Identify Large Fund Wallets on Ethereum using On-Chain Analysis
By: Patrick Gorrell
Tags: Data Science, Blockchain, Trading, Ethereum, Bitcoin

Decentralized Retail Trading:

The Future of Finance and Retail Trading with On-Chain Strategies

By: Patrick Gorrell, Patrick Doyle, Roman Krasiuk

“We assumed we knew nothing about investing in digital assets and we sought to find the wallets that seemingly knew everything because they had access to information that nobody else had” - Patrick Gorrell

TLDR;

Since our early inception, FRST has used on-chain data to find specific patterns of activity that would give us a competitive edge when investing in digital assets. The mantra our team followed was simple and humble. FRST believed the wallets with money knew more than we knew. In doing so, we set out to find the wallets that seemed to be moving the markets. Although we could not detect the trades that were occurring behind the scenes of centralized exchanges like Binance, Poloniex or Kraken, we could detect the wallets that were depositing and withdrawing the most value.

Using conventional analytics tools made it nearly impossible to conduct a historical search for the types of patterns we were looking for; so we had to make our own. Along the way, we were able to identify all of the largest depositors on exchanges and follow where they were originating their funds. FRST began working with Capital Markets Trading Digital (CMT Digital) in Chicago to understand the flow of value and the personas of trading activity behind the wallets. In doing so, CMT and FRST have successfully been able to target opportunities that would otherwise go unnoticed.

Identifying Funds Heuristic

When searching through the vast number of wallets that exist on Ethereum, there are very few tools available that provide the specific wallet details necessary for spotting funds. The idea behind the heuristic is to find the largest depositing and withdrawing wallets into centralized exchanges. We assume that many large funds take advantage of price differences between exchanges so it was very likely that we could spot the movements between their accounts. About 87% of the wallets on Ethereum exist between exchanges. This means that a majority of the activity on Ethereum is token transfers from one exchange to another. By identifying wallets that act as treasury wallets, you can begin to map out all of their customer’s deposit and withdrawal wallets.

“If you want to find the funds, just look for the large depositors.” - Patrick Gorrell

Understanding how exchange wallets work

Most centralized exchanges manage funds on account-based chains differently from UTXO chain. Ethereum’s account-based model allows for more transparency into how exchanges manage funds for their internal treasury wallets and customer custodial wallets. There are 3 basic types of wallet personas that are associated with most centralized exchanges.

Exchange Custodial Wallets (Customer Deposit Wallets) Exchange Treasury Wallets (Exchange Primary Wallets) Exchange Withdrawal Wallets

Custodial/Treasury/Withdrawal Wallet Structure

The wallets that are most important to identify are the custodial (deposit) wallets of an exchange. By locating the large depositors, we can find that funds typically move large value transfers either from one exchange directly to another or, they move funds from a wallet outside of exchanges from a cold wallet.

The second most important type of wallet to follow is the withdrawal wallets. As stated before, roughly 87% of wallets on Ethereum exist in between exchanges. We believe this is due to a large number of wallets that interact with the exchanges and them trading assets on more than one exchange. This means that a majority of the time, a withdrawal wallet is, in fact, a custody wallet to another exchange.

Typically, there are treasury wallets that are specific to deposits & withdrawals as well as types of assets on Ethereum. Binance, for example, has multiple addresses that they use to source customer funds from custodial wallets and others that are used to manage withdrawals, whereas Poloniex has wallets for different assets like Ethereum-based REP, ZRX, BAT & STN.

Binance Exchange Cluster: FRST Platform

Poloniex Exchange Cluster: FRST Platform

Transactional Patterns

After working closely with many of the large firms in digital asset trading, our team soon discovered that most funds have something called a clearing function. A clearing function is a designated individual who clears the transaction for any deposit into an exchange. Additionally, we assume that funds would be very wary of moving large value transactions without sending an initial test transaction. An easy way to predict when a large transaction is about to occur is by looking for wallets that pass enormous amounts of value that send test transactions before every new type of asset allocation to the exchange.

Transaction Filtering