Clustering bitcoin accounts using heuristics

[A version of this post appears on the O’Reilly Radar blog.]

Editor’s note: we’ll explore present and future applications of cryptocurrency and blockchain technologies at our upcoming Radar Summit: Bitcoin & the Blockchain on Jan. 27, 2015, in San Francisco.

A few data scientists are starting to play around with cryptocurrency data, and as bitcoin and related technologies start gaining traction, I expect more to wade in. As the space matures, there will be many interesting applications based on analytics over the transaction data produced by these technologies. The blockchain — the distributed ledger that contains all bitcoin transactions — is publicly available, and the underlying data set is of modest size. Data scientists can work with this data once it’s loaded into familiar data structures, but producing insights requires some domain knowledge and expertise.

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I recently spoke with Sarah Meiklejohn, a lecturer at UCL, and an expert on computer security and cryptocurrencies. She was part of an academic research team that studied pseudo-anonymity (“pseudonymity”) in bitcoin. In particular, they used transaction data to compare “potential” anonymity to the “actual” anonymity achieved by users. A bitcoin user can use many different public keys, but careful research led to a few heuristics that allowed them to cluster addresses belonging to the same user:

“In theory, a user can go by many different pseudonyms. If that user is careful and keeps the activity of those different pseudonyms separate, completely distinct from one another, then they can really maintain a level of, maybe not anonymity, but again, cryptographically it’s called pseudo-anonymity. So, if they are a legitimate businessman on the one hand, they can use a certain set of pseudonyms for that activity, and then if they are dealing drugs on Silk Road, they might use a completely different set of pseudonyms for that, and you wouldn’t be able to tell that that’s the same user.

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Regulation and decentralization: Defending the blockchain

[A version of this post appears on the O’Reilly Radar blog.]

Editor’s note: our O’Reilly Radar Summit: Bitcoin & the Blockchain will take place on January 17, 2015, at Fort Mason in San Francisco. Andreas Antonopoulos, Vitalik Buterin, Naval Ravikant, and Bill Janeway are but a few of the confirmed speakers for the event. Learn more about the event and reserve your ticket here.

We recently announced a Radar summit on present and future applications of cryptocurrencies and blockchain technologies. In a webcast presentation one of our program chairs, Kieren James-Lubin, observed that we’re very much in the early days of these technologies. He also noted that the technologies are complex enough that most users will rely on service providers (like wallets) to securely store, transfer, and receive cryptocurrencies.

As some of these service providers reach a certain scale, they will start coming under the scrutiny of regulators. Certain tenets are likely to remain: currencies require continuous liquidity and large financial institutions need access to the lender of last resort.

There are also cultural norms that take time to change. Take the example of notaries, whose services seem amenable to being replaced by blockchain technologies. Such a wholesale change would entail adjusting rules and norms across localities, which means going up against the lobbying efforts of established incumbents.

One way to sway regulators and skeptics is to point out that the decentralized nature of the (bitcoin) blockchain can unlock innovation in financial services and other industries. Mastering Bitcoin author Andreas Antonopoulos did a masterful job highlighting this in his recent testimony before the Canadian Senate:

“Traditional models for financial payment networks and banking rely on centralized control in order to provide security. The architecture of a traditional financial network is built around a central authority, such as a clearinghouse. As a result, security and authority have to be vested in that central actor. The resulting security model looks like a series of concentric circles with very limited access to the center and increasing access as we move farther away from the center. However, even the most outermost circle cannot afford open access.

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Bitcoin and the Future of Money

I’ll be a hosting a free webcast featuring Andreas Antonopoulos this Wednesday. Author of the new book Mastering Bitcoin, Andreas has emerged as one of the most popular & eloquent proponents of cryptocurrencies and related technologies:

Bitcoin technology is taking the world of finance by storm. Bitcoin and the blockchain technology that is at its core can be used to quickly build secure global financial services on an open and decentralized platform. Join this webcast to learn what bitcoin is, what makes it special, how to get it and how to use it.

For more, come to Bitcoin & the Blockchain: An O’Reilly Radar Summit, January 27, 2015, at Fort Mason in San Francisco.

Decoding bitcoin and the blockchain

[A version of this post originally appeared on the O’Reilly Radar blog.]

When the creators of bitcoin solved the “double spend” problem in a decentralized manner, they introduced techniques that have implications far beyond digital currency. Our newly announced one-day event — Bitcoin & the Blockchain: An O’Reilly Radar Summit — is in line with our tradition of highlighting applications of developments in computer science. Financial services have long relied on centralized solutions, so in many ways, products from this sector have become canonical examples of the developments we plan to cover over the next few months. But many problems that require an intermediary are being reexamined with techniques developed for bitcoin.

How do you get multiple parties in a transaction to trust each other without an intermediary? In the case of a digital currency like bitcoin, decentralization means reaching consensus over an insecure network. As Mastering Bitcoin author Andreas Antonopoulos noted in an earlier post, several innovations lie at the heart of what makes bitcoin disruptive:

“Bitcoin is a combination of several innovations, arranged in a novel way: a peer-to-peer network, a proof-of-work algorithm, a distributed timestamped accounting ledger, and an elliptic-curve cryptography and key infrastructure. Each of these parts is novel on its own, but the combination and specific arrangement was revolutionary for its time and is beginning to show up in more innovations outside bitcoin itself.”

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Financial analytics as a service

[A version of this post appears on the O’Reilly Strata blog.]

In relatively short order Amazon’s internal computing services has become the world’s most successful cloud computing platform. Conceived in 2003 and launched in 2006, AWS grew quickly and is now the largest web hosting company in the world. With the recent addition of Kinesis (for stream processing), AWS continues to add services and features that make it an attractive platform for many enterprises.

A few other companies have followed a similar playbook: technology investments that benefit a firm’s core business, is leased out to other companies, some of whom may operate in the same industry. An important (but not well-known) example comes from finance. A widely used service provides users with clean, curated data sets and sophisticated algorithms with which to analyze them. It turns out that the world’s largest asset manager makes its investment and risk management systems available to over 150 pension funds, banks, and other institutions. In addition to the $4 trillion managed by BlackRock, the company’s Aladdin Investment Management system is used to manage1 $11 trillion in additional assets from external managers.

BlackRock: Aladdin

Just as AWS has been adopted by e-commerce companies, some of Aladdin’s users are BlackRock’s peers in the asset-management industry. In the case of Aladdin2, asset managers have come to value it’s collection3 of high-quality historical data and analytics (including Monte-Carlo simulations and stress tests). In recent years, the amount of assets that rely on Aladdin grew by about $1 trillion per year. To put these numbers in context, the 6,000 computers that comprise Aladdin keep an eye on about “7% of the world’s $225 trillion of financial assets”. About 17,000 traders worldwide have access to Aladdin.

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