An Introduction to «On-chain» Analysis
Illustration by xresch
If you are into the Blockchain space, chances are that you have encountered terms like on-chain data, on-chain transactions, on-chain analysis, and on-chain metrics. And if you have just started following this emerging technology, then gaining an insight into the concepts of on-chain data or on-chain analysis might get a bit tricky. By the end of this article, hopefully, you will walk away with a decent understanding of this crucial Blockchain topic. Recap: What is a Blockchain?
However, before entering the world of on-chain data, let us have a quick recap regarding what Blockchain is: Even though the breakthrough of Blockchain, in popular culture, is often accredited to Satoshi Nakamoto for his revolutionary invention of Bitcoin, the original minds behind the idea of a cryptographically secured chain happen to be Stuart Haber and W. Scott Stornetta. The two academic researchers proposed in 1991 the development and implementation of a timestamp-based digital tool that was intended to make valuable documents published on the web both permanent and tamper-proof. A «proof protocol» would support and verify that a document existed at a certain point of time in a certain definite version.
Today’s most popular Blockchain protocols contain many of the original characteristics. In layman terms, a public Blockchain might be defined as a digital chain consisting of blocks where each block contains tranches of valuable information and a unique alphanumeric code known as a hash. A block is not only marked with its own unique hash but also with the hash of the previous block – a system through which Blockchains become almost impossible to be hacked once they have reached a certain length. Conceptually, a Blockchain is defined as a digital public ledger consisting of records distributed over a wide network of nodes where a single node (i.e. computer system), person, or organization is not authorized to make changes or control the flow of information unilaterally.
Blockchain technology lays the foundation for a potential shift from centralized financial and information systems to decentralized public networks that enable a «trustless» transfer of value and information.
What is on-chain data?
On-chain data includes the information of all occurred transactions on a certain Blockchain network – or put differently – all information written on the blocks of a Blockchain. In case of a public Blockchain, this information is available for everyone to see. The data can be broadly classified into three distinct categories:
Transaction data (e.g. sending and receiving address, transferred amount, remaining value for a certain address)
Block data (e.g. timestamps, miner fees, rewards)
Smart contract code (i.e. codified business logic on a Blockchain)
On-chain vs. off-chain data
Off-chain transactions are not (or at least not fully) executed and recorded on the Blockchain. This is in sharp contrast with on-chain transactions where the transfer of value occurs on the Blockchain network and therefore gets recorded. In a more traditional sense, the two kinds of transactions can be understood as «on-record» and «off-record» practices: Imagine a scenario where you are required to transfer a sum of money to X’s account. You can discharge your liability by following the traditional routine of transferring the value to X’s bank account via your bank account or some third-party vendor, like Paypal. Alternatively, you might prefer to settle the debt through other practices such as funding coupons and sharing the code with X or simply exchanging your PayPal password with X. While in the first case the bank or third-party provider typically charges its customers a fee for their services, the alternative practices permit individuals to dodge transaction costs.
Similarly, in a Blockchain ecosystem, off-chain transactions can occur in various ways. The simplest off-chain settlement involves the exchange of private keys through which full access to the owner’s funds are granted. Now, this prompts us to ponder over possible reasons for a party to opt for an off-chain transaction over an on-chain transaction. One key factor concerns the high transaction costs for exchanging cryptocurrencies such as Bitcoin. Especially for small transactions the miner fee might exceed the amount to be transferred, consequently making such a transaction economically unfeasible when executed on-chain. Performance is another crucial factor: On-chain transactions are not only limited in terms of speed but also regarding size. As a result, it can become very expensive to store a larger amount of data on-chain. Moreover, certain actors on public Blockchains may favor off-chain over on-chain transactions due to privacy concerns.
On-chain analysis and metrics
On-chain analysis is an emerging field aiming at extracting and scrutinizing the plethora of available data about public Blockchain transactions to facilitate a better decision making. Its tools and techniques are often applied for trading and investment purposes.
One of the first popular on-chain metrics was Coin Days Destroyed, introduced in 2011 to track the activity on the Bitcoin network. Coin Metrics’ launch of the Network Value-to-Transaction (NVT) ratio in 2017, a method to value Bitcoin taking into account both its market capitalization and actual usage in terms of network transactions, led to a broader interest for on-chain analysis techniques. Today, a vast number of similar and often more sophisticated on-chain indicators exist. In the next section of this article I will present different on-chain data and analytics tools that let users play around with and learn more about on-chain indicators. Popular providers of on-chain data and analytics tools
The amount of energy, time, and money required to run a node, store, and maintain a copy of an entire Blockchain is not within the reach of every individual or organization. To logically gather, structure and analyze the captured Blockchain data is an even more difficult task. Luckily, different companies have emerged over the past few years that offer dissected on- and off-chain data to users. Here I briefly summarize the solutions of eight popular Blockchain data providers:
The mission of Coin Metrics, founded in 2017, is to provide investors with in-depth market knowledge regarding all major cryptocurrencies. They offer four products: 1) Network data (e.g. visualization tools, on-chain exchange flows, coin age metrics, transaction backgrounds)
2) Market data covering the top 20 global exchanges
3) Indexes 4) Third-party data (e.g. Twitter sentiment feed) A formula builder, legacy and reference rate charts complement Coin Metrics’ product portfolio.
Switzerland-based Glassnode is renowned in the Blockchain space for its ever-expanding range of innovative on-chain indicators. The company’s online platform is very easy to use thanks to a great user interface. Even with the free plan, one can access a broad set of data points. Glassnode also publishes in-depth reports about on-chain insights on a regular basis. Furthermore, users can learn about different on-chain analysis concepts and indicators in Glassnode’s free «academy».
Dappradar tracks over 3,000 Decentralized Applications (dapps) in real-time. The platform is a hub for accessing the ranking of the most popular applications running on distributed computing systems. Dappradar also acts as a distribution channel for developers looking to expand their reach as well as providing them with the advertising facilities for new dapps.
Dune Analytics mostly deals with Ethereum on-chain data and enables users to access, analyze, and visualize decoded Ethereum smart contracts into self-explanatory graphs and reports. The Ethereum analytics website renders actionable market insights and reports extracted from on-chain data.
IntoTheBlock’s Blockchain indicators are categorized into four main groups: 1) Ownership (provides insights based on ownership concentration) 2) Financial (covers price information to provide insights into profitability / the monetary value of transactions) 3) Network (user growth, transaction activity patterns, costs) 4) Social (Telegram and Github metrics).
Xangle provides a 360-degree overview of a vast number of Blockchain assets or projects by combining off-chain and on-chain data. The statistics are presented publicly on each project's dashboard page.
CryptoQuant is a Seoul-based Blockchain data solution provider that focuses on Bitcoin, Ethereum, and stablecoins. Its data, which is available via API or directly in Python, R and Excel, can be classified into four subsets: 1) On-chain data 2) Exchange data 3) Miner data 4) Network data
Germany-based Anyblock not only offers data and tools but also professional consulting services for blockchain projects. Anyblock’s unique Index allows visitors to scan and explore data for 22+ Ethereum- and Bitcoin-based products in real-time.
Dapp.com, Elementus, and Alethio are other noteworthy Blockchain data providers.
In a world where data is considered the new gold and Blockchain is on the brink of transforming how (digital) value is being stored and exchanged, the relevance of emerging on-chain analytics practices cannot be overstressed. Different players have emerged over the past few years, offering their users a plethora of easy-to-apply on-/off-chain indicators and data sets. It is in the nature of things that not all indicators will prove insightful over time. Nevertheless, the on-chain analysis phenomena is here to stay and will likely grow further along with the general adoption of Blockchain technology.