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The decentralized finance (DeFi) industry is witnessing a wave of change as Uniswap, a leading decentralized cryptocurrency exchange, introduces Know Your Customer (KYC) hooks in its upcoming V4 update. This development sparked controversy and criticism within the community.
In Uniswap V4, hooks were introduced as a dynamic feature that allowed users to add completely new pool functions. These refer to pieces of code that run at various points in the lifecycle of a sink process.
These hooks can be described as smart contracts that are different from the main V4 liquidity contract. They can be used to dynamically adjust fees or create innovative order types.
Uniswap's decision to include KYC hooks in the V4 update came as a surprise to many. The new feature will specifically allow US-based liquidity pools to request KYC and Whitelist applications from users who want to join the pool. However, it is important to note that Uniswap, as a platform, will not enforce this requirement on all transactions.
The introduction of KYC hooks has been met with mixed reactions. While some see this as a disappointing shift towards centralization, others argue that an open and permissionless hook market can coexist with centralized hooks. They claim that the existence of KYC hooks does not mean that every transaction processed by Uniswap V4 must necessarily undergo KYC verification.
Similarly, AAVE had also launched the Aave Arc protocol, which also includes KYC and Anti-Money Laundering (AML) measures.
*This is not investment advice.