The decentralized finance (DeFi) sector is currently undergoing a significant transformation, with Uniswap, a prominent decentralized cryptocurrency exchange, preparing to launch its V4 update that includes Know Your Customer (KYC) hooks. This recent announcement has generated a considerable amount of debate and backlash within the DeFi community.

In the upcoming Uniswap V4, the introduction of hooks represents a dynamic feature enabling users to incorporate entirely new functionalities into liquidity pool operations. These hooks refer to segments of code that execute at different stages throughout the life cycle of a liquidity provision process.

Uniswap's recent update introduces unique smart contract hooks distinct from the main V4 liquidity contract. These hooks serve the purpose of dynamically adjusting fees and enabling the creation of innovative order types.

The inclusion of KYC (Know Your Customer) hooks in Uniswap's V4 update has caught many by surprise. This new feature is specifically designed to allow US-based liquidity pools to request KYC and Whitelist applications from users looking to participate in the pool. It's worth noting that Uniswap, as a platform, will not make it mandatory for all transactions to undergo this KYC process.

The introduction of KYC hooks has sparked a variety of opinions. Some view it as a disappointing move towards centralization, while others argue that an open and permissionless hook market can coexist with centralized hooks. They contend that the presence of KYC hooks doesn't imply that every transaction processed by Uniswap V4 will inevitably undergo KYC verification.

Similarly, AAVE has also introduced the Aave Arc protocol, which incorporates KYC and Anti-Money Laundering (AML) measures.