Artificial intelligence-powered agents in decentralized finance are specialized AI models designed to automate and simplify tasks such as trading digital assets, portfolio management, and yield farming activities.
For many, they’re proving to be a godsend, helping investors navigate the brain-scrambling world of DeFi protocols and all the activities they offer, be it staking, restaking lending, borrowing, liquidity provision,n and so on. The basic idea with DeFi agents is that the investors can focus more on the overall investment strategy, while they handle all of the grunt work of token swaps and cross-chain interactions.
What Are DeFi Agents?
In a nutshell, having a DeFi agent on hand is like having access to your very own DeFi geek. They’re super smart, they possess immense knowledge of the crypto markets and they’re always up to date. By utilizing powerful AI algorithms, they can perform tasks such as market intelligence and analysis, decision-making, and executing transactions on your behalf.
DeFi agents should not be confused with traditional trading bots. Rather, they’re designed to proactively interact with blockchain networks, user accounts, and smart contracts, and they often do this autonomously. This allows them to handle complex actions for users, such as trading cryptocurrencies, managing assets, and analyzing protocol data. Most DeFi agents are powered by large language models, which means they can make API calls and interact directly with blockchain accounts. LLMs also give them the ability to process enormous volumes of blockchain data in seconds, and they can do all of this without any oversight from humans.
These powerful characteristics mean DeFi agents can reshape the DeFi landscape, acting as our decision-makers and executing transactions while we sleep, without any need for us to keep up with the markets ourselves.
Traditional trading bots are fairly straightforward programs that can only operate within very tight parameters. On the other hand, DeFi agents can be thought of as “economic agents”. Whereas bots must be programmed by their users, DeFi agents can be configured easily by anyone, without any need to type code. In addition, their flexibility means they can safely navigate uncertain, volatile markets, meaning they can adapt even when faced with market conditions they’ve never seen before. This makes DeFi agents much more suitable to the unique challenges within DeFi’s characteristically dynamic markets.
The true competitive advantage of DeFi agents is not so much their underlying code, but the unique configuration. Most DeFi agents are decentralized and open-source, meaning anyone can use them. But it’s up to the user to fine-tune and configure these agents to act on their behalf. With the right setting, it’s possible to tweak DeFi agents to achieve superior performance.
Ultimately, DeFi agents are all about automating DeFi investing, giving users a way to make profitable decisions without spending hours analyzing the markets themselves.
DeFi Agents In The Wild
Although DeFi agents are a relatively new innovation, investors can access some extremely powerful tools. For instance, Giza’s autonomous DeFi agent ARMA is an interesting showcase for the power of intelligent market automation, continuously monitoring market conditions across numerous blockchains and protocols to execute complex yield farming strategies on behalf of investors. It’s designed to adapt on the fly to changing market conditions while implementing strong security measures to ensure user’s funds are safe.
ARMA pioneers a number of innovations that will unleash a wave of automation in DeFi markets. Its purpose-built algorithms ensure that anyone can verify its decision-making patterns to see why it takes the actions it performs on behalf of users. It also supports dynamic position management, responding to market changes in real-time, and it provides automated safeguards that guarantee user sovereignty.
According to Giza, the main purpose of ARMA is to help investors overcome the cognitive barriers presented by the complexity of DeFi markets. By keeping a watchful eye on thousands of key metrics relating to each asset and evaluating numerous protocols simultaneously, it can perform the kind of precise trades required to execute the most sophisticated investment strategies.
As a result, users benefit from superior capital efficiency and improved price discovery, together with reduced systemic risk.
Meanwhile, daos.fun brings the concept of DeFi agents to the world of hedge funds. It acts as a kind of automated hedge fund manager, allowing communities to create an AI-powered decentralized autonomous organization and invest their assets in a collective way to increase their market power.
With daos.fun, a DeFi agent manages the pooled funds of multiple investors, directing them into different DeFi protocols. Members of the DAO get to vote on the overall strategy, and the agent then goes ahead and executes it according to the community’s wishes. The performance of the fund determines the value of its digital token, and the profits are distributed proportionally to token holders.
Each fund has an expiration date, at which point all investments are frozen and token holders receive their share of the payout. One of the largest funds on daos.fun is AI16zDAO, which is led by an AI version of Marc Andreessen, the founder of the famous venture capital firm a16z. It has achieved a market capitalization of more than $600 million, exemplifying how DeFi agents can transform DeFi asset management.
How Do DeFi Agents Work?
DeFi agents have a number of abilities and can be considered multitaskers, but what they do can be broken down into three separate things. Essentially, they act as an assistant who reads the markets and follows the latest trends, works out the best tokens to invest in, and what time to invest in them, and then execute those decisions in an instant.
The first step for any DeFi agent is intelligence gathering. They collect tons of data by following every DeFi protocol and exchange platform across dozens of different blockchains. They lap up everything from asset price data to blockchain transactions and even the stats provided by platforms like DeFiLlama, DappRadar, and CoinGecko. They’re just like a sponge, soaking up all of the information needed to be able to make an informed decision.
The second step is the actual decision-making. DeFi agents do this by analyzing all of the data they accumulate, applying advanced machine learning rules and predictive analytics to guess where the market will go next. Based on this understanding, they can then decide on which course of action to take, guided by their user’s goals and risk tolerance.
Finally, step three is where they execute those decisions. This can involve actions such as making a simple trade, shifting funds to a different account or protocol, triggering a smart contract, or something else. In every case, the DeFi agent performs this on behalf of its user, without asking for permission every single time.
Is It Really That Easy?
Yes, it is. But that said, DeFi agents have encountered some challenges, and more risk-averse DeFi traders may want to wait a while and see what the industry does to get around them.
One of the major problems, not only for DeFi agents but for every kind of AI agent, is the reliability of the data they consume. In DeFi, agents require real-time market data to make decisions, but some of that data may not be reliable, or it may be conflicting. That’s because they obtain their information from hundreds of different sources, from asset price oracles to DEXs and lending protocols and more. If the data isn’t reliable, DeFI agents could make some erroneous decisions on behalf of their users, who will be left to deal with the consequences.
Hallucinations are a problem that relates to data quality. Essentially, hallucinations are where AI models generate false information, such as getting historical dates wrong or making up fake citations. In DeFi, such hallucinations can be extremely damaging, but the industry is looking to mitigate this challenge with innovations around real-time fact-checking, validation layers, and consensus-based decision-making.
The ever-present security risks of crypto and DeFi also extend to agents. Like smart contracts, DeFi agents can be a big target for cybercriminals, who will look for vulnerabilities and attempt to manipulate them as part of complex scams and fraud. As such, a strong security framework is essential for any DeFi agent.
Giza is looking to tackle this with the introduction of its “agent authorization layer”, which facilitates non-custodial operations using granular permission management. In this way, users remain in full control of their crypto assets, but they can give ARMA the authority to act on their behalf for limited durations using session keys and programmable authorization. Doing this, ensures users retain full sovereignty of their digital assets.
DeFi agents also raise questions about centralization. This fear stems from the fact that creating them requires significant technical expertise, lots of data, and vast amounts of computing power – and none of these things are easy to obtain. Because of this, there are genuine worries that DeFi agents could end up concentrated in the hands of a small number of well-resourced companies or developers, which would undermine the decentralized ethos of crypto and potentially introduce new security risks.
Automation Is Coming
Despite those concerns, it seems likely that DeFi agents have a very promising future, especially as we see blockchain networks such as Ethereum and Solana embrace more AI-powered automation. The prospect of being able to have a smart assistant automate your DeFi investing strategy and handle all of the trades and smart contract operations on your behalf is simply too compelling, not only because it’s easier, but because they often deliver better results with higher yields than by going it alone.
The challenges around security, accuracy, and centralization may hold back the adoption of DeFi agents somewhat, but it’s clear that a more intelligent, automated future awaits.
| Disclaimer: The text above is an advertorial article that is not part of Coincu.com editorial content. |
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