With the early adaption of Bitcoin, a decentralized cryptocurrency in the financial world, the policymakers started doubting that they will be able to keep their jobs given the new currency was an open door for crimes because of its lack of traceability and ensuring anonymity features. That is why in the beginning Bitcoin worth millions got stolen and were in a non-recoverable state. However, with the passage of time, quality researchers have been able to propose techniques that can be legalized to recover lost Bitcoins to some extent.
Every Bitcoin transaction is stored on a public ledger distributed across multiple hosts all over the world collectively called Blockchain. So, every transaction a user makes is potentially on a public platform but what makes it difficult to trace lost Bitcoins is that Bitcoin, unlike money, doesn’t have an identity. Using some reverse engineering one can track where the transaction emerged from but it’s difficult to pinpoint the exact ownership of a particular Bitcoin.
The UCL London and Cambridge university students however have been able to propose a first in first out technique according to which from a given wallet, if the initial Bitcoins to enter were from stolen source or faulty, they would be the first to get spent. This way, instead of using a brute force algorithm to trace back all the bitcoins spent from a given wallet, only some number of initial Bitcoins can be traced and the initial source of a transaction can be tracked.
A previously suggested approach to detect a stolen Bitcoin was to ping all the valid nodes of the network and if a particular node is set up using some fraudulent way, it wouldn’t send back a normal response to the system querying it. Ross and co. from Cambridge however, also worked on “peeling pattern” which was used by gambling sites. The process to detect stolen Bitcoins is all about detecting patterns used by the agencies.
One way to go around the FIFO( first in, first out) is randomizing the coin allocation through wallet in which case the algorithm wouldn’t be of much success. But if on authorization level, the principle of FIFO is agreed upon and made part of the mainstream network as a law, it would not be easy for the crime involving parties to hide as much as they can right now and even from a user perspective, it may become easy to recover someone’s lost Bitcoins because of a general trend followed by online wallets for Bitcoin transactions.