FINE-GRAINED TAINT TRACING IN CRYPTOCURRENCIES: A SUB-RANGE-BASED UTXO MODEL WITH VERKLE TREE PROOFS

Abstract

Cryptocurrency taint analysis is critical for tracking illicit funds, but existing methods either over-taint legitimate coins or struggle with scalability. This thesis proposes a finegrained taint tracing model for UTXOs that treats each coin as a collection of indivisible sub-units (satoshis) with unique IDs. We design a sub-range-based UTXO model with the support of Verkle tree commitments to efficiently encode and prove ownership of these sub-units and to validate the correct computation. Our approach allows a user to spend arbitrary portions of a UTXO while providing succinct cryptographic proofs: a membership proof to showeach spent sub-unit existed in theUTXO, a delta proof to prove the UTXO's commitment updates correctly after removing spent parts, and a combined Vroot proof to verify multiple inputs merge consistently into newUTXO.We validate the model's correctness using Kate-Zaverucha-Goldberg (KZG) polynomial commitments ensuring that the sum of spent and remaining parts matches the original commitment with minimal verification overhead. In our design, no on-chain enumeration of sub-units is required , only short commitments and proofs. Key findings demonstrate that finegrained taint can be traced through complex transactions (including coin mixes) without false positives: taint remains tied to the exact units of illicit origin. This work bridges the gap between regulatory needs and technical feasibility by delivering a provably correct, efficient mechanism for tracking tainted cryptocurrency funds at a granular level.