What impact will the introduction of KYC have on DeFi if Uniswap v4 implements it?

Since Uniswap announced the v4 plan and opened up the community to create various creative hooks for external plug-in functions, the types of hooks provided by major communities have reached over 60. However, recently a KYC hook has appeared on the directory, with the concept that users who use this hook must undergo KYC verification before being able to use the service, sparking controversy within the community.

Uniswap hook Appears Compliance Threshold, Community Concerns About DeFi Development

The hook in Uniswap v4 functions like a plugin that allows for the creation of various trading models, such as on-chain limit orders or the Time-Weighted Average Market Maker (TWAMM) model. Therefore, Uniswap Labs has opened up the design space for hooks to the community, hoping to generate various new trading models through the community's creativity and development capabilities. Note: In this context, "hook" usually refers to the most memorable and appealing part of a song. In the case of Uniswap, it is literally translated as "hook."

Background: What is Uniswap v4? Intending to build TWAMM, dynamic fees, and more.

Recently, the community proposed a "KYC verification approval required for trading" hook, allowing centralized off-chain nodes to perform the verification, sparking discussions within the community.

Community Views on the KYC Hook

Some community members believe that while the KYC hook's trading path is not mandatory, anyone can easily choose other hooks and trading paths. However, once a precedent is set, it will inevitably become a means of regulation. Perhaps someday a government will consider transactions verified by KYC as a model or whitelist, further creating a "regulatory agency whitelist" database. The worst-case scenario is that unverified transactions may be considered illegal. Author's note: Similar to the situation with Tornado.

Analyst Adam Cochran believes that this event is like the boiling frog, and its impact should not be underestimated. Establishing centralized systems on decentralized systems will require people to trust third-party institutions again, leading to more problems. Once the permissioned system is created, even if regulatory agencies are not directly involved, it will push people to use permissioned systems like KYC. Implementing a permissioned system on v4 will open Pandora's box.

Moreover, Uniswap's past actions regarding regulation have been mixed. During times of unclear regulation, Uniswap Labs has already restricted certain token trading functions on the frontend to comply with regulatory directions. Therefore, it cannot be guaranteed that Uniswap Labs will resist regulatory pressure in the future.

On the other hand, some community members hold opposing views, believing that designing to "accommodate" various needs and use cases will be the true essence of DeFi. For example, some individuals and entities may have compliant on-chain trading needs, and this feature can meet the requirements of specific users. At the current stage, it is impossible to directly determine the impact of these changes on future regulation.

Conclusion

The author believes that Uniswap v4 enhances the flexibility of trading model design. Under the community's spontaneous creation and development, conflicting designs will naturally emerge in the future. Regardless of the specifics of this proposal, it may be time to consider whether freedom and decentralization are synonymous and which is more important to users.

If the community consensus aims to maintain the stability of decentralization, then perhaps v4 is not a good idea; but if the consensus leans towards accommodating more users, designing on-chain compliance may be worth trying.

Before the launch of v4 in 2024, we look forward to seeing more discussions on this topic.