- It is important to note that AI is not a replacement for human decision-making and is not an avenue for easy profits.
- AI technology is only helpful in the blockchain and cryptocurrency world if innovators can identify the natural places for a potential application.
- Cryptocurrency and DeFi are still in their infancy. Since AI relies on historical data, there is little for the technology to refer to, making AI feedback untrue.
Despite Decentralized Finance (DeFi) terming as decentralized, some argue that there is an aspect of centralization in these financial technology projects. The brains behind some DeFi projects invest more than half of the shares. They nearly make them centralized.
However, Artificial Intelligence (AI) can potentially strengthen decentralization in DeFi. The AI tool can do this through its applications, such as predictive modelling in market trends and investment decisions, managing risks, trading bots, smart contract automation and auditing, and tokenization, among several others.
Despite all the above applications, AI is not a sure way to get correct market trend predictions and analysis. Additionally, it is essential to note that AI is not a replacement for human decision-making and is not an avenue for easy profits.
AI can produce delusional results.
While Artificial Intelligence looks promising, users need to manage their expectations. AI is sometimes delusional. Its output depends entirely on the quality of the data it is trained on, the algorithms used, and the expertise of the data scientists who design and implement it. AI becomes biased if there are biases in the data it is trained on. Therefore, AI technology is only helpful in the blockchain and cryptocurrency world if innovators can identify the natural places for potential applications.
Read: The Metaverse and AI: A bread and the butter relationship
Having said that, let us look at the potential of AI in DeFi.
The Potential of AI in DeFi
The correlation between AI and DeFi
AI and DeFi are built on four similarly striking characteristics; transparency, efficiency, accessibility and decentralization. DeFi has given us products we can all access, while AI has eased how we interact with them.
How AI applies in DeFi
As highlighted above, AI has several applications in DeFi
Predictive modelling in market trends and investment decisions
Predictive modelling is using AI to try and predict market trends and future outcomes through the analysis of past data and applying statistics to it. Through machine learning, AI can give predictive outcomes that can help traders make market investment decisions. AI can also give a trader a possible portfolio they can run with to make sizeable market profits.
Smart contract automation and auditing
AI can increase the effectiveness of smart contracts through automation. Automation makes DeFi smart contracts more decentralized as decision-making is based on predetermined input. AI can perform smart contract auditing in several ways. For example, Code Analysis (analysis to identify potential vulnerabilities, security weaknesses or bugs), Formal verification (using techniques such as theorem proving and model checking), simulation, risk assessment and smart contract security testing.
Credit scoring to facilitate lending and borrowing
DeFi lending has one defect: there are little to no barriers to entry. However, DeFi could apply AI for proper credit scoring, enabling the issuers to offer better prices to users with provable repayment track records.
Introducing human decision-making in determining credit scoring makes DeFi less decentralized.
Drawbacks of using AI in DEFI
Despite AI improving service delivery, it negates the need for human labour. In reaction, sidelining human actors to the innovation compounds the problem as the new technology requires all the monitoring it can get to realize its full potential.
Cryptocurrency and DeFi are still in their infancy. Since AI relies on historical data, there is not much for the technology to refer to, making AI feedback untrue.
2022 has been characterized by massive hacking. AI entry points and how they access data means a new avenue that scammers can use to attack. In that effect, there is still a lot to figure out on the security of the new technology.
Clearing misinformation about AI in DeFi
- AI cannot replace human decision-making.
- AI cannot solve all Decentralized Finance problems
- AI-generated portfolios are not more profitable
- AI responses cannot be considered extensive research on a subject