When analyzing certain blockchains you can find many transactions in which users give a high transaction fee that exceeds the actual transfer amount. This case happens in cryptocurrency networks with proof of work and in many cases is an initial signal that an entity is attempted to hide the source of funds or launder funds through miners/mining pools.
When you make a cryptocurrency transaction in a proof of work system, it goes into a pool of unconfirmed transactions. Then, miners select your transaction and place it into a block of transactions. The miner solves a special mathematical problem called a proof of work. After that, the network confirms your block and adds it to the blockchain. Each new block added to the blockchain is another confirmation for your transaction.
When we say a transaction has 1 confirmation, that means it’s included in a block.
When we say a transaction has 2 confirmations, that means it’s included in a block which is followed by one block.
When we say a transaction has 3 confirmations, that means it’s included in a block which is followed by two blocks.
One of the behaviors that might indicate the attempt to hide the source of funds or money laundering is passing high fees to miners. Both parties, the miner and the sender are suspected in this case. Here is an example (tx hash: cc455ae816e6cdafdb58d54e35d4f46d860047458eacf1c7405dc634631c570d) of an address which created a tx where almost $134k (on 26-04-2016) were passed that way:
This address 1QgTYzMYqStzZBQx8gguYaJQMjFRbagbh sent to 1DsB8CHc7fa87GUm6qs6YGoCRgQpBo2TJZ 0.0001 BTC but set extremely high fee and paid 291.2409 BTC and this amount went to a BitClub Network miner.
The money in the fee – isn’t lost. The TX fee doesn’t just disappear (otherwise it would be leaking its value). The payment is sent to miners who pick up the transaction and placed on the block. So the “miner” receives the money that the “sender” sent as a TX fee, and if they happen to be the same person, they get the TX fee. They don’t even have to race other miners if they only create the TX after they mine the block first. The transaction is not broadcasted publicly so it won’t be possible for others to get the fee. You can choose whether to broadcast the transaction publicly or not. You are free to privately mine a transaction nobody knows about into a block. Once it is mined it will be public (in the blockchain). When you mine a block, you choose which cryptographically-valid transactions are put into it (and collect the corresponding fees). It’s possible that miner slipped in their own special transaction (from a different wallet address), potentially for money laundering purposes.
Coinfirm has been analyzing the blockchain for such behavioral activity and is already identifying transactions where significant fees are passed to miners. According to our analysis, since Genesis Block there have been:
31,829 transactions with over 0.1 BTC in fees, totalling: $60,739,944.64 (12295.05 BTC)
556 transactions had over 1 BTC in fees, totalling: $1,319,530.76 (5339.16 BTC)
127 transactions had over 10 BTC in fees, totalling: $637,965.83 (3557.38 BTC)
4 transactions had over 100 BTC in fees, totalling: $161,500.82 (774.04 BTC)
The exchange rates were determined based on the block heights of particular transactions.
Below is an example of how such a behavior is reflected in a Coinfirm AML Risk Report.
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