Goldfinch and Blockpass: the first on-chain KYC solutions
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As the cryptocurrency industry grows, global and national financial regulations are putting pressure on crypto companies that offer digital asset services to comply with the same regulations as traditional banks. Accordingly, crypto businesses have to implement Know Your Customer solutions as part of their customer Due Diligence (CDD) procedures.
What is KYC?
KYC simply means “Know Your Customer”. It is designed to help financial service providers to identify and verify their customers. This is done to prevent money laundering.
KYC tools also help crypto companies come in line with regulations by enabling scaling when launching in a new country. Because of the anonymity of cryptocurrency, some people lack trust in trading but KYC balance between privacy and security, KYC (Know Your Customer) measures helps to prevent the illegal use of cryptocurrencies.
Benefits Of KYC
1. KYC builds customer’s trust and transparency
Because of the nature of crypto, where people transact between peers but don’t know who the other individual is, it’s difficult to fully trust them because there’s no way of tracking the transaction if you are taken advantage of. Through verification of the user’s identity KYC improves both transparency and builds customer’s trust. In order to improve user’s confidence, crypto exchanges must take proactive and precautionary measures to protect their accounts so users are more likely to continue using their services.
2. Reduced Potential For Money Laundering and Other Scams
Due to the fast growth in crypto, there is a perception that decentralized platforms are only used by criminals due to the anonymity of the exchange. Robust identity verification can significantly reduce fraudulent activities and boost market reputation.
What is On-Chain KYC?
On-chain refers to transactions that are recorded and verified on the blockchain. It provides security and transparency because these transactions can't be changed once they are verified on the blockchain network. A number of participants help to validate the transactions that occur on the blockchain.
Through the On-chain KYC, compliance for a host of different regulations to the blockchain are merged. This compliance can be accessed and easily proved by any company in the blockchain solutions. It also has an added benefit that allows blockchain technology and the multitude of solutions it brings to be adopted by the audience.
Benefits of on-chain KYC
1. The user has complete control over their identities.
2. The On-chain KYC provides a high security to personal identifier information and protect it from hacking
3. Users can easily store their identities and share across multiple platforms.
Projects that provide KYC Solutions include Goldfinch and Blockpass.
What is Goldfinch?
Goldfinch is a decentralized credit platform for crypto loans to real businesses without the involvement of banks - and even without collateral.“It is said that Goldfinch is the missing piece that finally Unlocks Crypto Lending” techstory.in for most people in the world through decentralization.
Decentralization in blockchain helps in the transfer of control and decision making from a centralized entity to a distributed network. In a decentralized project there is no single server where all information can be stored, if a single server is shut down, it can’t lead to a complete freeze of the project and loss of access.
Because Goldfinch is a decentralized protocol, it helps members become lenders or borrowers without the involvement of a third party. Decentralization helps crypto projects like Goldfinch to gain more popularity.
PARTICIPANTS IN GOLDFINCH
There are Four major Participants in the Goldfinch Protocol;
Borrowers: these are participants seeking to borrow funds. They raise capital from the protocol via Borrower Pools and also propose new borrower pools.
Auditors: they help to check borrowers by voting which is required before they can borrow. They are randomly selected by the protocol and provide a human-level check to guard against fraud. Auditors receive rewards in GFI, the token used for governance votes
Backers: they supply so-called junior tranche capital to borrower pools. They also verify new borrower pools.
Liquidity providers: they supply capital to the senior pool and earn passive yield. 20% of the interest paid by the borrowers is given by liquidity providers to the pool of borrowers as an additional motivation for their activities.
Goldfinch KYC solution
Goldfinch, an unsecured loan protocol (a decentralized credit platform) released an offering called a Unique Identity (UID). The Unique Identity (UID) is a non-transferable NFT representing KYC (Know Your Customer) and also a U.S investor accreditation verification on-chain Unique Identity (UID) is actually the first NFT for Identity.
KYC/KYB (Know Your Customer/ Know Your Business) is designed to help financial service providers to identify and verify their customers. It also helps to check that an entity and its representatives are actually who they say they are. This regulation helps to prevent cases of fraud and any suspicious activities from happening on the Goldfinch Protocol.
Meanwhile the U.S investor accreditation mentioned above, applies to U.S based individuals and entities who want to participate in the protocol. The protocol is also for both Non-U.S and U.S individuals, just as we explain below on how to use the types of UIDs.
The idea for the Unique Identity (UID) is that users can use it to establish their bonafides with financial firms or entities that conduct the KYC checks. The Identity Verification is a move that comes as decentralized identification. The decentralized identity solution helps users to control their digital identity without the interference of intermediaries or custodians.
Goldfinch’s protocol is not entirely decentralized; the venture is partnered with an identity verification firm called Persona to conduct the KYC checks while Goldfinch provides unsecured loans that don’t require the backing of a bank or crypto collateral - a feature that is currently missing from the DeFi’s core offerings. Another partner is Parallel Markets, which helps to manage the KYB and accreditation process and data.
The digital identities will grant governance voting power to users instead of tokens and also aid in the improvement of DeFi credit scores.
Because Goldfinch’s UIDs run on the ERC-1155 standard, developers will be able to integrate the NFTs within their DeFi protocols using Goldfinch. It was after 33,000 people had gone through the protocol’s KYC system to become lenders, that Goldfinch UID NFTs were developed. After seeing the high numbers of people willing to adhere to the KYC regulations, Goldfinch deployed the product with the hopes to contribute to the development of the overall DeFi ecosystem.
Types Of UID (Unique Identity)
- ID-TYPE=0, only Non-U.S based individuals can vote and supply capital across the protocol.
- ID-TYPE=1, U.S accredited individual. Only the accredited individuals can vote and supply capital to the senior pool, and to the borrower pool depending on borrowers’ requirements.
- ID-TYPE=2, U.S Non-Accredited individuals, can vote, but cannot supply capital.
- ID-TYPE=3, U S Accredited Entity. This entity can vote and supply capital to the senior pool, and to borrower pools on a case-by-case basis.
- ID-TYPE=4, Non-U.S Entity can vote and supply capital across the protocol.
HOW IT WORKS
- For U.S Accredited Investors
To submit KYC information to Parallel Markets, a user must also submit information to prove his or her accreditation qualifications. The Parallel Markets helps to check if the individual has a valid identity and not a duplicate of someone’s else’s identities. Once verified by the Parallel Markets the user is eligible to get his or her UID.
- For Non-U.S individual and U.S Non-Accredited individual
Once a user completes their KYC process, Persona checks if they have a valid identity and not a duplicate of other ones. Once verified by the Persona the user is eligible.
- For Non-U.S and U.S Entities
Parallel Markets also help to check that the entity documents are valid, once they submit their KYB (Know Your Business) information. Once verified by the Parallel Markets, an entity is eligible to get its UID.
- For All
Once a user is eligible to get a UID, the user submits an Ethereum transaction that mints the UID, which is a non-transferable NFT that is sent to their address. When the user participates in protocols like Goldfinch protocol, the protocol can check that they have this UID, by ensuring they are unique and accredited.
Due to the rapid growth of the blockchain technology and its anonymous structure where people transact between peers but don’t know who the other individual is, it is very easy that they would fall victim to regulatory standards designed to keep people safe from hackers.
The idea of enabling identification and compliance for blockchain projects became a high priority for people seeking to develop real-world application of blockchain technology, this led to the emergence of Blockpass.
Blockpass is an on-chain solution that provides users the opportunity to create their own identity profile which can be used to verify and identify that they are eligible to the services required by the regulations to perform KYC. Blockpass helps to bring regulatory compliance to the blockchain.
There are also other ways for enabling on-chain entities such as smart contracts and real-world information, known as an oracle.
A combination of oracles with Blockpass in a blockchain-agnostic manner, as happened with the integration of Blockpass and Chainlink, enables revolutionary KYC verification on-chain.
On-chain KYC verification before this was problematic, as the regulatory requirement prevented the storing of personal data, but through the merging of Blockpass' KYC Connect with Chainlink’s oracle solution, one avoids putting personal data on a blockchain. It provides a solution to the problem and also makes safe, simple and effective on-chain identification a reality.
The blockchain-based application is used to verify if a user is associated with the required age, geography, investor classification or any other information. App users fill out important details, which are checked against the required lists and criteria to ensure they are not associated with criminal activities.
Thanks to Blockpass’s integration with Chainlink, Blockpass provides seamless and secure on-chain KYC data across multiple blockchain platforms. The Blockpass platform is fully automated and hosted in the cloud, with no setup fee.
Blockpass is partnering with various crypto wallets and exchanges to provide digital identity verification services. Blockpass currently offers KYC services to Cardano’s commercial arm, EMURGO. Cardano-based addresses are added to the Blockpass App and projects can directly access on-chain KYC services if needed to comply with regulatory requirements. The Blockpass’s CEO Adam Vaziri believes that the firm’s on-chain KYC is a revolution capable of changing how blockchains enable compliance.
Lastly, Blockpass technology and approach enables rapid verification and onboarding for pre-existing and new Blockpass users. Blockpass also puts users in charge of their data and certification.
The decentralized exchange industry is subject to KYC regulations. KYC is here to stay, and these regulations are increasing worldwide as the number and velocity of cryptocurrency transactions increase. As a result, crypto platforms can’t afford to delay integrating KYC solutions - but doing this in a decentralized, on-chain manner is probably a better solution for the industry than regular centralized KYC.
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