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AI-powered DeFi: unlocking the synergy

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by 1inch Network

• 3 min read

AI promises to transform the DeFi space, but its true impact is yet to be seen.

The convergence of decentralized finance and artificial intelligence (AI) has the potential to revolutionize the industry, making DeFi platforms more efficient, accessible and secure while also introducing more sophisticated products.

Top players in the DeFi space, such as Etherscan or Solana, are already actively incorporating AI-based tech, ranging from Etherscan's code reader to Solana's chatbots and grant programs. AI's ability to analyze extensive data and apply the information could take the industry to the next level.

AI use cases in DeFi

Predictive analytics and risk mitigation. By leveraging AI algorithms, DeFi protocols can make informed decisions based on market trends, enabling better risk assessment and personalized investment advice. For instance, AI can detect sudden changes in transaction volumes, alerting investors to potential risks associated with market manipulation or shifts. This can empower traders and investors with valuable information, helping them to make more informed decisions.

Enhanced safety and anti-fraud activities. AI can play a role in better detecting fraudulent activity and scam schemes. By analyzing vast data sets and identifying patterns indicative of fraudulent behavior, AI can detect potentially nefarious activities, such as suspicious liquidity movements, alerting investors to possible risks associated with market manipulation or shifts.

Powering smart contracts. AI can improve interaction with protocols by generating explanations for enhancing the understanding of the smart contract code.

Based on the findings of recent studies, AI has also demonstrated its effectiveness in protection against smart contract attacks. By training AI algorithms to recognize patterns and abnormalities in the code, security weaknesses can be detected and addressed in subsequent iterations of the smart contracts. AI algorithms are able to analyze the language used in smart contracts for potential ambiguities and inconsistencies. They can also track funds' flow and identify suspicious or fraudulent activity, enabling developers to take proactive measures to prevent potential security breaches.

Digital identity security. Through robust authentication and verification processes, AI can ensure the integrity and authenticity of blockchain-based digital identities, including images, text and videos. This advanced approach mitigates the risk of digital identity theft, enhancing user asset security and fostering trust in DeFi platforms.

Credit scoring and portfolio management. By analyzing a user's wallet history and balance, AI algorithms can offer loans and provide tailored investment advice. This enables lenders to assess the solvency of borrowers more accurately and allows users with a proven track record of timely repayments to get lower interest rates. The automation of portfolio management using AI algorithms can also optimize investment strategies, offering users personalized recommendations based on their risk appetite and financial goals.

Generative art powering NFTs. NFT projects and creators can leverage AI art generation models, enabling them to input parameters and constraints, such as shapes, colors, patterns and text to create NFTs. Additionally, AI-powered NFTs, known as iNFTs, can analyze data patterns, evolve and interact with dApps and store new metadata in their smart contracts.

Various emerging platforms and projects are embracing the potential of AI, as well. SingularityNET allows users to build and monetize AI services in a decentralized manner, while Phala Network focuses on decentralized cloud computing with an emphasis on privacy. Numerai leverages AI for investment opportunities in a hedge fund that targets global stock markets. Other projects like Graph Maker, dKargo, and Ocean Protocol have also incorporated AI as a core aspect of their design and products. Many such projects offer utility tokens known as AI tokens.

Challenges of AI implementation

One of the main challenges in applying AI tech in DeFi is the need for more data to enhance the accuracy and performance of AI models.

Navigating the complex landscape of legal and regulatory compliance is another issue. As AI applications in fraud detection and risk assessment become more prevalent, different jurisdictions may have varying regulations and requirements, making it crucial to ensure global compliance.

Ethical considerations also come into play when deploying AI in DeFi. Transparency and explainability of AI algorithms are vital for building trust and ensuring ethical decision-making. Users need a clear understanding of how AI systems make decisions, especially when it comes to financial transactions and investments.

Finally, scalability is a pressing concern as the number of AI-powered DeFi projects continues to increase, and the interpretability of AI models becomes crucial for user trust and transparency.

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