In the area of decentralised finance (DeFi), artificial intelligence has the potential to promote transparency and decentralisation. Applications including credit scoring, smart contract automation, and predictive analytics appear to have promise. However, we must be realistic when setting goals for AI and avoid unnecessarily reducing human responsibility and decision-making. Nor should idealistic goals be created for easy gains.
The potential of artificial intelligence in DeFi
Let's start by defining both terms. Decentralized Finance (DeFi) is an ecosystem of financial applications built on top of blockchain development company. DeFi products include crypto lending, liquidity provision, and decentralized exchanges (DEXs).
According to the Oxford English Dictionary, artificial intelligence is “the ability of computers or other machines to display or simulate intelligent behaviour.” The most popular uses of artificial intelligence in finance or trading include fraud detection software, trading bots, and even chatbots for customer assistance.
What connects these two technologies?
On the surface, efficiency, openness, and accessibility of AI and DeFi have the potential to transform established financial institutions. DeFi changed the products that we can all access, while AI affects the way we interact with them.
In DeFi, AI seems to offer an opportunity to improve decision making and risk management. What would this look like in practice? Trading algorithms and market-making tools will likely be created with artificial intelligence, along with new financial goods and services.
How can artificial intelligence be used in DeFi?
Through the use of historical data analysis and statistical model application, predictive analytics employs AI to attempt to forecast future market outcomes. Over time, artificial intelligence can improve its predictive abilities by using machine learning. In more colloquial terms, this is as if the AI carried out fundamental and technical analysis on behalf of the trader.
Although the financial and cryptocurrency industries already have access to these AI technologies, we now see a potential market for automated trading and portfolio management in the DeFi industry as well.
Automation of smart contracts
Artificial intelligence has the potential to increase the effectiveness of smart contracts through automation. For example, a lending protocol may make use of AI to continuously track the lender's collateral position and foresee probable defaults in advance. This information could be sent to the lending protocol. In this case, artificial intelligence would play a role that would be difficult for a smart contract to perform.
Identifying Rogue Activity in DeFi
The anonymity provided by DeFi services can make it difficult to detect fraudulent behavior, a problem that artificial intelligence can solve by analyzing trends in large data sets to identify dishonest activity. For example, with data analysis techniques, false trading volume on exchanges or suspicious liquidity movement could be detected and identified.
Investment advice and portfolio management
Advisor bots are an exciting prospect for traders and investors in the DeFi markets. The learning curve for fundamental and technical analysis, as well as high-level predictive analysis, is slashed by an engaging, human-like user experience. Since blockchain development company transactions are openly completed, there is a plethora of data available for AI to study and utilise.
What are the myths around AI in DeFi?
While AI offers great opportunities in the DeFi space, we need to be realistic. To get the most out of AI in DeFi, developers need to focus on those places where it can really make a difference. Most of the following myths have already been seen in the traditional finance world, so it should be easy to spot them in the DeFi world.
AI can replace human decision making
An AI-based tool will always require human input. Artificial intelligence needs to be trained and used correctly, which in turn requires a more complex process than letting it run wild on the markets without any guidance.
AI can solve all DeFi problems
Although AI can increase transparency and decentralization in DeFi, it is not a silver bullet for all problems. Trying to forcefully frame the AI to fix every possible problem is not efficient and can actually lead to even more problems.
Trading platforms powered by AI will yield substantially greater profits
You only have to look at the existing systems on centralized exchanges (CEX) to realize that this is not the case. AI-based systems have some advantages, but we cannot guarantee that they will be more cost-effective.
AI will eliminate the need to trust DeFi
DeFi already operates with a significant degree of trustlessness, but in certain cases there trust is relevant. AI shouldn't attempt to substitute thorough investigation of a group's or a project founder's reliability.
What is the future of AI in DeFi?
There is no doubt that artificial intelligence will provide revolutionary advances in the future. However, we cannot be sure to what extent that will apply to DeFi. The potential for AI to increase the accessibility and efficiency of financial services is evident, which should be a goal to work towards.
Artificial intelligence may be used to increase productivity and effectiveness in generating predictions, controlling risk, and automating repetitive processes.
What we should not expect is that it will help us make profit quickly and easily. If that's what you're looking for, chances are you'll be disappointed. It is much more practical to focus on the potential of AI to increase accessibility and financial freedom for DeFi users.
The potential of artificial intelligence in the DeFi space is undeniable. It has the potential to fundamentally alter how we engage with DeFi, from automating financial procedures to allowing more precise market trend forecasts.
However, while AI in DeFi promises a lot, there are also a number of myths that need to be addressed. Therefore, as the field continues to develop, it will be critical that the crypto community remain vigilant about AI implementation considering its potential, but taking care to avoid unintended consequences.