At the “ETHGlobal” event, held in New York between 22 and 24 September, a number of decentralized finance developers proposed the implementation of more than 50 different hooks on the Uniswap v4 crypto exchange platform, which will be launched in the coming months.
One among all these hooks has sparked controversy and anger in the community, as it would introduce KYC requirements for some of the pools that will be introduced on Uniswap v4.
KYC checks, in fact, ruin the permissionless structure of a decentralized application and open the door to a new era in which regulators can place certain addresses within whitelists, effectively controlling what happens in DeFi.
At the same time, this approach could allow for a strong development of the crypto industry, accompanied by clear regulation regarding exchanges on noncustodial platforms.
Are we facing the abyss or the evolution of the DeFi industry?
All the details below.
The future launch of crypto DEX Uniswap v4 and the implementation of a hook with KYC requirements for users
During the big “ETHGlobal” event held in New York City between September 22 and 24, there was a lot of talk about Uniswap v4 and the future launch of the crypto platform that could take place by the end of the year.
In particular, more than 50 different hooks were proposed to be implemented within the decentralized application, one of which attracted strong controversy given the presence of a KYC requirement for some users.
For the uninitiated, a hook represents a tool that allows developers to customize a code without altering the backbone of the program.
Specifically, verification would be done through non-fungible tokens (NFTs), introducing certain requirements for operators who want to provide liquidity to an exchange pair.
All of this would help create an increasingly transparent DeFi environment within which regulators can easily detect money laundering and terrorist financing activities.
Currently, all live versions of Uniswap do not require personal information from users using them, and are in fact open to anyone with a non-custodial wallet and cryptocurrencies within it.
Governments around the world are pressing to be able to gain control over everything that happens in these decentralized environments: recently the G20 agreed to pursue a very specific regulatory roadmap on cryptocurrencies that could make crypto exchange platforms like Uniswap increasingly controlled by regulatory bodies.
The roadmap in question was proposed by the International Monetary Fund (IMF) and the Financial Stability Board (FSB).
Should the aforementioned rules on formal customer identification (KYC) come into effect, the new platform could rely on limited access to governance-approved entities.
As for the launch of Uniswap v4, there are no exact dates published by the platform team yet, but this could likely happen by year-end if EIP-1153 is introduced soon in the upcoming “Cancun” update of the Ethereum blockchain.
Community controversy and the risk of centralized control over Uniswap
With the introduction of a whole series of hooks for the launch of the new noncustodial crypto exchange platform Uniswap v4, the decentralized finance community has expressed its disappointment with the possibility of implementing KYC requirements to users.
Although in fact this could be seen as positive for the future of the entire industry, effectively regulating financial activity in this context, it should be noted that these rules would ruin the structure of decentralized platforms by introducing a central control point.
Although KYC questionnaires are currently provided only for liquidity providers in the new DEX, in the future these controls could be expanded to all users who intend to interact with the application’s smart contracts.
Unfortunately, this is a serious violation of the basic principles on which the underlying philosophy of cryptocurrencies rests.
One user X, used strong words to describe what Uniswap is up against, saying that at the moment the KYC rule is only an option but could become a fixed rule, with users’ data stored on off-chain servers.
In the future, those who do not obey the KYC rules will be labeled as terrorists or money launderers.
Within the public debate in reference to the introduction of this “optional option” for monitoring platform clients, there are also those who take a more moderate view and believe that these principles can be applied even on a system where it does not require the consent of a central entity.
Indeed, it is not yet certain that KYC verifications will be extended to all users of Uniswap v4: individuals who simply intend to perform a swap between two cryptos may in fact be exempt from this requirement.
Also it should be noted that on UniswapX, there are already access requirements that are kept on an off-chain server.
KYC and AML blocks are also present on the recently launched Aave Arc protocol.
Hence, it is not new that similar monitoring rules are being proposed in the DeFi environment: rather, their introduction within the largest DEX in the crypto market has made those who support the decentralization philosophy turn their noses up a bit.
Overall, the implementation of a KYC hook is positive because it allows Uniswap to move to the next step, which sees international regulation and legitimization of its crypto business.
On the other hand, however, there will need to be close monitoring so that the requirements we discussed earlier are not exposed to the entire audience of the exchange platform.
If this were the case, it could ruin a masterpiece developed in 2018, which would become a mere “noncustodial centralized” exchange marketplace, distinctly inefficient compared to the custodial counterparts of exchanges.