How do Bitcoin Transactions Work?
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This article does not attempt to provide a beginners guide to Bitcoin, nor an in-depth thesis on Bitcoin forensics. Rather, it will be an overview of the potential opportunities available to digital forensics and traditional investigators bitcoin block explorer transaction expression obtain evidence in relation to attributing transactions or holdings to a specific person and legally seizing those funds.
I will discuss academic work that has been undertaken in this area, what precautions a security aware user may take and the issues introduced by them doing so. I will also discuss an open-source Python tool called BTCscan, which has been created to accompany this article and will carve out bitcoin addresses, private keys and other Bitcoin artifacts.
This article may be of interest to persons conducting investigations for criminal, civil, personal or business reasons. Whilst I have undertaken to make this document as easy as possible for the beginner to understand, this is a highly technical area and as such further personal research may need to be performed by readers to understand all the information contained herein.
Bitcoin was not designed to be anonymous, it was designed to retain a high degree of privacy for its users, in the words of its creator Satoshi Nakamoto: Bitcoin transactions can be viewed as they are all recorded in the publicly accessible block chain.
For this reason, Bitcoin has been described as pseudo anonymous. There is no requirement to reveal bitcoin block explorer transaction expression identifying information, including an IP address to receive, hold or transfer bitcoins, unless it is imposed upon you by third-parties, the use of which is optional.
There is also no central person, issuing authority, designated intermediary, organization or country in charge of Bitcoin, therefore there is no single place to subpoena with a court order to determine user account or ownership details. A third party service can manage your private keys for you, however, trust will be required bitcoin block explorer transaction expression they will take all necessary security precautions and not steal your bitcoins. This has given rise to the security conscience bitcoin owner providing their own security for their private keys, rather than relying on third party services.
The storing of bitcoin without third-parties is discussed in more detail below. Due to the above, ownership of bitcoins can be surprisingly hard to prove. Ownership can be thought of as merely knowledge of, or being able to recreate, the private key for the bitcoin address in which the bitcoins currently reside. To increase the potential difficulties bitcoin block explorer transaction expression investigators, a private key can be stored — and hidden — in a number of ways.
Third party websites such as wallet services or exchanges can purchase, hold, trade, store and perform bitcoin transaction for their users. Determining third parties used by a person of interest can be done by examining their internet history, or by examining the block chain. Performing the latter would require knowledge of bitcoin addresses owned by both the person of interest and the third party service, which can then be used to identify the transactions between the two.
Only the direct movement of funds between these known addresses that have not passed through intermediate addresses would be of evidential value on their own, as with any intermediate hops it could be argued that the bitcoins have moved out of the control of the original owner.
Third party services do not typically document the address they use, so assumptions may have to be made. Their method works by fingerprinting users based on the connections they have to other nodes on the Bitcoin p2p network, these connections are randomised and therefore should be different for each connected user.
When a user bitcoin block explorer transaction expression to another node, their IP address is advertised to that node. If an attacker is connected to enough nodes, these announcements can be watched and fingerprinting can be done. But even in these cases, the bitcoin block explorer transaction expression would be able to collate separate and distinct transactions to the same user.
The problem with using this method is that it is not targeted and the more successful you wish it to be i. Users may use Bitcoin over TOR thinking that it increases privacy, but a later paper and real life attack shows doing bitcoin block explorer transaction expression opens the user bitcoin block explorer transaction expression man-in-the-middle attacks if they are not using specific.
Additionally, attackers may have the ability to ban all TOR exit nodes from connecting to the Bitcoin network by abusing Bitcoins spam protections, thus forcing users to connect via more traditional means. The above de-anonymising attack works by performing traffic analysis on the Bitcoin network. This is different from transaction graph analysis which has been the primary subject of the bulk of academic research in this area. This is where the public ledger of bitcoin transactions the block chain is analysed to find patterns or other such artifacts which can then be used to assist the investigator.
The three major factors that can reduce privacy for the user and are exploitable through transaction graph analysis are address reusechange addresses and the merging of outputs. The results of block chain analysis will more than likely not provide you with the real life details of the owner, but it may reveal usage of third bitcoin block explorer transaction expression, with whom subpoenas can be lodged.
Address reuse is treating bitcoin addresses like a bitcoin block explorer transaction expression account where a single bitcoin address is used for multiple transactions. Bitcoin addresses are not designed to be used this way, the fact that they can is by accident and not by design.
There are no restrictions on the number of bitcoin addresses one person can use and the design is such that for each transaction a new bitcoin address should be created. This is not considered wasteful due to the extremely large number of addresses available there are 1. When addresses are reused, all other transactions performed by that address can be seen by examining the block chain.
If you are aware of a transaction made by a bitcoin block explorer transaction expression of interest and bitcoin block explorer transaction expression transaction comes from the same bitcoin address by which this person receives all their payments, then their earnings can easily be determined.
You will also be able to look back at the history of that address, following the chains of transactions, to ascertain what other information can be extracted.
Bitcoins are spent by creating a transaction to transfer the funds from one address to another. Every transaction has one or more input and one or more output — this means bitcoins can be sent to more than one address in a single transaction.
This means if you receive 10 BTC in a single transaction, you must spend the entire 10 BTC if you wish to spend any of it. To receive any change you are owed, two outputs are created; one to whom you are paying and another back to another address owned by the sender. This is bitcoin block explorer transaction expression to as a change address. If you were to buy a 1. This is of interest to an investigator as it can be assumed that one of the bitcoin address associated with an output of the transaction is also owned by the bitcoin block explorer transaction expression of the transaction.
Mixing services also called bitcoin block explorer transaction expression and tumblers are used to exchange a set of bitcoins which are perceived to be tainted for another set which are believed to be taint free, for a small fee.
This is done in an attempt to stop bitcoin block explorer transaction expression being able to follow the block chain and determine current ownership of bitcoins that they have a specific interest in. If a mixing service operates as advertised, then the bitcoins that the user ends up with have no relation to those deposited into the system. The user has to generally trust that the service has enough customers in order to effectively mix the amount of bitcoins they have deposited and that they do not retain any log files of the mixing.
Some research has indicated that at least in some cases, the mixing services may not be as secure as they suggest to their users, with transactions of services being able to be picked out of the block chain or the deposited funds being stolen outright. Bitcoin mixing services may soon be replaced by privacy enhanced wallets such as dark wallet which uses transaction mixing with every transaction conducted bitcoin block explorer transaction expression the wallet as well the use of advanced privacy stealth addresses.
Another method for anonymising bitcoins can be to deposit them in a popular wallet service or exchange and withdraw them some time later — although the service used may retain records.
If the exchange supports other crypto-currencies such as litecoin, ripple, dogecoin, namecoin etc. Any movement or splitting of bitcoins can be a potential issue for investigators, as it can prove extremely difficult, if not impossible to determine what has occurred. Have they been moved from one address owned by the person of interest to another, have they been moved into an exchange or a wallet service or have they been sold? That being said, for large amounts of bitcoins it is easier to obtain plausible deniability of ownership as opposed to full anonymity, for smaller sums either can be obtained with little effort bitcoin block explorer transaction expression a bit of knowledge.
The method by which the block chain is analysed to determine which bitcoin addresses are related to others is called taint analysis. If a person of interest is performing trait analysis on addresses, it may mean that they have performed bitcoin mixing and they wish to check that it was successful.
Bitcoin user de-anonymisation, bitcoin block explorer transaction expression block chain analysis, is an area which I foresee being bitcoin block explorer transaction expression ongoing interest to academia and commercial communities.
While the best-case scenario for an investigator having seized a computer would be to find private keys in plain text, this is increasingly unlikely due to the additional security precautions required to keep bitcoin storage safe from potential thieves and depending on who is holding the bitcoins investigators. An advanced user who has decided to provide their own security and to not trust third parties is likely to store the private keys protecting the majority of their holdings off-line, either digitally or physically.
This is called cold-storage. One way of storing private keys is with a paper wallet; these commonly containing two QR codes, one showing the bitcoin address, the other the private key for spending. These may be folded up so that the spend QR code is not viewable, with only the Bitcoin address showing on the outside. Recently created paper wallets may be BIP protected, where the private keys are encrypted so that a password is required to access the funds.
If a BIP paper wallet is obtained, the password will also be required in order bitcoin block explorer transaction expression move the bitcoins. BIP encrypted private keys start with a 6, non encrypted as above start with a 5. For bitcoin block explorer transaction expression, someone may store a copy of their BIP encrypted private key on their local computer, another in a document stored in the cloud, a print out of the same in a safe with a friend holding a further copy.
With multiple copies of the same private keys only one would be required to move the bitcoins potentially away from seizureas they are all the same.
Another method is storing the private keys on a bitcoin block explorer transaction expression cost computer such as a Raspberry Pi or a cheap laptop which is then kept air-gapped from all networks. To access the bitcoins, transactions can be signed using private keys stored on the air-gapped computer while offline, then these signed transaction can be transported to an internet attached computer via an USB flash drive, before being sent anonymously on to the Bitcoin network as a raw transaction.
This could also be kept permanently off-line, or used only with a security distribution such bitcoin block explorer transaction expression tails for enhanced network security. Bitcoins can be stored in addresses with built in redundancy called m-of-n or multi-sig. Whilst these have similar results and are sometimes referred to interchangeably, they utilise different technologies — one operating outside of the block chain, the other working explicitly within it.
They both bitcoin block explorer transaction expression access to funds within a bitcoin address to be split up between a group of people or different locations to enhance security. For example an address split into 2-of-3, has three parts, any two of which are required to be brought together to recreate the original private key.
These parts may be retained by the same person secured in different locations or they may be handed to three different people. Multi-sig addresses are similar in concept, but they utilises the scripting capabilities of Bitcoin transactions to lock a bitcoin block explorer transaction expression address with multiple private keys and again requiring a certain number of them to unlock the funds.
Of the two using multi-sig addresses is considered the more secure and powerful way of performing key splitting, as unlike SSS, with multi-sig addresses the separate private keys do not need to come together in one place a potential point of failure in order to unlock the funds. A device called Trezor is the most bitcoin block explorer transaction expression currently available hardware bitcoin wallet, and is used to securely store Bitcoin private keys.
It is a custom made single-purpose hardware device and is therefore considered more secure than a computer for storing bitcoins, as general purpose computers are more susceptible to malware and the hardware wallet bitcoin block explorer transaction expression be directly connected to the internet nor can it be accessed without the correct pin-code being entered.
Transactions can be signed using the stored private keys by creating the transaction using an app or website that is compatible with the hardware wallet and then confirming on the hardware wallet bitcoin block explorer transaction expression you wish to sign the transaction. When a Trezor is set up, a recovery seed is bitcoin block explorer transaction expression.
While the Trezor is by far the most popular at the moment, other hardware security devices are beginning to enter the market. Other devices can look like thick credit cards with buttons and a small LCD display or small USB devices — potentially kept on a key ring.
Other Bitcoin related USB devices are 2FA Two Factor Authentication devices, allowing the user to authenticate themselves to websites typically wallet services or exchanges. These may mimic USB flash drives in appearance or be much smaller and they may or may not have a button on them. Alternatively, 2FA can be supplied by receiving SMS messages bitcoin block explorer transaction expression automated telephone calls, an app such as Google Authenticator or Authy on a smartphone or pre-printed one-time codes.
If a wallet service or app is used, then that wallet will manage the multiple address for the user. This has been solved by HD hierarchical deterministic wallets, which can create an unlimited amount of bitcoin addresses from a single seed. As these addresses are created in a predictable manner, only the seed needs to be backed up, without having to worry about the backup being out of date. A BIP compliant HD wallet such as the Trezor discussed above stores the seed as a 12 or more word mnemonic using common English words.
The popular wallet service blockchain. Below is an example 16 word blockchain. Internally, HD wallets store seeds as private and public node keys. These can be separated, so one computer may be capable of creating addresses for an HD wallet, but not being able to access the funds itself.
