DeFi and AI coupled together would significantly improve financial services and unlock a new level of innovation.
Decentralized finance has become one of the fastest-growing sectors within the cryptocurrency ecosystem over the past year. At the time of writing, the total value locked in DeFi has exploded to over $100 billion. Despite impressive figures, decentralized finance is still in the beginning stages of development, which begs the question: What’s next for this disruptive financial technology?
The next frontier will likely uncover new possibilities through artificial intelligence (AI) and machine learning joining with decentralized finance to create DeFi intelligence.
DeFi intelligence in the wild
Today, several companies are spearheading the integration of AI and machine learning with blockchain, focusing on automation and working towards a vision that makes intelligent capabilities a core feature. The interoperability is essential to creating fully functional intelligent DeFi solutions. They have developed a network of autonomous economic agents that aim to provide the Web 3.0 ecosystem with efficient, reliable and future-proof infrastructure and tools to build a smart decentralized digital economy.
This spring, Shopify Capital announced plans to use machine learning and AI to offer eligible merchants funding based on their previous sales history and store performance. Similarly, decentralized AI marketplace SingularityNET has developed a new DeFi project called SingularityDAO which plans to manage dynamic token sets, carry out predictive market-making, and execute hedging strategies based on predictive modeling.
DeFi intelligence has the potential to revolutionize DeFi protocols, adding an additional layer of data that will bring new levels of efficiency to the market and enable intelligent and decentralized asset management vehicles.
DeFi intelligence and financial freedom
The need for an accessible and transparent financial system has become more and more apparent as DeFi works to replace outdated systems, highlighting the failures of traditional centralized entities and providing a viable option for global financial freedom. Contrary to its centralized counterparts, DeFi has proven to promote global financial freedom, allowing participants to exert full control over their funds at any point in time and interact without middlemen.
The evolution of DeFi toward including automation is likely to enable robust news services that will assist in making financial transactions and services simpler and more widely accessible. These changes will enable a new set of services, including:
1.AI-managed derivative products that will significantly enhance the investment process and onboard liquidity to peer-to-peer financial markets. Improved risk mitigation will also be an added benefit.
2.AI-mitigated risk management on decentralized exchanges that will evaluate trading situations and hedge on markets accordingly.
3.User scoring. The banking sector is currently being transformed by AI technology that enables faster and more efficient user risk profiling. Without intruding too much on users’ privacy, the same technology could be applied to DApps in order to enable more sophisticated customer tiers and more advanced incentive mechanisms. At the very least, the user could access higher yields on their liquidity or other exclusive product/service features.
DeFi intelligence and interoperability
Interoperability allows funds to freely flow across different blockchain platforms such as Bitcoin, Ethereum, Binance Smart Chain and more, generating liquidity and creating a more user-friendly environment for the mass adoption of decentralized finance. By utilizing artificial intelligence, interoperability will become a core capability in the next generation of DeFi protocols.
Liquidity relocation could be further automated once more complex intelligence is applied in real time based on the analysis of thousands of data points. This will be beneficial to price discovery and could dampen volatility and streamline risk management across blockchains.
If you think of an automated market maker, or AMM, as a robot that’s always willing to quote you a price between two assets, it is clear that applications such as Uniswap or Balancer are on the right path. But how do we take this one step further? By incorporating AI, intelligent AMMs could learn from factors such as historical market performance based on the behaviors in a given set of liquidity pools. This would create an asset distribution function that correctly reflects the current market conditions.
Intelligent DeFi lending
Once intelligence capabilities are incorporated, DeFi lending protocols can evolve to factor in collateralization levels and factors, such as liquidation history and transactional patterns, to develop an intelligent and quantitative profile of borrowers and lenders.
The traditional insurance market today is valued at over $6 trillion. As institutional capital flows into DeFi and the risk of theft grows, DeFi insurance will become necessary for investors. Although insurance is slowly becoming an established component of the DeFi ecosystem, it still leverages little intelligence.
Insurance of specific smart contracts can be based on intelligent models that use quantitative DeFi factors such as the number of liquidations in lending protocols that the smart contract has been exposed to, or the types of pools specific addresses are supplying liquidity to. Another important service AI can deliver is the ability to evaluate the risk of a particular smart contract that may be suffering from an exploit or a hack/bug.
As DeFi continues to spawn a vast network of platforms and protocols that allow users to swap, trade, deposit, borrow and lend cryptocurrency, the move towards incorporating AI is one that will likely continue to gain traction. Combining these two movements seems inevitable and will unlock a new level of innovation in DeFi that powers a brand new generation of decentralized and intelligent financial services.