Exploring the Impact of Artificial Intelligence on DeFi and Crypto

Technology Jun 7, 2023

Artificial Intelligence, or AI, has been the season's flavor ever since ChatGPT launched in November 2022. Hardly a day goes by without hearing about an incredible advancement in one form of AI or another. Every company and industry, both big and small, are trying to figure out how to use AI to benefit themselves better, and the cryptocurrency ecosystem is no exception. Numerous AI-based cryptocurrency projects have already been announced. But unfortunately, many are just meme coins or outright scams, with only a few being genuine projects. However, considering how quickly the cryptocurrency space moves, it won’t be long before we find several exciting AI projects based on blockchain.

In this article, we'll look at the larger question of what AI is and how our industry can benefit from this incredible development unfolding right in front of us.

What are the current-gen AIs?

To say ChatGPT had a successful launch would be an understatement. Within five days of its launch, the project crossed 1 million users, making it the fastest product ever to reach that milestone. Compared to Facebook, which took ten months to reach that number, and Netflix, which took 3.5 years, you can understand ChatGPT's explosive growth. Only a few months after its launch, it has over 100 million users and approximately a billion monthly visits.

Despite the massive growth in the user base, there is still a lot of confusion about what ChatGPT is and how it works. While this is a complicated topic, a simple explanation of the current generation of AIs would be to call them a sophisticated version of the word suggestion feature we have on our cell phones. These features are then augmented using Reinforcement Learning from Human Feedback, or RLHF.

How can AI benefit the cryptocurrency ecosystem?

AIs are highly capable of performing complex tasks that require multi-layered thinking and logical deduction. This level of sophistication makes them well-suited to many roles in the cryptocurrency ecosystem:

  1. Smart contract auditing: Smart contracts are the foundation on which much of the cryptocurrency ecosystem has been built. Most projects invest significant time and resources to ensure their contracts are audited and free of exploitable weaknesses. However, despite such audits, we have seen several smart contract errors that were found and exploited by hackers. Although auditing with AI alone may not be feasible, using AI to assist human auditors can make the auditing process more efficient and reduce the risk of future exploits.
  2. Faster threat detection and response: AIs can use their pattern recognition capabilities to detect malicious actors and their transaction patterns. This could allow it to track hackers who use similar methods to attack different protocols that suffer from similar vulnerabilities and warn them ahead of time.
  3. Spotting logical vulnerabilities: Logical vulnerabilities have become another serious threat to the DeFi ecosystem. Price manipulation and flash loan attacks have cost millions and bankrupted several DeFi projects. Using AI as a logical vulnerability detection tool can prevent many if not all of these attacks and help increase user trust in the ecosystem.
  4. More efficient routing system: As DeFi becomes more decentralized and spread across multiple chains and layers, we need to integrate them all through smart routers and bridges that can carry out these cross-chain and cross-layer transactions more efficiently. An AI can be trained to make on-chain traffic more efficient by routing transactions through different blockchains and layers to reduce transaction costs and slippages.
  5. Better on-chain tracking: On-chain tracking is a fast-developing field, and with the addition of AI, it can get be even more advanced. Currently, on-chain tracking is a complicated process that is largely performed by experts in the field. But with the use of AI, not only can on-chain tracking be carried out faster, but it will also be open to everybody, which will allow users to get a clearer picture of their network transactions.
  6. Trading strategy optimization: Algo trading has become an integral part of trading stocks and cryptos. With advancements in AI, trading algorithms could potentially become even more powerful and effective. By tracking multiple data points such as price action, social media sentiment analysis, breaking news, and on-chain data, AI-powered trading bots could potentially outperform any current algorithmic trading strategies in both crypto and stock markets.
  7. Integration to wallets: We are already witnessing wallets like Metamask introduce features that try to warn users about possible malicious transactions before users approve them. If AIs can be integrated into wallets, they will be able to perform this task far better, giving users a simple explanation of transactions before they approve them. Such a feature could dramatically improve the usability of wallets and DeFi in general.
  8. Educating new users about crypto: For newcomers to the cryptocurrency and DeFi space, the learning curve can be overwhelming. The rapid pace of change in the ecosystem means that educational resources from even a year ago may already be outdated. However, AI can help simplify the learning process and provide users with up-to-date educational resources, making it easier for them to understand the basics of crypto and navigate the rapidly evolving ecosystem.

In conclusion, the potential for AI in the cryptocurrency space is immense. From educating new users to improving usability and security, AI has the power to bring in the much-expected mass adoption. While there are still challenges to be overcome and the technology is still in its early stages of development, the fact that the cryptocurrency ecosystem has been so quick and eager to adopt this game-changing technology points is a great sign. As the ecosystem continues to grow and evolve, it will be exciting to see how AI can be leveraged to make cryptocurrencies what we all want them to be.

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