Chainalysis, the new company on the block featured earlier on our site is back in news, but this time for a wrong reason. The company has been forced to defend itself after allegations of Chainalysis launching a Sybil attack on bitcoin network surfaced. Chainalysis’ claims to provide financial institutions with the means to access real time transaction information from the blockchain. Their API allows users (their clients) to identify the origin of transactions for regulatory compliance.

Nodegate

Chainalysis allegedly created 250 false nodes to obtain information about the origin of transactions. These false nodes caused disruption of services and threatened to compromise the privacy of bitcoin users. They don’t store or dispense blocks when requested. Thereby causing slowdowns by keeping other connecting nodes in waiting, explained Wladimir van der Laan, one of the Bitcoin Core developer.

In its defense

In response to the allegations, Chainalysis CEO, Michael Grønager has described the “partial” Sybil attack as unintentional. According to him, these false nodes were created to obtain location data for a blog post on international bitcoin transfers. Apparently Chainalysis had taken precautions to prevent these nodes from causing any harm to core bitcoin network. These false nodes don’t contain copies of the blockchain. They collect location information and network data from other trusted nodes.

Damages

Due to these false nodes, many simplified payment verification (SPV) based services were affected. Breadwallet, a decentralized bitcoin wallet was one such service that was affected. Breadwallet users were unable to carry out transactions as these nodes prevented their wallet from syncing with rest of the network.

Chainalysis is now facing the blowback from this incident. Mycelium (where Jan Møller, CTO of Chainalysis is a consultant) has distanced itself from Chainalysis and other node operators are blocking the company’s IP range from connecting to their nodes.

The bitcoin community was prepared to debate about Chainalysis’ services, its repercussions on anonymity of users and security of bitcoin network. Chainalysis, by its actions just handed over more ammo to its critics. Thanks to “Nodegate”, Chainalysis will be drawing heat from the whole bitcoin community.