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With Uniswap’s latest upgrade coming later this year, the decentralized exchange has opened code suggestions to the community.
Not everyone is enthused by all of those suggestions, however
Community-contributed code for a Know Your Customer (KYC) and whitelisting features, for example, have sparked fierce debate on the future of DeFi.
Executing KYC checks and whitelisting addresses are tools used to prevent illegal activities and comply with international sanctions via an online identity verification process.
The proposals are part of Uniswap’s new “Hooks” feature, which essentially allows third-party developers to propose different changes or modifications to the market’s largest decentralized exchange.
Submitted by blockchain developer Jongwon Park, a Hooks code incorporates KYC checks before users are allowed to trade on a pool.
This code has been at the center of the controversy, with prominent DeFi investor and analyst Adam Cochran calling it “a slippery slope” for the protocol.
He explained that by creating “the tooling for permissioned systems, you give grounds for regulators to push to use them even in contexts where they aren't necessary.”
Park fired back, saying that permissioned tools on blockchains are inevitable “like tech itself.” He added that Uniswap still remained permissionless and that its contracts are “immutable on a protocol-level.”
“Our job as early adopters should be establishing a sound framework on which permissioned and permissionless protocols co-exist yet remain isolated,” said Park.
It remains to be seen which pools, if any, this hook will be integrated.
"I think it [KYC Check] won't be used much, to be honest," Lido contributor Seraphim Czecker told Decrypt. "Most trading firms and bots that drive activity are like traditional finance prop firms. They like to stay hidden and don't want to KYC anyway."
Uniswap and several other DeFi protocols such as dYdX and Aave have also incorporated screening processes for wallets linked to illegal activities.
The decentralized exchange has been screening and blocking addresses related to the entities sanctioned by the U.S. Department of the Treasury against targeted foreign countries and regimes, terrorists, and international criminals.
Last year, Uniswap partnered with blockchain security firm TRM Labs to improve its screening process to block funds related to illicit activity, such as stolen funds or funds passed through the sanctioned Tornado Cash protocol.
Authorities have also tried to impose mandatory KYC on self-custody wallets and DeFi applications several times in the past.
Elsewhere, several projects like Civic Pass, Polygon ID, Astra Protocol, and Parallel Markets, are working to provide a permissless and secure compliance process for Web3 applications.