Decentralized finance (DeFi) and artificial intelligence (AI) when integrated would considerably enhance the financial services around the world and unlock a new level of innovation.
DeFi has become one of the quickest-growing sectors within the crypto ecosystem over the past 12 months. At the time of publication, the total value locked (TVL) in DeFi has exploded to more than $100 billion. Despite the impressive figures, DeFi is still in the early stages of development. Many now ask, what comes next for the disruptive financial technology?
The next frontier might be to uncover some new possibilities via artificial intelligence and machine learning (ML) joining with decentralized finance to set up DeFi intelligence.
DeFi Intelligence Hits The World
Currently, many companies are spearheading the integration of artificial intelligence and machine learning with blockchain, focusing mainly on automation and working towards a great vision that makes intelligent capabilities an integral component.
The interoperability is important for creating fully functional intelligent DeFi solutions. They have created a network of autonomous economic agents that strive to offer the Web 3.0 ecosystem with efficient, future-proof, and reliable infrastructure and tools to develop a smart decentralized digital economy.
This spring, Shopify Capital published its plans to use machine learning and AI to provide eligible merchants with funding based on their previous sales history and store performance.
Decentralized AI marketplace SingularityNET has created a new DeFi project known as SingularityDAO that plans to manage dynamic token sets, conduct predictive market-making, and execute some hedging strategies based on predictive modeling.
Decentralized finance intelligence has the possibility of revolutionizing DeFi protocols, adding an extra layer of data that will introduce new levels of efficiency to the market and support various intelligent and decentralized asset management vehicles.
DeFi Intelligence Coupled With Financial Freedom
The requirement for an accessible and transparent financial infrastructure has now become quite clear as DeFi works continuously to replace the old systems, highlighting the failures of traditional centralized entities and offering a viable option for financial freedom worldwide.
While contradicting its centralized counterparts, decentralized finance has proven to promote global financial freedom, enabling participants to exert some control over their money at any point in time and transact without middlemen.
The evolution of decentralized finance toward including automation might enable robust news services that will assist in making financial transactions and services simpler and widely accessible. These new changes will support a new set of services, including:
- AI-mitigated risk management and decentralized exchanges that are set to evaluate trading situations and hedge on markets accordingly.
- AI-managed derivatives products that will considerably enhance the investment process and onboard liquidity to peer-to-peer financial markets meaning that improved risk mitigation will be an extra benefit.
- User scoring. The banking industry is now getting transformed by artificial intelligence technology that supports faster and more efficient user risk profiling. Without intruding too much on users’ privacy, the same technology may be applied to DApps to support more sophisticated user tiers and more advanced incentive mechanisms. At the very least, the user may access higher yields on their liquidity or various exclusive product and service features.
DeFi Intelligence And Interoperability
Interoperability enables funds to freely flow across different blockchain platforms like Binance Smart Chain, Ethereum, Bitcoin, and more, generating liquidity and then creating a more user-friendly environment for the general and quick adoption of decentralized finance (DeFi).
By using artificial intelligence, interoperability will become a core capability in the next generation of DeFi protocols. Liquidity relocation may be further automated once more complex intelligence is applied instantly based on the analysis of thousands of data points. That will be beneficial to price discovery and may dampen volatility and then streamline risk management across the blockchains.
If you think of an automated market maker (AMM), for example, a robot that is always willing to quote a price between two assets, it is quite clear that applications like Uniswap and Balancer are on the right part to achieve that.
But, how can this one step be taken further? By integrating artificial intelligence, intelligent AMMs may learn from various factors like historical market performance according to the behaviors that exist in a given set of liquidity pools. This strategy might create an asset distribution function that perfectly reflects the current market conditions.
Intelligent DeFi Lending And Insurance
After the intelligence capabilities are integrated, DeFi lending protocols can evolve to incorporate collateralization levels and factors, like liquidation history and transactional patterns, to create an intelligent and quantitative profile of lenders and borrowers.
The old insurance market currently is valued at over $6 trillion. As institutional capital flows into DeFi and the risk of theft grows, DeFi insurance will become critical for investors. Even though insurance is gradually becoming an established component of the DeFi ecosystem, it still leverages some little intelligence.
Insurance of particular smart contracts can be based on intelligent models that utilize quantitative DeFi factors like the number of liquidations that exist in lending protocols that the smart contract has been exposed to, or the types of pools particular addresses are supplying liquidity to.
Another critical service that AI can deliver is the capability of evaluating the risk of a specific smart contract that might be suffering from an exploit or a bug/hack.
As decentralized finance continues to create a massive network of protocols and platforms that enable users to trade, swap, borrow, deposit, and lend crypto, the move towards integrating artificial intelligence is one that might continue to gain some traction.
The combination of the two movements appears to be inevitable and might eventually unlock a new level of innovation in DeFi that powers a brand new generation of intelligent and decentralized financial services.