- Uniswap v4 will feature a KYC verification “hook”.
- The crypto community raises concerns about mandatory KYC compliance.
- Coinbase CEO called for DeFi protocols to sue regulators.
Decentralized finance (DeFi) has revolutionized the finance world by enabling open, permissionless trading and lending for all. However, authorities are pushing back, citing the need to clamp down on the illicit activity that flows through DeFi channels. Earlier this month, THORSwap took its front end into “maintenance mode” to appease the regulators, who had raised issues about criminal activity on the platform.
There are growing concerns that Uniswap, the largest decentralized exchange in the crypto space, is headed down a similar route to THORSwap. It recently emerged that Uniswap will incorporate a KYC verification “hook” as part of its v4 upgrade. For some, this path to permissioned transactions represents a dangerous compromise of DeFi’s foundational values.
Uniswap on Slippery Slope
Crypto investor and podcaster Scott Melker mentioned that Uniswap’s KYC hook had triggered a debate on the future of DeFi. Expanding further, Melker stated that while hooks are an optional feature for now, the fact that a KYC hook exists could mean a potentially “slippery slope toward full regulatory compliance.”
YouTuber “yourfriendSOMMI” criticized the feature, implying that optional features tend to become mandatory based on past experiences. The YouTuber continued his criticism by labeling Uniswap “Fake DeFi” accompanied by several thumbs-down emojis.
The release of Uniswap v4 is set to roll out with Ethereum’s Cancun upgrade, which is expected to go live by the end of 2023. Uniswap v4 will add a variety of new features, including revised smart contract administration for cheaper gas fees, more efficient accounting for token management, and hooks to enable customizable features.
“Hooks are programmable buttons that developers can customize to add new features to their liquidity pools,” explained Uniswap.
Hayden Adams, the creator of Uniswap, recently praised the Ethereum developer community for creating around 75 different hooks to date, including hooks for multi-sig liquidity removal and hedging against impermanent loss. However, all eyes are firmly on the KYC hook and what it might mean for the future of DeFi.
Regulatory DeFi Capture
The future of DeFi looks increasingly uncertain as US regulators continue ramping up their oversight efforts. THORSwap’s recent run-in with authorities culminated in the protocol adding transaction surveillance to continue operating, further highlighting the abandonment of core DeFi principles under regulatory pressure.
Other recent crackdowns have seen DeFi protocols Opyn, ZeroEx, and Deridex charged by the Commodity Trading Futures Commission for offering alleged illegal leveraged trading services. Coinbase CEO Brian Armstrong called on DeFi protocols to strike back by instigating legal action against the regulators.
The Coinbase CEO believes that the enforcement actions doled out by regulators are unlawful and that suing them will “uphold the rule of law,” setting a precedent for DeFi protocols to operate without fear of regulatory reprisals.
On the Flipside
- Heightening compliance expectations is an indication of DeFi’s growing influence.
- The regulatory stance toward DeFi varies by country, leading to a fragmented global approach to DeFi regulation.
- Mass adoption cannot happen until the issue of DeFi compliance is resolved.
Why This Matters
The debate around permissioned versus permissionless is a complex one. Though a minority of users engage in criminal activity, no easy answers reconcile the values of decentralization with the demands of regulators, leaving the crypto industry in a tough spot.
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