process. Despite the fact that the jump process does not enhance explanatory power, we still observe that jumps convey valuable information. Specifically, we find that the one-day lagged threshold jump component has a significant positive impact on future realized volatility, indicating a likelihood of increased volatility in the cryptocurrency market following jumps occurring one day before. However, the unthresholded jump component exhibits a significant negative correlation with future realized volatility.

5. Blockchain Analytics

   1. Frontmatter

   2. Process Mining for Blockchain Analytics: Examining Blockchain Applications Through a Process Lens

      Richard Hobeck, Christopher Klinkmüller, H. M. N.  Dilum Bandara, Wil van der Aalst, Ingo Weber

      Abstract

      Process mining offers a rich tool set for analyzing event data which record information about events that occur during the execution of processes. Event attributes captured in those data include, at a minimum, the type of executed activities, the temporal ordering of events, and the process instance to which an event belongs, but can also cover additional aspects like the involved resource or the execution status of activities. Given the distributed, temporal, and concurrent nature of blockchain technology, process mining is a valuable addition to the blockchain analytics tool set, allowing applications to be analyzed through a process lens. In this chapter, we summarize the current state of the art regarding process mining for blockchain analytics. Starting from a process mining methodology for blockchain analytics, we provide an overview of available techniques and tools for the two most important analysis steps: data extraction and preparation as well as data analysis and visualization. We then discuss promising use cases and limitations of process mining for blockchain analytics and present an illustrative real-world case study involving a DApp deployed on the public Ethereum network.

   3. Blockchain Meets Network Analytics: A Tale of Heuristics, Location, and Fraud Detection

      Simon Trimborn, Le Yu

      Abstract

      The information provided by blockchains of cryptocurrencies is immense and diverse. Blockchain information is represented by networks, the transaction network and the user network, approximated by the entity network. We review heuristics for constructing the entity network out of the transaction network and discuss how they have been used, improved, and developed over time. We introduce network analytics applied to blockchain data, which supports finance and economics research to look into location identification, fraud detection, and price investigations of cryptocurrencies, among other topics. We inspect how they make use of network analytics, often tailored to the specific properties of blockchains. By this comprehensive overview, we intend to aid research on the use of blockchain information to understand user behaviours and the corresponding price behaviours of cryptocurrencies.

6. Blockchains and Finance

   1. Frontmatter

   2. Blockchain Transaction Decision: Through the Lens of Mempool

      Ankush Agarwal, Cathy Yi-Hsuan Chen, Elsa Hernandez

      Abstract

      In the Bitcoin, blockchain miners use computational resources to validate transactions and are rewarded with newly created Bitcoin and transaction fees appended by users for their transactions. The priority of a transaction is determined, among others, by the fee appended to it. Profit-maximising miners choose transactions that pay higher fees. As trading volume in Bitcoin increases, network congestion has become a key issue in the viability of Bitcoin as a medium of exchange. As congestion leads to large waiting times and soaring transaction fees, users with small-value transactions may no longer find it profitable to record transactions. We aim to examine the viability of Bitcoin blockchain when users pay no transaction fees so that there is no priority given to transactions. Users’ decisions to record a transaction through the Bitcoin blockchain are modelled through a queueing game in a processor-sharing system. The symmetric equilibrium threshold of this game sheds light on the limit of the queue length at which self-optimising users who seek to minimise transaction costs find it economically inviable to record a transaction through the Bitcoin blockchain. This analysis highlights the key role that transaction fees play in sustaining an increasing number of transactions in the Bitcoin blockchain.

7. Modern Applications

   1. Frontmatter

   2. Blockchain Business Development

      Katarina Krüger

      Abstract

      This chapter shows how blockchain technology can create real value for companies, especially small- and medium-sized enterprises (SMEs). It first introduces key ideas, including public and permissioned blockchains, consensus methods, and smart contracts in clear, non-technical language. Next, it gives a step-by-step plan to analyse business processes, map stakeholders, and run a simple utility analysis to see which process is the best place to start. The study then explains technical points such as system architecture, data storage (on-chain versus off-chain), and links to current IT systems. A special section presents Decentralised Autonomous Organisations (DAOs) as a new way to manage joint work without middlemen. Throughout, the author stresses that blockchain is not a goal itself, and that it helps only when it cuts costs, saves time, or opens new business options. The framework offered here helps managers judge when and when not to use blockchain in practice.

   3. The Implication of DLT and Blockchain: Legal and Financial Aspects

      Zihao Li, Hao Xu, Yang Fang, Boyuan Zhao, Lei Zhang

      Abstract

      As a representative of distributed ledger technology (DLT), blockchain holds enormous potential to reform cyberspace architecture by revolutionizing information storage, circulation, and exchange through decentralization, transparency, and de-identification. This blockchain-driven information revolution has significant implications for legal and financial frameworks, providing tools for brokerage, finance, legal enforcement, and regulation. Ordinary participants can become traders, miners, retailers, and customers simultaneously, breaking the market barriers and reducing the information gap within the community, as all records are visible to all participants.

      This study explores the implications of the blockchain-driven information revolution from legal and financial perspectives. It first investigates the legal implications of blockchain, examining the notion of trust and a new understanding of electronic evidence and the free flow of data. The study then uses blockchain in finance as a case study to illustrate its practical applications, discussing emerging financial models, corporate governance, sharing mechanisms, and the influence of blockchain on central banks and digital currencies. The research concludes that blockchain is much more than a technology; it represents a community, acting as a source of trust and a new architecture for cyberspace.

   4. Applications of Blockchain in Healthcare

      Wui-Chiang Lee

      Abstract

      Despite great advances in storage technology and the exchange of health information and data, the lack of easy access to this information by patients and clinicians has long been considered a barrier to transparency and efficiency in healthcare delivery. Among the emerging information communication technologies, blockchain is a type of distributed ledger technology that creates a shared, immutable, and chronological record of transactions. Blockchain technology has several characteristics, including decentralized storage and data management infrastructure, high security, privacy protection, accessibility, transparency, and interoperability.

      There are several potential applications of blockchain in healthcare. The first is health information exchange and interoperability. Blockchain’s decentralized data storage technology can allow immutable patient records to be maintained across different medical organizations. A second application of blockchain involves saving personal health information from wearable devices and the Internet of Things (IoT). Third, blockchain’s distributed identity management model can ensure data integrity and information sharing across medical systems and provide high security and privacy. Fourth, the immutable and interoperable nature of blockchain presents innovative opportunities for medical supply chain management. Fifth, the introduction of the blockchain information system will simplify the medical insurance claim process. Sixth, blockchain can facilitate the upload and integration of experimental data records from different sources due to its characteristics of immutability and transparency.

      There have been new attempts to apply blockchain technology to control the SARS-CoV-2 pandemic throughout the world. The decentralized architecture, high transparency, high interoperability, and high confidentiality and security of the blockchain system meet the requirements for national epidemic prevention, surveillance, and management in Taiwan. If the blockchain surveillance system operated by the Center for Disease Control (CDC) detects a clear growing trend of infections after analyzing data from primary care clinics, hospitals, pharmacies, and long-term care facilities, the healthcare authority could take immediate actions to control the outbreak.

      Blockchain technology can improve healthcare delivery in a decentralized, immutable, transparent, and secure manner, and it has the potential to provide long-term benefits as it develops and integrates with other emerging technologies. It can not only protect existing electronic medical records but also provide a powerful tool for patients to take control of their health data.

   5. A Survey on Blockchain-Based Federated Learning (BCFL) Frameworks

      Chia-Yu Lin, Li-Jen Wang, Ted T. Kuo

      Abstract

      Federated learning (FL), proposed by Google in 2016, has attracted increasing interest from academia and industry to address the data shortage issue of machine learning due to privacy concerns. The emerging FL paradigm outsources model training tasks to data owners instead of collecting data and saving them to a central repository. In an FL setting, a central server coordinates the learning rounds by dispatching the model under training to each client, which trains the model using her data. Thus, FL preserves user data privacy while satisfying machine learning needs. However, adopting a centralized server requires participants’ trust in the server. Moreover, federated learning does not address how to incentivize data owners to participate. Without proper reward/penalty systems, it is hard to ensure all clients behave and provide quality data for training. With features such as immutable distributed ledgers, smart contracts, and integral incentive mechanisms, blockchain has shown promises to be used with FL to solve the trust and incentive issues. This chapter reviews recently proposed Blockchain-based Federated Learning (BCFL) framework architectures and categorized them into three design patterns according to blockchain scaling mechanisms. We characterized each pattern’s applicability, advantages, and disadvantages from the network architecture, privacy and security, and incentive designs. These analyses provide insights for future framework design and three open research areas for further study.

   6. Blockchains and Cybersecurity

      Lo-Yao Yeh, Jiun-Long Huang, Po-Ting Tsai

      Abstract

      In today’s era of information explosion, data is being constantly created and accumulated, making it a valuable resource. Storing these large and sensitive resources securely and efficiently introduces a number of challenges. Blockchain, a decentralized digital ledger known for its tamper-proof and transparent characteristics, has great potential to improve data collection and storage. This chapter will discuss how blockchain technology can be used in data sharing and verification services. For example, it can be combined with software-defined networks (SDNs) to enable secure and intelligent data sharing in Intelligent Transport Systems (ITSs). Additionally, researchers can use a blockchain-based platform with smart contracts and batch verification to maintain scalability and the integrity of firmware updating files. Lastly, a decentralized DDoS data exchange platform over a consortium blockchain, called SOChain, can be used to address issues of trust and fairness in DDoS blacklist sharing. Overall, we believe that blockchain will play a crucial role in the current data landscape due to its secure and powerful features.

8. The Blockchain Ecosystem

   1. Frontmatter

   2. The Use of Blockchain Technology in the Compliance Function

      Mark L. Shope

      Abstract

      This chapter explores the opportunities and challenges of utilising blockchain technology to enhance compliance monitoring, regulatory compliance, and due diligence. Blockchain technology may offer the tools needed to usher sophisticated businesses into a new technological era, but ideas about how blockchain technologies fit into current compliance regimes continue to evolve. When new and fundamentally transformative technology meets traditional ways of thinking, there tend to be contradictions to our schema, and the revelation of possibilities is not entirely apparent. Thus, this chapter will attempt to discuss new possibilities of blockchain in the compliance monitoring, regulatory compliance, and due diligence functions. Attention will be given to six possible advantages of using blockchain technology in the compliance function of an organisation: (1) transparency, (2) immutability, (3) real-time availability of information, (4) security, (5) uniqueness, and (6) proof of compliance. This chapter will also discuss challenges to using blockchain technologies and conclude with suggestions.

   3. Who Cares About Decentralized Finance? Evidence from DeFi Attacks

      Xian Zhuo, Felix Irresberger, Denefa Bostandzic

      Abstract

      This chapter provides an overview of historical decentralized finance (DeFi) protocol attacks. We empirically analyze the impact of DeFi attacks on the underlying blockchains’ valuation. Using event study difference-in-differences regressions, we show that treated blockchains, relative to control group blockchains, experience an increase, rather than a decrease, in the market capitalization of the native cryptoasset in the days following the attack. Our results suggest that single DeFi security issues, once resolved, enhance the value of the underlying blockchain. We discuss our findings in the context of the vast blockchain and DeFi protocol ecosystem and its security.

   4. Imagining a Democratic, Affordable Future of Foundation Models: A Decentralised Avenue

      Fengxiang He, Lihao Nan, Tongtian Zhu

      Abstract

      Foundation models show astonishing performance for a variety of tasks while requiring extremely huge amounts of computing resources in both training and inference. Such costs are beyond the affordability of most users; consequently, foundation models are dominantly occupied by tech giants. To pursue an affordable and democratic future of foundation models, there is growing interest in examining decentralised learning approaches. This chapter provides a thorough review of the current decentralised solutions and offers insights into prospective strategies to overcome the existing barriers. We also describe our insights in facilitating decentralised learning by blockchain, as well as challenges and future work. In our vision, decentralised learning will energise the foundation model economy, but is still obstructed by major challenges such as establishing robust incentive mechanisms and developing training strategies suitable for heterogeneous environments.

   5. The Development of Blockchain Platform for Maritime Supply Chain

      Chin-Tung Lin, Teddy Chen, Henry Horng-Shing Lu

      Abstract

      In recent years, supply chain processes have been improved through digitalization. However, digital data is sometimes unsynchronized and untrustworthy. Many blockchain applications have been developed in different supply chain industries to solve the issue based on the features of blockchain, such as tamper-proof, immutability, and traceability. The text focuses on a specific supply chain, the maritime supply chain, due to its significant position in global trade. The text aims to explore some blockchain applications in the field, compare them, and discuss them from different aspects. The text begins with the basic idea of blockchain and its evolution, followed by the basic knowledge of supply chain and maritime supply chain. By delving deeper into these topics, the text reinterprets the concept of blockchain 4.0, proposes a framework to explain the bottlenecks of digitalization in the field, and claims that blockchain can break the bottlenecks. Subsequently, the text discusses the applications from the aspect of blockchain 4.0. The advantages and disadvantages of each application’s design are shown, and suggestions to reach blockchain 4.0 are provided. Researchers and application builders can refer to the text to discover research topics and develop successful blockchain applications. The ecosystem will then become more and more efficient.