Op-Ed: AI boasts the potential to foster a safer DeFi ecosystem and boost mainstream adoption, but not if it is controlled by centralized entities.
There is no doubt that artificial intelligence is going to change all of our lives and that it will be a force to reckon with over the coming decades. The recent news around Nvidia's revenues, which rose 265% from the previous year to reach $22.1 billion in Q4 2023, was just a small taste of the power of this incredible technology to transform all markets.
Indeed, the news was a tide that lifted all AI-linked cryptocurrency projects. Tokens like SingularityNet (AGIX), Fetch.AI (FET) and Render (RNDR) surged on the news as optimism around the growth potential of AI soared. But while Nvidia is undoubtedly the biggest player in the field, AI’s impact on the decentralized finance (DeFi) space is much more than a few altcoins.
AI is going to become a major part of every corner of the blockchain ecosystem and revolutionize the way DeFi functions. More than that, AI has the potential to finally help make the truly decentralized ecosystem that we have all dreamed of a reality. From efficiency to security, AI has a major role to play in building the decentralized finance ecosystem of the future and, indeed, it is perhaps the missing piece of the puzzle required to bring DeFi into the mainstream.
Mainstream adoption of DeFi
So how exactly will artificial intelligence enhance decentralized applications to help achieve this lofty goal? Firstly, AI can be embedded into any smart contract, enhancing their efficiency and making them more reliable. Powered by AI, smart contracts can finally facilitate truly decentralized transactions without the need for any type of intermediary.
From staking to portfolio rebalancing, AI can act as a wealth manager, a trader, an adviser, or any other part of the financial ecosystem. Anything from underwriting to lending can be made more efficient with the help of machine learning and AI algorithms. On top of this, AI can transform the DeFi user experience. Imagine a DeFi ecosystem where transactions occur seamlessly.
Just like a traditional investment app, the integration of AI could automate menial and time-consuming tasks, simplifying these complex processes and ultimately making the space more accessible for all types of investors. Indeed, AI's impact extends beyond DeFi into the broader financial advice market. By offering cost-effective alternatives to traditional wealth management solutions, AI democratizes access to financial services and empowers investors by freeing up time for critical decision-making processes.
Democratizing data
On the DeFi infrastructure side, AI will also play a critical role in data collection and market analysis. AI algorithms can efficiently analyze vast amounts of blockchain data, providing valuable insights at unprecedented speeds. AI-driven analytics can track market trends and behaviors which can, in turn, help traders, investors, and key decision-makers in the crypto space.
As such, AI not only democratizes access to financial services, it also opens up decentralized access to financial data and reduces the reliance on centralized entities. Until now, we haven't been able to transition fully to decentralized data for key decisions, but AI has the power to facilitate this shift.
This could have far-reaching implications for both the decentralized and physical world. Decentralized data, unencumbered by centralized control, is more accurate, timely and transparent than data available from centralized sources. AI can enhance this data to the point where it provides the most comprehensive picture of any market, be it commodities or bonds. By embedding AI into decentralized data oracles, we can eliminate the risk of data inconsistencies and the threat that this data might be tampered with.
A safer DeFi ecosystem
Centralized data isn’t the only DeFi risk that can be drastically reduced with the help of artificial intelligence. AI is uniquely positioned to make the DeFi space more secure for both new and existing users. AI-powered algorithms can identify potential threats and vulnerabilities in decentralized protocols and quickly deploy solutions to protect against these threats. Ultimately, this can make the entire ecosystem more secure, reducing the instances of hacks and fraud, which still plague the DeFi space, and make it more accessible to the mainstream user.
Last but by no means least, artificial intelligence has applications in the management of decentralized autonomous organizations (DAOs). AI can help automate decision-making, which, in turn, ensures transparency and fairness. This has the potential to simplify the governance of DAOs, which are central to DeFi. By making DAO governance fairer and simpler, AI can help foster a more equitable decentralized ecosystem.
The potential applications of AI in crypto are truly exciting. But if there is one thing that we should be concerned about, it is the centralization of AI. Artificial intelligence is an incredible resource that has almost unlimited potential, which is both exciting and frightening. In the hands of the wrong centralized entity, it could also do a great deal of harm. AI must be a decentralized technology if it is to bring benefits to the world at large.
And, in particular, in DeFi, we cannot rely on AI resources if they are centralized – this simply goes against the ethos of this space. This is the biggest battle the DeFi community will have to fight when it comes to AI – ensuring that this technology can be used to enhance decentralization, rather than destroy any hope of a truly decentralized future.
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Stefan Rust is the CEO of Truflation.com, which tracks real-time data across networks, markets, and feeds to provide financial and economic data on-chain. He served previously as the CEO of Bitcoin.com. He got into crypto in April 2012 before expanding his investment and advisory portfolio across the entire blockchain industry.
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