Towards Integrity: How On-Chain Data is Changing the Game
In today's digital age, data has become essential for industries worldwide. The availability and quality of data have a significant impact on decision-making, innovation, and market dynamics. To derive real benefits from the wealth of information collected, entities must ensure that the data is reliable and accurate. This is where data transparency and traceability come into play.
Blockchain technology has emerged as a powerful tool for achieving this market transparency, revolutionizing the way transactions are recorded, verified, and audited. And the heart of this revolution lies in on-chain data, which refers to the information stored on a blockchain that is accessible to all participants in a decentralized network.
Why do We Need Transparency in Data?
Over the past decade, the practice of manipulating financial data has persisted and continues to prevail among various companies. This deceptive tactic is employed with the aim of creating a facade of success and profitability.
Through meticulous manipulation of financial reports and customer figures, companies can create an illusion that attracts investors, drives up stock prices, and potentially secures additional funding or favorable loan terms. They also use it to conceal internal struggles, financial difficulties, or mismanagement issues (1).
For example, just 2 months ago, a thorough inquiry conducted by the messaging app IRL's board of directors revealed that approximately 95% of the app's claimed 20 million users were determined to be "automated or from bots." The unicorn social app, which had once attracted $200 million in investment and a valuation of $1.17 billion, was shut down overnight (2).
The consequences of such actions are far-reaching. Company's engagement in fraudulent financial reporting erodes the trust and confidence of their customers, the lifeblood of any company. The very foundation on which businesses thrive is built on a relationship of trust and transparency, and any breach of this trust can have severe repercussions.
Blockchain technology has emerged as a solution within finance to address these issues with on-chain data. On-chain data essentially refers to all the publicly available information regarding transactions that have occurred on a particular blockchain network. This could include wallet addresses, transaction hashes, inflow and outflow amount, etc. Let's say in IRL's case, it would be infeasible to falsify their on-chain users as the wallet address calculation would inherently expose their actions. The increased transparency would reduce sudden and unrealistic spikes in company valuations, benefiting all involved parties.
The transparency of data stored on the blockchain has the potential to revolutionize not just the finance industry, but also various other sectors. Take the healthcare industry, for instance. If medical records are stored using blockchain technology, neither doctors nor patients would have the authority to tamper with the data. This would effectively prevent insurance fraud and ensure the integrity of the records. Similarly, in the logistics industry, real-time visibility of information through transparent data can help prevent fraudulent declarations of goods.
In addition to offering precise and reliable information, on-chain data also provides investors with real-time updates on market activity. By monitoring the behavior of assets directly on the blockchain, investors can anticipate potential issues and stay ahead of the broader community. By continuously updating themselves with on-chain information, investors can gain an advantage and make more informed decisions.
Figure 1. Trading Volume on Decentralized Exchanges. Source: Crypto Macro Report by M3TA
In the blockchain industry, companies would compete based on their level of transparency. The more transparent a company is, the more trust investors will place in its security or utility tokens, especially after the FTX exchange bankruptcy.
Moreover, transparency in on-chain data enables investors to track the movement and distribution of tokens, facilitating a clearer understanding of market trends and investor sentiment. This real-time visibility allows investors to make timely adjustments to their investment strategies and capitalize on emerging opportunities or mitigate risks (3).
With such importance, this topic will be explored in greater detail at KBW 2023.
Challenges & Solutions
While the presence of transparent on-chain data offers various advantages, it also presents certain obstacles. Anonymity of the data is one such challenge, making it difficult to identify the individuals involved in cases of exploitation or scams. While this anonymity can safeguard privacy, it also hinders accountability, potentially resulting in permanently lost funds.
Hackers used to employ Tornado Cash, a decentralized protocol that uses zero-knowledge proofs (specifically zk-SNARKs) to enable anonymous transactions on the Ethereum network, allowing users to withdraw funds from the blockchain. When a user deposits Ether or an ERC-20 token into Tornado Cash, the deposit is mixed with other deposits in the pool. When the user wants to withdraw the funds to a new address, they provide a proof that they have a valid claim to the funds without revealing which deposit it corresponds to, breaking the on-chain link between the source and destination addresses.
However, Tornado Cash has been prohibited in numerous countries, making it challenging for hackers to execute withdrawals and launder illicitly obtained funds. In this context, transparency acts as a potent regulatory mechanism, ensuring a level of oversight and discouraging malicious activities within the blockchain ecosystem.
Another challenge is the potential for misinterpretation or malicious use of the data. For instance, a seemingly routine transfer involving a well-known entity like Vitalik could be misinterpreted as negative news, leading to negative impacts on the market. This highlights the importance of careful analysis and understanding when interpreting transparent on-chain data.
To address transparency challenges in on-chain data, there are solutions available. DeFi insurance projects in the blockchain space can assist users in recovering their funds. Additionally, tools and algorithms can be developed to aid users in understanding and interpreting on-chain data accurately, minimizing misinterpretation and manipulation risks. Notable organizations such as CryptoQuant, Arkham Intelligence, The Tie, and M3TA offer valuable insights and data analytics on various cryptocurrencies, entities, and platforms, facilitating better tracking and assessment of crypto platforms.
Figure 2. One of M3TA’s Monitoring Reports. Source: Maverick Protocol: Monitoring by M3TA
In conclusion, on-chain data represents a paradigm shift in the way we handle and utilize data. Its inherent transparency, accountability, and trustworthiness have the potential to revolutionize various industries and empower individuals. By embracing on-chain data and addressing the associated challenges, we can build a future that is built on data integrity, where trust is inherent, and transparency is the norm.
- CFI Team, Top Accounting Scandals, March 13, 2023
- Amanda Silberling, Unicorn social app IRL to shut down after admitting 95% of its users were fake, June 27, 2023
- Rin on Red Kite Medium, On-chain Data Analysis, A Crucial Tool to Evaluate the Market and Make Reasonable Investment, August 9, 2022
Established in 2022, M3TA is an AI-enabled data analytics platform dedicated to Web3 & emerging blockchains. Our team, composed of experts from Stanford, MIT, and Fortune 300 companies and seasoned in Defi, NFT, Metaverse & Gaming and Web3, distills over 10TB of data, covering 500+ projects and 5K+ tokens to produce clear insights for all audience levels. Boasting a robust presence in Korea, Vietnam, and South-East Asia, and spanning an evolving partner network, most currently with Google Cloud and FactBlock, M3TA is your trusted partner in unraveling blockchain complexities.
Writer & Reviewer: Research Analysts & Content Writers at M3TA Analytics
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