Technology + Industry + Law: Building on-chain compliant automation infrastructure

Author: Zhang Feng

Blockchain technology, with its decentralization, immutability, and open transparency, is reshaping the global financial and trust systems. However, this “permissionless” freedom also brings significant regulatory and compliance challenges. Risks such as money laundering, terrorist financing, and transactions involving sanctioned entities hang like Damocles’ sword over the entire industry. How to introduce traditional compliance frameworks into the on-chain environment without stifling innovation and openness has become a key question for blockchain to mainstream. As a result, “on-chain compliance” has emerged, and with collaborations between industry giants like Chainlink and Chainalysis, it is moving toward a new era of “programmable compliance automation.”

1. On-Chain Compliance: From “Post-Event Tracing” to “Real-Time Interception” Paradigm Shift

In simple terms, on-chain compliance involves embedding compliance rules and logic into the lifecycle of blockchain transactions as code, enabling automatic compliance checks before or during transactions, rather than relying solely on post-transaction judicial tracing.

Traditional financial compliance relies on centralized institutions (such as banks and payment companies) performing KYC (Know Your Customer), AML (Anti-Money Laundering), and sanctions list screening in the background. This system faces failure in the on-chain world: blockchain addresses are pseudonymous, transactions are globally fluid and instant, and there is no single gatekeeper. Early on, on-chain compliance mainly depended on blockchain analysis companies like Chainalysis and Elliptic providing “post-hoc” analysis tools, used by law enforcement and exchanges to trace illegal fund flows—essentially a “firefighting” approach.

True on-chain compliance aims for “prevention” and “real-time interception.” The core idea is to convert compliance logic into states that smart contracts can read and execute. For example, a decentralized finance protocol could automatically query whether a user’s wallet address is associated with known illicit addresses before executing a transaction, and then automatically approve or reject the transaction based on the result. This shifts compliance checks forward in the process, transforming them from manual, report-driven procedures into a real-time, automated, programmable infrastructure.

2. Industry Status Quo: Fragmented Efforts and Centralization Bottlenecks

Before the collaboration between Chainlink and Chainalysis, efforts in on-chain compliance were fragmented.

Centralized exchanges as gatekeepers: Currently, the main compliance burden falls on centralized exchanges, which strictly enforce KYC and AML within their platforms, acting as the primary gatekeepers connecting the fiat world with crypto. However, this compliance is confined within their centralized walls; once assets move into DeFi protocols on-chain, their control diminishes significantly.

DeFi protocols’ self-regulation attempts: Some DeFi protocols have tried integrating simple compliance tools, such as blacklists of addresses. But these methods often suffer from outdated data, limited coverage, and evasion tactics (like mixers). More importantly, protocol developers are not compliance experts; maintaining a dynamic, global compliance database is impractical and carries significant responsibility.

Isolated analysis tools: APIs from companies like Chainalysis provide powerful data but require project teams to actively invoke and integrate them into centralized backend systems. This leads to issues such as complex and non-standard integration, reliance on centralized servers for compliance logic (not fully on-chain), and lack of transparency and automation. For fully decentralized protocols, there is no clear responsible entity to invoke these APIs.

While these efforts are beneficial, they have not yet formed a standardized, automated, and smart contract-native solution. On-chain compliance needs an infrastructure akin to the power grid—something that any DeFi application can plug into seamlessly.

3. Building an Automated On-Chain Compliance Infrastructure: The Chainlink and Chainalysis Collaboration

The partnership between Chainlink (a decentralized oracle network) and Chainalysis (a leader in blockchain data analysis) aims to build this infrastructure. It cleverly combines Chainalysis’s world-class compliance data with Chainlink’s ability to connect off-chain data to on-chain environments.

Core architecture includes data sources, transmission layers, and on-chain interfaces.

• Data Source: Chainalysis Orion
  Chainalysis provides its “Orion” tool, which contains a database of millions of addresses associated with illicit activities, along with risk scores. These data are core assets developed over years for government and financial institutions, covering sanctions, hacking, scams, darknet markets, and more.

• Transmission Layer: Chainlink Oracles
  Chainlink’s decentralized oracle network transmits Chainalysis’s compliance data—such as risk scores for addresses—in a verifiable, tamper-proof manner to multiple blockchains (Ethereum, Polygon, Avalanche, etc.).

• On-Chain Interface: Compliance Status Feeds
  The data transmitted to the blockchain is formatted as an easily queryable “compliance status feed.” In simple terms, it functions like a continuously updated, on-chain “blacklist” or “risk score table,” which any smart contract can query via standard functions.

Operational flow (example with Aave):

• Step 1: Protocol Integration
  Aave’s smart contracts are upgraded to include a call to the Chainlink compliance feed during key functions like deposit or borrow.

• Step 2: User Initiates Transaction
  Alice attempts to deposit 10 ETH to borrow USDT on Aave.

• Step 3: Automatic Compliance Check
  Before the transaction is mined, Aave’s smart contract automatically sends a request to Chainlink: “Check Alice’s address risk score.”

• Step 4: Oracle Response
  The Chainlink oracle fetches the latest risk score from Chainalysis Orion and returns it on-chain, signed and verified.

• Step 5: Conditional Execution
  If the score indicates “low risk,” the transaction proceeds; if “high risk” (e.g., associated with sanctions), the smart contract automatically reverts the transaction and informs the user that it was rejected for compliance reasons. This entire process occurs within seconds, automatically, without manual intervention.

4. Meeting Precise, Dynamic, and Auditable Compliance Requirements

This automation addresses the increasing strictness of global compliance:

• OFAC sanctions compliance: Ensures DeFi protocols automatically reject transactions involving addresses on the SDN list, aligning with OFAC’s core requirements and reducing legal risks.

• Dynamic risk monitoring: Blockchain addresses’ risk profiles are constantly changing. Chainalysis’s continuously updated data, delivered via Chainlink, enables near real-time risk assessment, far surpassing static blacklists.

• Transparency and auditability: All compliance checks and results are recorded on-chain, publicly accessible. Regulators can trace decision processes for any rejected transaction, verifying protocol adherence. This “verifiable compliance” offers unprecedented transparency.

• Clear responsibility boundaries: Developers and DAOs can leverage this infrastructure to demonstrate they have taken “reasonable measures” against illicit activities, providing a strong legal defense.

5. Cross-Disciplinary Collaboration: Technology, Industry, and Law

Achieving such automated on-chain compliance requires seamless collaboration among technical experts, industry practitioners, and legal professionals:

• Technical experts (Chainlink, smart contract developers): Ensure system reliability, security, decentralization, and efficient data delivery. They design robust oracle networks, audit smart contracts, and optimize performance.

• Industry experts (Chainalysis, compliance officers): Define compliance rules, maintain and update risk databases, and ensure data accuracy and coverage. They translate legal requirements into machine-readable rules.

• Legal experts (lawyers, regulators): Architect compliance frameworks and interpret legal boundaries. They advise on whether automated rejection constitutes discrimination, how to handle false positives, and how to align with evolving regulations.

This creates a continuous feedback loop: legal requirements inform rule definitions; industry data feeds into technical implementation; technical challenges prompt legal and industry adjustments. It’s a dynamic, evolving process.

6. Lawyers as Code Architects: From Document Drafting to Technical Design

The new landscape of on-chain compliance is transforming the legal profession, especially lawyers specializing in fintech and blockchain:

• Bilingual expertise: Future lawyers must understand smart contracts, oracles, cryptography, and blockchain mechanics to communicate effectively with developers and defend technical decisions in court.

• Rule designers: Lawyers will participate in designing compliance logic—translating vague legal principles into precise, executable code, and deciding at which transaction stage rules should apply.

• Digital investigators: Blockchain’s transparent ledger enables on-chain forensics. Lawyers will need skills in blockchain analysis tools to trace transactions and gather evidence for disputes.

• Interdisciplinary bridges: Successful blockchain lawyers will serve as connectors among technical teams, regulators, and users, translating legal risks into technical specifications and vice versa.

The collaboration between Chainlink and Chainalysis marks a shift from passive, manual compliance efforts to proactive, embedded infrastructure. We are witnessing the dawn of a “programmable compliance” era, where compliance is no longer just a cost or legal burden but a composable, tradable on-chain service that drives the next generation of secure, compliant DeFi growth.

Challenges remain—data accuracy, privacy, decentralization, and global regulation harmonization—but the overarching trend is clear. A grand experiment in future digital governance is underway, led by technologists, industry leaders, and legal pioneers. Lawyers who embrace change and continuously learn will not only participate but will be key architects shaping new rules and order in the digital world.