The impending “hook” for Know Your Customer verification that Uniswap will implement has users worried about regulatory capture.
Decentralized finance (DeFi) has changed the financial industry by making it possible for anybody to engage in open, permissionless trade and lending. The authorities are resisting this arguing that they must crack down on the illegal activities that pass over DeFi channels. Because of concerns expressed by authorities, THORSwap temporarily put its public-facing servers into “maintenance mode” earlier this month.
Concerns are rising that Uniswap, the biggest decentralized exchange in the cryptocurrency industry, may follow in the footsteps of THORSwap and collapse. A KYC verification “hook” is being included in Uniswap’s v4 update, it was recently revealed. Some feel that this route toward permissioned transactions threatens DeFi’s core principles.
A discussion over the future of DeFi was sparked by Uniswap’s KYC hook, as stated by crypto investor and podcast host Scott Melker. Melker elaborated, saying that although hooks are currently an opt-in feature, the existence of a KYC hook might signal a “slippery slope toward full regulatory compliance.”
YouTube user “yourfriendSOMMI” was critical of the addition, arguing that such things often become required after initially being optional. In his subsequent video, the YouTuber called Uniswap “Fake DeFi” and included multiple thumbs-down emojis to emphasize his disapproval.
The fourth version of Uniswap is scheduled for release by the end of 2023, coinciding with the launch of Ethereum’s Cancun update. In Uniswap v4, there will be a number of improvements, such as updated smart contract administration that reduces gas costs, improved token accounting, and extensible features made possible through hooks.
To far, the Ethereum developer community has created roughly 75 distinct hooks, including hooks for multi-sig liquidity removal and hedging against temporary loss, as recently lauded by Uniswap’s author, Hayden Adams. However, everyone is focused on the KYC hook and what it may represent for DeFi’s future.
As US officials increase their monitoring, the future of DeFi becomes murkier. The recent legal trouble encountered by THORSwap, which resulted in the protocol requiring transaction monitoring in order to continue functioning, is just another example of the loss of fundamental DeFi principles in the face of governmental pressure.
In other recent crackdowns, the Commodity Futures Trading Commission filed charges against the DeFi protocols Opyn, ZeroEx, and Deridex for providing what it claims to be unlawful leveraged trading services. CEO of Coinbase Brian Armstrong has urged DeFi protocols to take legal action against authorities as a means of retaliation.
The CEO of Coinbase thinks that authorities’ enforcement measures are illegal, and that by suing them, they would “uphold the rule of law,” allowing DeFi systems to function without fear of regulatory punishment.
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