Continuing with the analytics theme from the last post, today we will introduce the concept of block explorer analysis.
Public block explorers offer a treasure trove of information about potential blockchain token investments. As every transaction and wallet address created is publicly available on most blockchain projects, we can glean an incredible amount of information on how the project is progressing.
A few caveats before starting:
1. Multiple wallet addresses can be owned by the same person/persons. In addition many users follow security best practices to create a new address for each transaction. An area of active research is blockchain "deanonymization" where programs such as the Bitcoin Graph Explorer can be used to link wallet addresses together through webs of interlinking transaction history.
2. Anonymous focused projects like Monero, Zencash, Verge, intentionally obscure transactions to protect user privacy and are thus more difficult to analyze.
One of the first block explorer metrics we look at are the percent ownership by the top wallet addresses. This can be used to estimate a Gini coefficient, or how fairly tokens are distributed among members of the project.
As projects progress, distribution of the tokens will increase as tokens are bought and sold openly in the market. As evidenced by the recent Ethereum flash crash, owners with several percent of the overall tokens in circulation can potentially fill the entire order book, drastically effecting the price.
A more insidious example is when founders with large holdings leave the project and slowly sell their holdings into the market which suppresses the price. An example of this occurred when founder Steven Dai (potentially Patrick Dai) left BitBay and continued to flood the market with his holdings for several years.
Digging deeper into transactions, it becomes more clear how money is moving through the system.
We can glean several interesting findings from analyzing transactions:
1. We can determine how many address holders are a long term investors. Several accumulation deposits into the same address over a period of time helps indicate long term holders.
2. Multiple wallet addresses becoming inactive shows progress in the project is slowing. There is a difference between an individual investor becoming inactive, and large scale inactivity. Confirmed transactions per day can show this metric, though it is a rough measure of real use as bots can easily generate a large portion of network activity.
3. We can roughly calculate how many coins have been lost. This is especially interesting as lost funds indirectly boost the price of the remaining tokens as long as development of the project remains active. Analysis done on the Bitcoin blockchain shows hundreds of millions of USD equivalent have potentially been lost.
New token creation
New token creation is an interesting metric especially when investigating micro cap projects. As an example, the project "Neurocoin" has only one address mining 98% of the entire coin supply.
This illustrates how important block explorer diligence is before making potential investments. While most larger capitalization projects are not as blatant as this example, understanding the flow of capital inside of each system helps make more informed investing decisions.
Princeton University lecture on de-anonymizing Bitcoin