Lack of liquidity and significant capital costs have hindered the growth of decentralized finance (DeFi).
One of the solutions to solve this problem is depositing arbitrage with artificial intelligence protocols. AI tools can detect minor price differences between exchanges, DeFi protocols and reward shareholders, then arbitrage and make a profit.
The decentralized financial space (DeFi) promises a future where financial services are no longer in the hands of a handful of big banks.
In other words, in the future users may not have to rely on financial institutions as intermediaries.
Instead, they will have access to open source protocols and smart contracts that will replace banks as efficient, cost-effective and transparent alternatives.
As the DeFi space continues to evolve, it is becoming increasingly clear that artificial intelligence (AI) will play an important role in the industry. In fact, AI can be said to solve one of DeFi’s biggest problems, namely liquidity.
Let explore together:
- Liquidity problems plaguing the DeFi industry
- How can AI help solve liquidity problems in DeFi?
- DeFi industry risk
Liquidity problems plaguing the DeFi industry
The decentralized financial space consists of various decentralized protocols that provide financial services on blockchain platforms. Most of these DeFi protocols are launched on Ethereum, the largest blockchain network for smart contracts.
Compared to traditional finance and even other cryptocurrencies, the DeFi space is still very small. According to the analytical platform Messari, DeFi accounts for only 0.2% of the global financial services market.
The relative size of DeFi means that it can be difficult to find buyers or sellers willing to trade at any given moment. This translates into liquidity problems for DeFi and extreme price fluctuations during booms and busts.
For example, the year 2022 saw a further slowdown in the crypto and tech markets due to unfavorable macroeconomic conditions. This slowdown is mostly because rising interest rates hurt high-growth businesses the most.
Hence, fewer industries were hit as hard as DeFi. By the end of 2022, the total value locked (TVL) in the DeFi industry was reported to be $40 billion, or just 25% of what it was at the beginning of the year.
Given its relative size compared to financial markets, analysts at firms like Mesari still believe DeFi will grow in 2023. However, lack of liquidity will be a hindrance to its growth.
To deal with the issue of lack of liquidity, the DeFi space needs market markers or companies with sufficient capital for arbitrage.
Few major financial players are willing to invest in this emerging space. However, DeFi companies are already finding alternative solutions to this problem.
How can AI help solve liquidity problems in DeFi?
Instead of relying on giant financial firms as market makers, DeFi industry players are using rewards and artificial intelligence to increase liquidity in the space.
One of the active companies in this field is Mosdex, which is an arbitrage-based liquidity and equity platform. Joseph Emmett, CEO of Mosdex, believes that artificial intelligence can significantly increase the potential of DeFi applications.
“Liquidity risk is a major concern for any company considering entering the DeFi space,” Emmett said. Solving this problem could be a major catalyst for the growth of DeFi.”
The Mosdex platform uses artificial intelligence algorithms to find arbitrage opportunities between DeFi protocols and centralized exchanges.
Due to low liquidity, digital currencies can have slightly different prices in different markets. If these prices are sufficiently different, an AI algorithm can arbitrage and make a small profit.
At the same time, the capital of these arbitrage transactions comes from users who want to earn a return on their digital currency. Mosdex claims that this is a relatively low-risk strategy that can provide reliable returns to investors.
Mosdex is not the only industry player exploring the synergy between DeFi and AI. World Economic Forum experts have also pointed out how artificial intelligence and blockchain technology can complement each other.
“It’s clear that traditional finance has been using AI tools for a long time,” said the Mosdex CEO. However, AI will be a real game changer for the DeFi industry. “In addition, DeFi really improves the power of AI in finance.”
DeFi industry risk
Liquidity protocols (LP) are still an unregulated industry. Unlike traditional finance, there is no insurance if the DeFi protocol is hacked or for any other reason. Potential investors should only invest with stock pools and liquidity protocols they trust. So you need to be very careful.
The DeFi field is one of the more powerful use cases for crypto. Its growth can boost the adoption of the entire blockchain ecosystem. As a result, smart contract-based blockchains like Ethereum can benefit from the growth of DeFi.
Disclaimer: Investing in cryptocurrencies and other ICOs is highly risky and speculative. This article is not intended as a recommendation by the html69 or the author as a signal to buy or sell cryptocurrencies. Because each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions.