Summary

AI can potentially improve DeFi transparency and decentralization. Predictive analytics, smart contract automation, credit scoring, and other applications look promising. But we should be realistic about AI goals, avoid unnecessarily reducing accountability and human decision-making, and avoid setting overly high goals for easy profits.

Introduction

AI is one of the most fascinating technologies in the world in the public eye. AI seems to have the potential to change every aspect of our lives, including the blockchain and cryptocurrency industry.

But we must remain rational. Although AI brings hope, it also makes people fall into certain delusions. Only by identifying potential innovation sites can we successfully implement AI technology.

The DeFi Potential of AI

Let’s start by defining these two terms. DeFi is a decentralized financial application ecosystem built on the blockchain network. DeFi products include pledged lending, liquidity products, and centralized trading platforms (DEX).

According to the Oxford Dictionary, AI is “the ability of a computer or other machine to exhibit or simulate intelligent behavior.” Common AI applications in finance or trading include fraud detection software, trading robots, and even chatbots.

What ties these two technologies together?

On the surface, both AI and DeFi can disrupt the traditional financial system through efficiency, transparency, and accessibility. DeFi changes the products available to all of us, while AI affects how we interact with products.

AI seems to have the potential to improve decision-making and risk management in DeFi. But what will this look like in the end? We are looking forward to brand new AI financial products and financial services, as well as trading algorithms and market-making mechanisms.

How to apply AI to DeFi?

Predictive Analytics

Predictive analytics uses AI technology to analyze historical data and apply statistical models to try to predict future market outcomes. Over time, AI can also improve its predictive capabilities through machine learning. In layman's terms, this is similar to AI performing technical and fundamental analysis on behalf of traders.

AI tools have long been applied in the fields of cryptocurrency and finance, and we also see prospects for automated trading and portfolio management in the DeFi field.

Smart Contract Automation

AI has the potential to improve the effectiveness of smart contracts through automation. For example, a lending agreement could use AI tools to continuously monitor the collateral levels of lenders and predict possible defaults before they occur. The detection results are then fed back to the lending agreement. In this case, AI will perform functions that are difficult for smart contracts to do.

Identifying DeFi fraudulent activity

The anonymity of DeFi services makes it more difficult to identify fraud, and AI can identify fraud by observing trends in large data sets. For example, data analysis technology can be used to identify fake exchange trading volumes or suspicious liquid asset liquidation behaviors.

Facilitating lending and borrowing through credit scoring

As part of the core spirit of DeFi, decentralized products require little to no human input from the lender. However, this means that in addition to capital requirements, DeFi products such as cryptocurrency lending often have very low or even no barriers to entry.

Collateralized lending providers can offer better prices to users with a proven repayment history based on credit scores. However, introducing a potentially biased human element into this scoring system would remove the decentralized aspect.

One way to combat this is to use AI credit scoring to analyze borrowers’ wallets and histories and assess their repayment potential.

Investment consulting and portfolio management

Traders and investors in the DeFi market see robo-advisors as very promising. Anthropomorphic interactive user experience can ease the learning curve for technical analysis, fundamental analysis, and advanced predictive analysis. With transactions on most blockchains fully transparent, there is a large amount of data available for AI to analyze and use.

Does the combination of AI and DeFi have negative effects?

Looking at the bigger picture, we can see potential AI pitfalls. AI will undoubtedly negate the need for human labor for certain tasks, which could eliminate certain jobs and even accountability to some extent. The anonymity of DeFi increases the difficulty of regulation, and the inclusion of non-human operations further complicates the issue.

We should also consider the possible problems with training AI based on limited data. Compared with traditional markets, cryptocurrencies, especially DeFi, are still in their infancy, and without long-term data support, it is difficult to establish a balanced view of the entire market.

Introducing new tools also carries security risks. The entry points of AI tools and the way they access data and wallets provide additional hacking points for scammers. In addition to open source AI tools, other AI tools are often developed by private companies or individuals. How secure these tools are depends entirely on the robustness of the security features configured in the tools by their developers.

We also need to consider the potential decentralized risks that come with introducing privately developed AI tools. There is a lack of transparency into exactly how these tools work. You may not be fully aware of updates to the AI ​​tool, or even understand exactly what the AI ​​tool has access to. If the developer stops supporting the AI ​​technology, your AI tool could end up being obsolete.

What are some unrealistic ideas about AI tools for DeFi?

Although the combination of AI and DeFi brings new opportunities, we must be realistic. In order to fully utilize AI tools in DeFi, developers should focus on where AI tools can actually play a role. Most of the following delusions have already appeared in the traditional financial world, so they are also easy to identify in the DeFi field.

AI can replace human decision making

Human input is always necessary when using AI tools. Users must be trained to use AI tools correctly, which is an extremely complex process rather than simply putting AI tools on the market without any guidance.

AI can solve all DeFi problems

While AI can improve the transparency and decentralization of DeFi, it is not a panacea to solve all its problems. Applying AI to every potential problem is not an effective solution, but will cause more problems.

AI trading systems are more profitable

You only need to look at the systems of existing centralized exchanges (CEX) to know that this is not the case. AI systems have advantages, but we cannot guarantee that they will generate more profits.

AI will eliminate the need for trust in DeFi

DeFi is largely trustless, but in some cases it does require "trust". AI should not attempt to replace extensive research on the credibility of the project team or founder.

What is the future of DeFi AI?

In the future, AI will surely achieve revolutionary breakthroughs. However, we cannot be sure whether such breakthroughs will apply to DeFi. AI clearly has the potential to make financial services more convenient and efficient, which should be the goal to strive for.

We can achieve this by using AI to improve the efficiency and effectiveness of DeFi systems in making predictions, managing risks, and automating routine tasks. We can also use AI to improve user experience and user safety.

But we shouldn’t expect quick profits. If you expect AI to make huge profits, you’re bound to be disappointed. It’s much more practical to focus on the potential of AI not to create greater profits, but to increase financial accessibility and freedom for DeFi users.

Conclusion

There is no doubt that AI has great potential in the DeFi field. AI can change the way we interact with DeFi from automating financial processes to more accurately predicting market trends.

Although DeFi AI is promising, some unrealistic ideas must be dispelled. As the DeFi field continues to develop, the cryptocurrency community needs to remain vigilant when implementing AI to explore potential and avoid unexpected situations.

Further reading

  • A Beginner's Guide to Decentralized Finance (DeFi)

  • Decentralized Finance (DeFi)

  • Blockchain and Artificial Intelligence - Future Technology Analysis