Risk Assessment

Qualitative risk assessment plays a pivotal role in determining the likelihood of a potential adversarial attack and serves as a valuable tool in managing low-risk exposures while preventing the misclassification of addresses. Establishing a transparent organizational method for transactions based on their associated risk is of utmost importance. To achieve this, we have introduced the Relative Scoring Mechanism (RSM).

Through RSM, each address undergoes evaluation based on its overall transactional activities, with the risk factor being subject to exponential increases or decreases depending on the level of risk associated with these activities. Essentially, each transaction is assessed and assigned a "score." When a certain threshold is surpassed, the address may receive a "risky" index, signifying its potential to pose a significant threat.

The risk score is determined by considering both the total number of transactions initiated by a user, denoted as "T," and the quantity of transactions surpassing the predefined risk threshold, represented as "r." This calculation method aids in accurately categorizing and quantifying the risk associated with each address.

A challenge arises when dealing with new users who lack a transaction history, resulting in nonexistent scores. This limitation becomes more pronounced when we consider that even a single non-threatening transaction immediately assigns a score of 1, the highest possible value, categorizing the user as "risky." Conversely, a single transaction perceived as risky can significantly reduce a user's score. This situation can lead to assessment discrepancies. For instance, a user with numerous non-risky transactions and one risky transaction may be erroneously deemed riskier by the system than a user with just one non-risky transaction in their entire transaction history. The former user, who has left more extensive and diverse transaction records, should ideally offer more room for a qualitative assessment.

To address this challenge, we must adopt a more comprehensive and nuanced approach to evaluating transactions.

Complex Risk Assessment with the introduction of Case Category (Reputation Score):

S = defines the reputation score of a given address. The reputation score is calculated by considering values such as the total amount of transactions by the same user and the percentage of those transactions being risky. The threshold of risk is calculated separately for each address based on the tiers and their respective points. The binary system of risk calculation still remains so there are only two possible outcomes: risky or non-risky. T = refers to the total transactions issued by the given address. R = pertains to the number of transactions issued by the address that involves any of the risk tiers and supersedes the threshold of risk.

Each tier within the Case Category is representative of and adds to the totality of score calculation. Based on the score and whether this score indicates a higher or lower risk exposure, the added “points” will influence the verdict of the assessment.

Category of Cases (Reputation Score)

A case refers to a reported incident involving illicit activity, which may involve multiple addresses. Each case represents a recorded transaction involving a specific address within the MGT Smart Contract, along with its immediate transactional history recorded on the blockchain.

Utilizing the Reputation Score serves two essential purposes: firstly, it provides a more dependable measure of the address's potential threat level, and secondly, it complements the straightforward structure, reducing the margin for error.

Example of Risk Scoring

Exact points given and classification in general might be subject to change.

Tier 0 - No risk

  • 0 Safe - this is a safe address

Tier 1 - Low risk

  • 1 Wallet Service

  • 2 Merchant Service

  • 3 Mining Pool

  • 4 Low Risk Exchange

Tier 2 - Medium risk

  • 5 Medium Risk Exchange

  • 6 DeFi

  • 7 OTC Broker

  • 8 ATM

  • 9 Gambling

Tier 3 - High risk

  • 10 Illicit Organization

  • 11 Mixer

  • 12 Darknet Service

  • 13 Scam

  • 14 Ransomware

  • 15 Theft

Tier 4 - Severe risk

  • 16 Terrorist Financing

  • 17 Sanctions

  • 18 Counterfeit

  • 19 Child abuse

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