Know your customer(KYC) and Scalability Challenges Faced by Blockchain Developers.

Introduction

Two of the biggest challenges blockchain developers faces are Scalability and KYC (Know your customer).

In security-sensitive businesses, there is a need to have a means of knowing who your customers are. The “know your customer” process better known as KYC helps institutions verify the identity of their clients. KYC is a regulatory and legal requirement that has to be fulfilled by the banks for both new and existing clients. Typical KYC includes acquiring personal information, related proofs, background checks, ongoing changes and store client details. Current systems require each institution do their own KYC which translates to a higher cost of customer acquisition for the banks. Also, should the customer wish to engage with a different bank, the process gets repeated.

One solution is to have a central entity do the KYC process on behalf of the entire industry. A central database provides universal accessibility and lower cost of client acquisition. However, having a single source of information makes it more vulnerable to hacking attacks. This is where the distributed ledger technology becomes a game changer. Documents necessary for KYC often includes Driving license, Passport, utility bill etc.

Than we have scalability, a network protocol is said to be scalable if it is suitably efficient and practical when applied to large situations, for example, a large input data set; a large number of outputs or user; in the case of a distributed system, a large number of participating nodes. If a system or design fails when a quantity increases, it does not scale.

Also, scalability is defined by B. Clifford Neuman as:
“A system is said to be scalable if it can handle the addition of users and resources without suffering a noticeable loss of performance or increase in administrative complexity.”

What the community are talking about and their solutions to these two issues?

In a meet up with Pavel Kravchenko (PhD), he talks about cryptocurrency exchanges like Kraken, having a huge form with many pages for customers. These contain all the information of all their customers, leading to a situation where whitelisted customer information. As soon as these whitelisted addresses get leaked to the internet, then anonymity is completely destroyed. Everybody will then be able to see who transacted with whom, when and why.

He also discussed a group based system for solving the KYC problem, by assigning private keys to each member of the group, and a unique public key that ties them to the group. In an event where an individual in a group has his identity stolen or lost his/ her phone, this can be easily revoked as soon as it is reported to the group head, and a new one can be re-issued via a recovery key.

The best-proposed solution again was a community-based manager, whereby if some member of a group did something wrong, the group could vote to reveal the person’s identity.
Pavel further mentioned data mining, which makes it possible to analyze transaction patterns, hence leading to an understanding of the individuals or entity behind the transactions. Cryptocurrencies are no different from credit card information, considering that the blockchain (database) is public. With whitelisted addresses, at some point anonymity will be zero.

Why Scalability and KYC (Know your customer) are so hard to solve?

The first generation cryptocurrency “Bitcoin” was about building a decentralized money, i.e. sending the value to people that is actually worth something. The second generation “Ethereum” looked at the transactions having stories, which came in the form of smart contracts. Both first and second generation blockchain systems faced a challenge of scalability because of the way their architecture. This makes it difficult to make a change or upgrade without it leading to a hard fork, i.e. a complete divergence of the network.

Know your customer (KYC) is equally challenging because these systems were also designed as completely anonymous. This anonymity makes it very attractive to a lot of users who believe in having control over their identity and privacy. Making any form of changes to this is hard without it leading to a hard fork of the network.

Which crypto blockchain might be able to solve the problem: Cardano, Ethereum, Neo, Qtum, or Civic?

From a research of the above-listed blockchain/cryptocurrency solution, no single one proffers a perfect solution to both scalability and KYC challenges. However Cardano, Civic, and Qtum are closest to coming up with solution towards scalability and KYC.

Following an interview with Charles Hoskinson the CEO of Input-Output Hong Kong (IOHK), currently working on the Cardano (ADA) project. Charles talked about one of the major challenges with cryptocurrencies when it came to adding new features or making upgrades, hence scalability issues. Even making small changes were complicated. He further discussed Bitcoin being the first generation blockchain, Ethereum being second generation blockchain, and Cardano being the third generation blockchain, with a vision to solve the ever-growing scalability and KYC challenges in the blockchain/cryptocurrency space. Cardano has series of layers which allows for scalability and gives users more flexibility to decide if their layers will be regulated or not. With Cardano, a user has a KYC profile which helps with issues of lost login details and so on.

Civic focuses more on KYC related solution, giving the user control of their KYC information. Qtum in their white paper also mentioned working on a KYC solution, and ability to connect real world through off-chain data sources. Ethereum is currently working on tackling scalability through the use of “Plasma” as a scalable autonomous smart contract, but not more information on KYC. Unfortunately we all have to wait and see.