DeFi
4 Ways AI Is Driving Mainstream Adoption of DeFi
AI and blockchain may seem like opposites. Blockchain technology is deterministic, transparent, and open to all, with every transaction recorded immutably on a public ledger. It also has a steep learning curve, requiring users to understand complex protocols.
On the other hand, AI often functions as a “black box,” making decisions based on model parameters and training datasets, providing probabilistic rather than strictly predictable answers. What unites them, however, is that both technologies have become buzzwords in recent years: venture capital funds are looking for them and companies are working hard to implement them.
While cases where synergy between the two is evident are rare, it holds considerable potential for widespread adoption, particularly in the field of decentralized finance. Here’s why:
Improving user adoption of DeFi
One of the biggest barriers to DeFi adoption is its complexity. AI can play a crucial role in simplifying user interactions with DeFi platforms through AI-driven chatbots and virtual assistants that can guide users through complex DeFi protocols, making them more accessible and user-friendly. Maxim Savelyev, CEO of Web3 consultancy Empathy Consulting, notes: “Mainstream users can only see the tip of the iceberg of what DeFi can offer, such as the Coinbase wallet, while the most powerful tools remain locked away in the enthusiast community due to their complexity.”
By analyzing a user’s portfolio and behavior, token trends, and whale transactions, AI can offer personalized advice, helping users make informed decisions without the need for deep technical knowledge. One example is decentralized hedge fund Numerai, which uses AI and machine learning to gather predictions from data scientists, which are then used to trade on the exchange. This approach shows the potential of AI to drive investment strategies in a decentralized manner. Additionally, AI-powered platforms like AlphaPoint leverage AI to analyze on-chain data and predict future prices of DeFi assets, helping users make informed investment decisions.
Fraud prevention and auditing
With 76 hacks in 2023 resulting in a collective loss of around $1.1 billion, according to String analysisSecurity is a major concern in DeFi. AI’s ability to detect anomalies and suspicious activity in real-time reduces fraud and maintains trust in decentralized platforms. As Lars Nyman of cloud provider CUDO Compute points out, “AI can increase security through anomaly detection and improve the functionality of smart contracts through predictive analytics.” AI can also help create smart contracts, an activity previously reserved for technical practitioners. By verifying smart contracts and identifying potential vulnerabilities, AI ensures higher security standards and builds trust in blockchain systems.
In this way, the decentralized exchange Uniswap
Uniswap
uses AI to identify and block fraudulent transactions, ensuring a safer trading environment for its users. Similarly, the open-source Aave protocol
Aave
uses AI-powered risk management tools to optimize loan health and collateral requirements, highlighting the role of AI in improving financial products and services.
Making blockchain data accessible
Blockchain’s transparency is one of its greatest assets, but the sheer volume of data can make it difficult to derive meaningful insights. AI can fill this gap by processing and summarizing large datasets, making blockchain data more accessible and smart contract execution more efficient. Adnan Masood of solution provider UST highlights the importance of hybrid approaches where AI processes data off-chain while preserving the integrity of the chain. By transforming raw blockchain data into understandable information, AI can democratize access to information, enabling users to make better decisions.
Chainalysis is one example, which uses AI to monitor and analyze blockchain transactions to detect suspicious activity, improving security and making data more accessible for analysis. Another blockchain protocol, Fetch.ai, integrates AI to optimize transaction timing and processing to reduce congestion.
Improving tools for blockchain developers
AI can also improve the quality of life for blockchain developers by providing low-code and co-pilot-like solutions. These tools can simplify the development process, reduce the need for deep coding knowledge, and accelerate project timelines. One example is the multi-chain protocol Guru Network, which provides a low-code solution that integrates traditional business process automation engines with AI snippets to streamline the creation of Web3 and AI applications. Developers can use pre-built components and templates, while GPT agents provide real-time contextual consultation from documentation and code repositories.
AI can help generate smart contracts, debug code, and predict potential issues before they arise. This not only speeds up development, but also reduces the margin for error, allowing developers to focus on more strategic and innovative aspects of their projects. AI can also help with the creation of smart contracts, making the development process more accessible to non-technical practitioners.
For example, the open-source framework OpenZeppelin uses AI to audit smart contracts, identifying bugs and vulnerabilities before deployment. This proactive approach ensures that smart contracts are secure and work as intended, reducing the risk of errors and exploits. Similarly, Ocean Protocol uses AI to develop deterministic models that align with the deterministic nature of blockchain, improving the overall development process.
AI is transforming the DeFi landscape, bridging the gap between complex financial technologies and everyday users. By improving infrastructure, enhancing user experience, providing robust security measures, and supporting developers, it is making DeFi more accessible and efficient.
As these technologies continue to evolve, we can expect AI to play a larger role in the mainstream adoption of DeFi. By leveraging AI’s analytical prowess and ability to handle large datasets, DeFi platforms can offer safer, more efficient, and more user-friendly financial services, democratizing finance and empowering users around the world.