What Is An Address Cluster?
A Bitcoin address cluster is a collection of Bitcoin addresses that are linked to each other by multiple inputs merged in a single transaction or a series of change addresses over the course of multiple transactions. When addresses are clustered, they are thought to be owned by the same person or entity.
There are a few different ways that address clusters form: merging multiple inputsWhat Are Inputs & Outputs? Every bitcoin transaction is made up of inputs & outputs. Inputs are bitcoin being sent and outputs are bitcoin being received. Until bitcoin is sent... in a single transaction, sending bitcoin from multiple addresses to the same address (address reuse), and “peeling” chains of change addresses.
Merging Inputs
Merging inputs creates clusters when multiple inputs are all merged in a single transaction to generate the outputsWhat Are Inputs & Outputs? Every bitcoin transaction is made up of inputs & outputs. Inputs are bitcoin being sent and outputs are bitcoin being received. Until bitcoin is sent.... This is typically indicative that all of the addresses are controlled by the same person or entity.
Peeling Chains
Peeling chains are a type of address cluster generated from a small number of inputs sent over the course of multiple transactions and change is generated. The change is then used to generate the input in a later transaction until the UTXOWhat Is A Bitcoin UTXO? UTXO is short for unspent transaction output and is any particular fraction of a bitcoin that has not been spent. A single UTXO can hold... becomes too small to be sent all by itself and it is eventually merged with another input.
This creates a “peeling” chain of addresses that are all clustered together. Peeling chains can potentially continue indefinitely unless you use coin controlWhat Is Coin Control? Coin Control is a privacy enhancing wallet feature that enables manual control of which UTXOs (unspent transaction outputs) you send in a Bitcoin transaction. This can... and/or CoinJoinWhat Is CoinJoin? CoinJoin is a type of privacy-enhancing Bitcoin practice that groups multiple UTXOs (inputs) together and spends them with other users' transactions, making it more difficult to know... to break the peeling chain.
Address Reuse
Another way that clusters are formed is when multiple addresses send funds to the same address. While this does not reveal that all of the sending addresses are controlled by the same person or entity, it does link payments by creating a history as well as potentially reveal the nature of the payments.
All of the addresses that made donations made to this address known to be controlled by the Ukrainian government are now clustered which provides chain analysis companies an immense amount of data to analyze.
Visualizing Address Clusters
When working with large data sets, it can be helpful to visualize the data in order to better understand the patterns and relationships between different parts. Address clustering is a technique that can be used to group together transactions from multiple addresses, making it easier to identify patterns and trends. There are a number of different ways to cluster address data, but one common approach is to use inputs and outputs as the basis for grouping. This method groups together all of the inputs for a given address and then groups together all of the outputs for that address.
Visualizing address clusters can be a helpful way to explore patterns in your data. You can see how different addresses are related to each other, and how this changes over time. This information can help you better understand your data and find trends or patterns that you might not have otherwise noticed.
Clustering and the common ownership heuristic is one of many ways that chain analysis companies are able to break down bitcoin privacy and learn about the nature of payments being made. While the common ownership heuristic is not perfect, it is often accurate enough to break down user privacy and potentially reveal the identity of the clustered addresses.