In some ways, blockchain and artificial intelligence technologies are polar opposites. On the one hand, blockchain is celebrated as one of the most open and transparent technologies around, based on the idea of a decentralized public ledger that’s shared across nodes. There are no secrets on the blockchain, with the full transaction history of every user available for anyone to see.

On the other hand, AI is often described as a “black box”, in which enigmatic algorithms make decisions based on opaque model parameters and proprietary datasets. It’s a notoriously secretive industry and very few understand how the technology actually works.

Given these contrasts, the synergies between the two technologies may not be immediately apparent. But as they mature and evolve, it’s becoming increasingly apparent that blockchain and AI are on a path towards convergence, and it could well provide the spark that sets decentralized finance on a path towards mainstream adoption.

Breaking Down Barriers

It makes sense when you think about it. Perhaps the biggest thing holding DeFi back right now is its complexity. Navigating the world of DeFi, with all of its protocols and volatile price swings of crypto assets, is not an easy journey, even for experienced cryptocurrency users.

AI can play a key role in simplifying the way people interact with DeFi. With generative AI-powered chatbots capable of conversing with users in a humanlike way, the technology can streamline our interactions with DeFi, guiding us through complex protocols in order to make them more user friendly.

At present, most people barely understand the possibilities of DeFi. It’s fairly easy to get to grips with the idea of decentralized trading, where users pool their liquidity to enable others to buy and sell amounts of cryptocurrency without going through a third party. But beyond this, there is a whole world of staking, restaking and yield farming that very few currently understand.

Optimized Trading

When it comes to trading, most people seem to fail. At least, that’s the general consensus. Fact is, most people see the world of crypto trading as just another form of gambling, and many are afraid to try it due to the potential of losing vast sums of money.

AI can aid with this too. By using algorithms that can analyze user’s portfolios and behavior, assess their risk tolerance and study asset price movements and more, it’s possible for AI to deliver tailored advice to users, helping them to make better decisions about when to buy and sell different assets. A cool example of this is the decentralized hedge fund Numerai, which employs AI algorithms to crowdsource predictions made by data scientists. Traders can then use these predictions to make more informed trading decisions, driving their investment decisions in a decentralized and logical way.

We can also imagine a world in which AI models can accurately predict asset price movements and identify broader industry trends that can help investors to make more accurate predictions.

As an extension of this, AI-powered trading bots can automate the actual process of buying and selling DeFi assets, based on predefined strategies. Unlike human traders, who are required to get a good night’s sleep every day, AI can watch the markets 24 hours a day, seven days a week, analyzing price movements and trading volumes to identify the best time to enter and exit a trade. This helps traders to maximize their profits while reducing risk.

Blockchain Insights

While transparency is often touted as one of the major advantages of blockchain, the reality is that few people can take advantage of this. Because of the sheer volume of data hosted on blockchains, it’s almost impossible for regular users to make any sense of it.

AI has the potential to bridge this gap because it’s uniquely able to process and summarize vast amounts of data and dig up useful insights from it. By analyzing blockchain data to identify patterns and trends, developers will be able to build more efficient smart contracts, while security can be improved through automated threat detection.

AI can also help to improve the quality of smart contract code, helping to audit it and identify vulnerabilities that could lead to hacks. It will lead to higher security standards and reassure users that their funds are safe.

In fact, AI is doing this already on some platforms. Uniswap, one of the best known decentralized exchange platforms, has created AI algorithms that monitor trades on its platform to identify and block fraudulent transactions, creating a more secure trading environment for its honest users. A more interesting use case has been pioneered by Aave, another popular DeFi protocol, which uses AI to manage risk and optimize its loan collateralization requirements.

Simplified Development

Creating DeFi applications has always been a time-consuming process that requires extensive knowledge of smart contract programming languages like Solidity. As such, DeFi development has been restricted to only a handful of developers that possess such a skillset.

AI paves the way for almost anyone to become a DeFi developer, enabling the creation of “low-code” tools that make it simple to build decentralized applications using a drag-and-drop interface, for example.

Such tools not only make it possible for citizen developers to build DeFi protocols, but they also accelerate project timelines. Seasoned developers can use prebuilt components and templates to iterate on new ideas more rapidly, while generative AI agents can aid in the creation of documentation, compiling this from code repositories.

A Few Concerns

The convergence of DeFi and AI won’t always be plain sailing, because it’s not without its challenges. One of the major concerns around AI is data privacy and security. AI models need to be trained using vast, high quality and diverse datasets. The more advanced AI becomes, the more its thirst for data will grow, and it will become more difficult to obtain this data.

Some of the difficulties in creating high quality datasets stem from data fragmentation and privacy concerns that prohibit certain kinds of data being used, and financial information is generally considered to be some of the most sensitive, which creates problems for the DeFi industry. That said, AI can help to overcome this challenge too, creating synthetic data that might be able to substitute for real-world data in some kinds of applications.

Another danger of AI is that we might become over-reliant on the technology, leading to complacency and ethical concerns. It’s important to remember that AI models have limitations and they're not infallible. AI is notorious for its “hallucinations”, where it essentially just makes things up when it’s unsure of how to respond to a prompt, and this creates risks in a world where people’s savings are on the line.

It’s for this reason that there must always be a degree of human oversight and evaluation when creating systems and tools based on AI. This could put the skids on the acceleration of AI’s development, but it’s a necessary safeguard.

In addition, there are questions of scale. Although another benefit of AI is that it can potentially help blockchains to scale and process transactions more quickly, AI itself becomes incredibly resource-hungry when it scales. Some AI models require vast amounts of computational resources, which can be expensive and lead to sustainability concerns.

DeFi For The Masses

Despite these challenges, it’s hard not to be excited by the possibilities of AI and its integration with blockchain and DeFi. The scope of operations for AI in the crypto space is broad and continually expanding. They can facilitate trading strategies and operations, manage payments across different platforms, handle cross-chain transfers, and even participate in more complex DeFi activities such as liquidity provision and yield farming strategies. This flexibility allows them to adapt to the ever-changing demands of the cryptocurrency ecosystem.

As AI evolves and more DeFi developers come to learn its benefits, we can expect this convergence will accelerate, helping to bridge the gap between everyday users and complex financial concepts.

AI is positioned to have a major impact on DeFi and accelerate its journey to mainstream adoption. It will make the world of DeFI more accessible, more efficient and more secure, giving millions of people the confidence they need to start making smarter financial decisions.