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The DeFi (decentralized finance) market has staged an impressive comeback over the past 12 months with the TVL (total value locked) across all protocols doubling to $93 billion.
Meanwhile, excitement surrounding the capabilities of generative AI continues to build.
A Bloomberg report suggests this industry could be worth $1.3 trillion by 2032 and “fundamentally change the way the technology sector operates.”
DeFi and AI (artificial intelligence) are set to go from strength to strength in their respective fields over the coming decade.
But there’s been little discussion about the seismic impact these technologies can have if applied together delivering exponential growth and revolutionizing finance on a global scale.
In the seven years since DeFi protocols came into existence, a blossoming ecosystem of financial applications and services have been built on top of blockchain networks, offering a modern, real-time parallel to the outdated and slow infrastructure relied upon by traditional institutions.
Smart contracts now offer self-executing agreements that eliminate the need for intermediaries and open up access to lending, borrowing, trading and saving all with much more competitive interest rates.
When you peel away the complicated jargon and talk of liquidity pools and yield farming, the opportunities that DeFi presents are nothing short of mind-blowing.
In a world where access to banking services is governed by strict eligibility criteria that billions of people are unable to meet, these protocols can secure financial inclusion for unbanked and underbanked populations around the world.
Now, anyone can manage their money through a smartphone.
Funds can be sent and received instantly and cheaply without depending on gatekeepers who charge punishing fees, while those shut out of receiving a credit score can now build a reputation on the blockchain.
By bringing DeFi and AI together, a multi-trillion-dollar power couple begins to form with truly transformative use cases.
But what does this look like in practice and what are the opportunities and challenges on the horizon as we redefine the future?
DeFi done right
AI’s ability to digest vast datasets in the blink of an eye, make intelligent predictions and connect the dots between trends is going to supercharge the world of DeFi.
We’re barely scratching the surface when it comes to the potential applications.
Algorithms powered by AI can analyze market trends, bringing together news coverage, social media posts, historical data and brand-new figures in the time it takes a human to get a cup of coffee.
Applied correctly, this allows traders to stay ahead of the curve, enables businesses to detect changing behaviors and helps forward-thinking entrepreneurs spot compelling opportunities for new goods and services.
What’s more, all of these in-depth insights can be delivered with full automation, saving time and boosting productivity.
Together, AI and DeFi will also reinvent the way we interact with money, personalizing financial services like never before.
Imagine an algorithm that makes bespoke recommendations on the products you’ll love based on past purchases or uncovers discounts for car rentals and accommodation when you’re booking flights.
While the barriers to entry surrounding investments and financial planning have started to come down in recent years, many consumers still lack the means and the know-how to prepare for a brighter future.
In the coming years, all of that will change, with AI-enriched platforms enabling investors to save regularly, invest wisely and budget meticulously.
And instead of adopting a ‘one size fits all’ approach, each user would be able to benefit from specific plans based on their income and outgoings with investment portfolios and trading strategies tailored to an individual’s risk tolerance and long-term goals.
Broadening access to fintech can be done safely as AI and DeFi converge.
Both technologies will also prove invaluable in the fight against identity fraud, which cost Americans a staggering $23 billion last year.
Advanced analytics, fueled by machine learning, have the power to detect complex patterns of fraud in multiple locations instantaneously while the cryptographic security offered by blockchain platforms helps remove some of the attack vectors commonly exploited by malicious actors.
This, when coupled with faster and more accurate KYC (know your customer) checks, can prevent funds from being stolen in the first place, and make DeFi platforms an even safer environment for storing assets.
A win-win situation for consumers and lenders also starts to emerge, thanks to a revolution in credit underwriting.
Applications can be scrutinized using alternative data points enabling self-employed individuals to access capital rather than suffer arbitrary rejections with users building a reputation score on immutable blockchains.
This leads to more informed lending decisions for DeFi platforms and the development of robust risk management strategies.
Leveraging machine learning, AI can automate the creation and execution of smart contracts, streamlining operations and eliminating the potential for human error.
We’re already starting to see innovative new projects take advantage of these capabilities like Zircuit, a layer-two blockchain with AI-enabled security, and Ritual, the network for open AI infrastructure.
Innovating responsibly
There’s so much to be excited about and a lot to be working on. But against this backdrop of innovation, careful consideration must be paid to the potential pitfalls of a close integration between AI and DeFi.
Data quality, privacy and security are three crucial themes that innovators need to focus on as they build new products.
Robust safeguards need to be in place to shield protocols against adversarial attacks.
The complexities of regulatory compliance are another hurdle to overcome, with jurisdictions worldwide set to pay closer attention to both technologies in the years ahead.
There are also ethical implications to reflect on. The purveyors of AI tools need to ensure they mitigate the risk of algorithmic bias that leads to unjust outcomes.
State-of-the-art cybersecurity is required to ensure that the personal data processed by up-and-coming platforms isn’t misused for malicious purposes.
And as AI models are developed, transparency is needed to ensure potential errors can be remedied and that the public has confidence in the systems they’re interacting with.
Let’s not forget that new technology also represents a steep learning curve for consumers, who can be resistant to change.
DeFi and AI have the potential to redefine finance as we know it.
By democratizing access, promoting inclusion and fostering a more transparent and secure ecosystem, this technological marriage could usher in a new era of empowerment for all.
But to truly unlock their potential, we must address future challenges head-on and ensure these tools are responsibly implemented.
The future of finance rests on our ability to harness the power of AI and DeFi for good.
Sunil Srivatsa is the founder and CEO of Storm Labs, the creators of the Cove Protocol, the first on-chain portfolio manager.
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