Supercharge Your Compliance In Web3: Multichain Systems for Brand Security and Throughput

Brands hesitate to enter the cryptocurrency ecosystem due to potential hacks and low throughput. Here’s how brands are leveraging multichain systems to overcome this challenge.

Key Takeaways

• Access-restricted blockchains lead to KYC-compliant applications
• Custom EVMs can significantly increase decentralized application throughput
• Organizations like Shopify are starting to use multichain platforms to create their own blockchains

Reasons Businesses are Hesitant to Use Blockchain

If blockchains can provide benefits such as decentralized markets, instant cross-border payments, and tokenization of real-world assets — how is it possible that not many businesses leverage these benefits?

To get a quick insight into this question, we can turn to a recent comment from the head of the SEC, Gary Gensler. He mentioned that Bitcoin “is primarily a speculative, volatile asset that’s also used for illicit activity…”. This statement accurately represents the perception that an average US adult has concerning cryptocurrencies and blockchain technology.

However, it’s not just the money laundering part. Nearly monthly, we find out about another DeFi smart contract that has been hacked. This news contributes significantly to the hesitancy among businesses since a hack can directly lead to customers losing funds. Security audits are expensive, and none of them are bulletproof. The potential for a malicious actor to compromise your user base is very real— and that’s not good for customer retention and brand reputation.

Moreover, understanding terms like ‘gas fees,’ ‘transaction signing,’ ‘wei’, ‘blocks,’ etc., can prove frustrating for a user who simply wants to invest some of their money in a financial instrument or participate in a brand’s marketplace and loyalty programs. This confusion leads to social engineering attacks since users simply do not know what they’re doing.

How To Secure Blockchain Applications

The risks are two-fold; it’s not just the user-facing problems. Businesses have a hard time trusting the underlying blockchains (due to potential hacking vulnerabilities), and they also struggle with uncertainty regarding the auditors’ review of smart contracts, as there is always an inherent level of risk.

What if enterprises could create blockchains with their own set of rules, permissions, and user roles? That's exactly the purpose of multichain systems like Avalanche—they hand companies the tools to shape their own rules. For example: to prevent attacks on smart contracts, they can define restrictions on who can transact in the blockchain and also what actions they can do within the network.

Through the use of precompiles that enforce permissions and roles, users are blocked from executing certain transactions like contract deployment, transfers, and whatever else the business might want to restrict. This is an extra layer of security for enterprises that want to operate safely in the ecosystem.

Multichain systems ensure interoperability between networks, meaning users won’t have their assets locked into app-specific blockchains. Companies have the ability to construct bridges between their networks and others.

Being KYC Compliant in Blockchain

Sure, blockchains are used for illicit activity — there’s no real argument against that. However, every year, multiple solutions addressing this concern pop up. Systems like Polkadot, Cosmos, and Avalanche provide tools that enable “Know Your Customer” processes. As a literal “blockchain” developer, you can customize a network to only allow certain users to transact in it, similar to an NFT whitelist, but for specific transactions done in the whole network.

Introducing App-Specific Blockchain KYC

As a law-abiding brand, the last thing you want is to inadvertently facilitate money laundering for illicit activities while developing a protocol — whether that be for DeFi, marketplaces, or loyalty programs. You must implement a process where users are required to submit an identity verification form. In a compliant blockchain, an administrator carefully reviews verification forms, and upon approval, the users are added to the blockchain’s transaction whitelist. This approach ensures that, with proper identity verification, your organization remains fully compliant with regulations.

For Avalanche, the precompiles that might be used for this task are the AllowList and Smart Contract Deployer precompiles. Adding this configuration to the blockchain initialization file is a straightforward process, significantly easier than building a blockchain from the ground up.

{
  "contractDeployerAllowListConfig": {
    "blockTimestamp": 0,
    "adminAddresses": ["0x8db97C7cEcE249c2b98bDC0226Cc4C2A57BF52FC"]
  }
}

Are Blockchains Scalable?

They can be. With the recent development of ZK-rollups, L2 blockchains can group transactions (off-chain) and then submit them as a compressed blob to the underlying L1 blockchain (such as Ethereum), where their validity is verified using zero-knowledge proofs. Using this method, L2 blockchains significantly increase their throughput while inheriting the security layer-1 networks provide.

However, this is not the only tool that we can use to scale. Multichain systems allow us to configure how long a block of transactions takes to be incorporated into the chain. This parameter increases the throughput and allows for near-instant operations. Development teams can easily customize transaction speed parameters to suit their requirements.

Additionally, Avalanche sets itself apart with a unique consensus mechanism, validating transactions through sub-sampled voting. This approach ensures low transaction latency, surpassing most L1 and L2 blockchains.

Real Word Use Cases of App-Specific Blockchains

1. Gunzilla (Gaming): This game uses a custom low-latency and high-throughput blockchain to register user actions in a full-fledged AAA environment.
2. Shopify (Loyalty Programs): Shopify, partnered with TYB, uses a custom blockchain to allow eCommerce merchants to reward their fans for actions like writing reviews, making referrals, and posting to social media.
3. Dreamus (Ticketing): Dreamus, part of SK Planet, uses Avalanche to enhance its OK Cashbag ticketing app. With 21 million users, the app streamlines digital transactions, combats scalping, and ensures ticket authenticity in South Korea’s $230 million ticketing industry. With such a large user base, an app-specific L2 blockchain is necessary.

Also published here.