Although the value proposition of smart contracts in a distributed environment is high, the inherent permissionless nature of blockchains has resulted in a lawless system with an abundance of fraudulent activity over the past several years. Chainalysis reported a cumulative $113.5B in illicit volume from 2018 to 2023, with a peak year of $39.6B in 2022. Although one can abide by common security practices, such as being cognizant of URLs they interact with and utilizing 2FA for login credentials, they are evidently still taking risks every time that they send a transaction. Further, DeFi exploits are prevalent in an EVM environment, where centralized teams, multisigs, or re-entrancy attacks can drain assets from a dApp, which can lead to a significant destruction in value for a user. Despite these challenges, large institutions like BlackRock and Franklin Templeton continue to cautiously enter the crypto ecosystem. 

While many have attempted to address this issue, such as Aptos and Sui’s utilization of the Move programming language, adoption of these proposed solutions has been relatively slow when compared to the moat seen through the TVL, volumes, and development activity seen on the EVM. Kinto introduces several EVM-native solutions that aim to redefine the crypto experience with security as its cornerstone. In order to attract a new generation of users, the industry must prioritize safety and ease of use. 

The Institutional Blockchain Landscape

Financial institutions have shown their dedication to blockchain technology through their investments in resources, such as J.P. Morgan’s permissioned Onyx blockchain, which is a closed system dedicated to wholesale payment transactions. While J.P. Morgan chose the permissioned side of the spectrum, BlackRock took a different approach with its BUIDL tokenized treasury fund, which is live on Ethereum mainnet. Although BUIDL sits atop a public blockchain, access to the fund is not inherently permissionless. In order to invest, a user must first complete an investor form and wait for an employee to contact them. 

While both of these programs are a step toward institutional crypto adoption, neither platform is necessarily open to the general public, and each platform offers a walled garden that silos assets away from the rest of the crypto ecosystem. Despite the risks of deploying on a permissionless network, Blackrock’s BUIDL fund has attracted ~$473M of capital in just three months, indicating potential demand for permissioned products. Ondo Finance has led the industry through the creation of USDY, a yield-bearing stablecoin, as well as OUSG, which offers tokenized exposure to short term Treasuries. One aspect that has fueled Ondo’s success is its composability with other DeFi products, signaling that Kinto’s product is aligned with a promising vision. 

Kinto's Rollup Architecture

Kinto is a safety-first L2 built with the Arbitrum Nitro stack that settles to Ethereum Mainnet. This grants Kinto full EVM compatibility, low transaction fees, and access to battle-tested fraud proofs. Kinto will generate revenue from the spread between all fees and the cost of settling batched transactions on Ethereum Mainnet. The network utilizes a modified execution layer and relies on Celestia for data availability. Initially, Kinto will run its own sequencer, but governance can explore a decentralized sequencing system as designs become more viable. All sequencer fees will accrue to a treasury contract that will be fully controlled by onchain governance. Developers on the network will be entitled to 10% of sequencer fees as contract secured revenue. A primary differentiating feature of Kinto from other safety-optimized blockchains is its openness to other permissionless systems. Users can bridge to and from Arbitrum, Base, and Ethereum Mainnet.

Kinto’s KYC architecture involves three components:

1. KYC Providers
2. Kinto ID NFTs
3. Identity Nodes

Users can apply for the KYC process through several providers, including Onfido, Synaps, and Plaid, where the processing time ranges from 10 minutes to eight hours. The KYC process involves a biometric liveness check, document manipulation detection, and screening for sanctions. KYC providers, not the Kinto protocol, are responsible for storing users’ personal data, but they never store users’ wallet addresses. This is to protect users from adverse effects in the event of a data breach. The Kinto protocol and any associated servers will never store personal data, but users can choose to share personal data with applications by signing a message in their wallet. 

Kinto’s Identity Nodes can monitor whether a given wallet address has completed the KYC process and then relay this information to the Kinto ID contract, which is responsible for the minting of Kinto ID NFTs. Identity nodes also process AML and KYC updates as specified by KYC providers. The code for Identity Nodes will be open-sourced so that anybody will be able to run their own. In order to send a transaction or use the Kinto network, a user must have a Kinto ID NFT. These NFTs are non-transferable between wallets, ensuring that every user address is tied to one unique identity. This addresses the Sybil problem seen on many networks, where one user can control many wallets to game airdrop distribution mechanisms. The protocol also has troubleshooting workflows for cases where a user loses access to their wallet or needs to migrate accounts. 

Kinto’s identity management mechanisms create a secure environment for smart contracts, where users provide safeguarded personal data to accredited entities while also gaining full access to the benefits of sovereign identity and open financial systems. 

Kinto's Commitment to Security

While Kinto’s KYC architecture provides a moderate level of security, the protocol utilizes several other service providers to bolster its incident response. First, all wallet signers are analyzed with Chainalysis to identify potential malicious parties on the network. As a part of this process, these signers are continually monitored across all networks. In the event of an incident, malicious signers can be blacklisted from transacting on Kinto. Kinto also connects protocol developers with IronBlocks, which is a firewall service that can provide an extra level of transaction verification. IronBlocks can potentially detect malicious transactions before they are executed on a protocol. For example, if an entity attempts to execute a re-entrancy exploit on a lending protocol, IronBlocks could flag and prevent that transaction. 

The Kinto protocol uses Hypernative, a service that constantly monitors smart contract activity for threats and enacts custom incident responses. Kinto’s security council also has the ability to freeze the native bridge if a hack has been executed anywhere on the network.10% of sequencer fees will flow to a safety module to purchase smart contract insurance. This safety module will be used as a last resort to fill any gaps in the event of a smart contract hack on the network. Underwriters can elect to supply USDC to the safety module and earn these fees as yield. The pool will be dynamically capped at 10% of the network’s TVL.

Kinto Governance

Users and developers of Kinto receive an allocation of KINTO tokens, which grants ownership and governance rights over the protocol. Kinto relies on a two-layer governance system that exists fully onchain and emphasizes governance minimization so that it can be resistant to value capture. Governance has control over treasury management, network fees, KINTO rewards, and system upgrades. Kinto plans to work toward progressive decentralization, where a multisig of trusted individuals can change protocol parameters and execute rescue functions in response to emergencies. Once the network reaches maturity, onchain governance through the Kinto Governor contract will be enabled, removing control of the multisig. 

Kinto’s two-layer governance model consists of nine elected governance guardians (Nios) and KINTO holders. Nios can be elected via KINTO-weighted voting for six-month terms. Nios can signal system upgrades, manage the treasury, and propose fee changes via onchain voting, where a simple majority vote passes. To incentivize active governance participation, a Nio who misses two proposals in a row will be forced out of power and trigger a new election. 

Engen, Kinto’s Launch Program, was created to facilitate a fairly distributed launch, where users could deposit funds to earn non-transferable ENGEN tokens to participate in proto-governance. ENGEN also grants reduced fees and priority access to new products launched on Kinto. Holders have the right to vote on the DAO constitution, the token distribution plan, and mining program, which is set to start in June. The Kinto Mining Program allocates 2M tokens (20% of total initial supply) with an allowance for up to 5M tokens (33% of total maximum supply) to incentivize user and developer activity. 

Kinto Wallet

One standout feature of Kinto is the Kinto Wallet, a non-custodial smart contract wallet that supports UserOperation objects, as specified in ERC-4337. The wallet prioritizes the user experience through simplicity and security, where users do not need to manage seed phrases, browser extensions, or gas settings. Further, the Kinto Wallet abstracts transaction fees from the user, as application developers must sponsor a paymaster to pay for transactions. All transactions on the Kinto network must be sent with the Kinto Wallet. After completing the KYC process, a user is prompted to become the first signer of their account and set up a passkey. Users can elect to add up to two more signers, granting optionality for a hardware wallet. If a user loses control of their wallet, they can execute a recovery process to reset the signers. The Kinto Wallet requires users to approve applications and tokens, but bundles the two permissioning requests in one batch to simplify the user experience. 

Final Thoughts

2024 has shown that institutional and retail interest for crypto is stronger than ever before, but the ecosystem still must make substantial progress to create a truly permissionless and safe financial system onchain. While Onyx and BUIDL show promise as institutional solutions, they fail to capture the entire value proposition of crypto by prioritizing safety over openness. Kinto stands as a solution that does not make unnecessary tradeoffs, where users can access an L2, an identity solution, and DeFi, without compromising on security or a friction-filled wallet experience. 

Kinto shows promise as composable infrastructure that has the potential to capture RWAs, payments, lending, and attestation, without closing out the broader crypto ecosystem. In a secure environment, developers should have the freedom to explore novel financial applications that have not yet been seen in the industry, whether that be AMMs for tokenized ETFs, seamless banking and wallet services, or the onchain collateralization of mortgages. Kinto’s modular architecture, combined with a novel KYC mechanism and a two-layer governance structure, provides a scalable backbone for a new era of sovereign financial applications.

This research report has been funded by Kinto. By providing this disclosure, we aim to ensure that the research reported in this document is conducted with objectivity and transparency. Blockworks Research makes the following disclosures: 1) Research Funding: The research reported in this document has been funded by Kinto. The sponsor may have input on the content of the report, but Blockworks Research maintains editorial control over the final report to retain data accuracy and objectivity. All published reports by Blockworks Research are reviewed by internal independent parties to prevent bias. 2) Researchers submit financial conflict of interest (FCOI) disclosures on a monthly basis that are reviewed by appropriate internal parties. Readers are advised to conduct their own independent research and seek the advice of a qualified financial advisor before making any investment decisions.