Decentralized finance, or DeFi, is integral to the 21st Century economy. With an average volume of 2 billion dollars in daily transactions completed on the Ethereum blockchain alone, DeFi is a thriving ecosystem for many reasons. Decentralized AI trading is quickly rising as one of these reasons, primarily for the ease, security, and speed it brings to the DeFi space.
That’s why, in this article, we’d like to explain this relatively new technology, its applications in DeFi trading, and how you can use it to fetch profits!
What is Decentralized AI Trading?
Decentralized AI trading refers to using AI tools specially designed for crypto trading on decentralized platforms to buy, sell, and exchange crypto assets. These AI tools are software programs or bots that facilitate the transfer of crypto and other DeFi assets on a blockchain.
Since DeFi is very broad, decentralized AI has way more applications than just buying and selling crypto assets. To fully understand this, we must first establish, to a reasonable degree, what DeFi trading is.
DeFi trading refers to the process of buying, selling, or swapping cryptocurrencies and other digital assets on blockchain networks using decentralized exchanges such as UniSwap and PancakeSwap. It is quite different from trading on centralized exchanges like Binance and Coinbase, which most crypto normies and beginners are used to.
The main emphasis of DeFi is decentralization, which is the very thing centralized trading fails at—private entities, under government regulation, own centralized exchanges like Binance and Coinbase. When you deposit funds into your centralized wallet, you give these organizations control over your money.
So, despite going through vigorous KYC regulations, you could lose access to your funds if the exchange locks you out, experiences a fallout, or gets banned by your government. In DeFi trading, these risks are mitigated. As long as your crypto and DeFi assets are in your private wallet, they are under your complete control.
In addition, DeFi trading involves using smart contracts and self-executing codes that allow you to directly trade cryptocurrencies and other assets with other traders peer-to-peer on a blockchain network. There are no intermediaries in this process, and the transaction occurs seamlessly.
Centralized exchanges, on the other hand, manage the order matching process and control the order book, a mechanism they use to facilitate trades.
Have you ever searched for a trending token you wanted to trade and didn’t find it on Binance or Coinbase? It was probably because it hadn’t been listed there yet. Thankfully, DeFi platforms allow for permissionless listing. This means you can take advantage of these new projects, which usually experience incredible price increases as soon as they are listed on DEXEs.
You may be wondering how these relate to decentralized AI trading. Well, these peculiarities differentiate the applications of AI in typical centralized trading from those in the DeFi world. Let’s explain below.
Why is AI important in Decentralized trading?
Speed, efficiency, and preciseness are essential factors in DeFi trading. With unmatched speed and second-to-none machine learning-powered processing capabilities, decentralized AI tools are the perfect accessories for the decentralized crypto ecosystem.
For instance, DeFi assets, such as newly listed blockchain tokens with growing market caps, tend to be very volatile. Utilizing decentralized AI tools, such as sniper bots, which execute transactions in milliseconds, is a very valid option to take advantage of their sudden price movements.
As helpful as smart contracts are, they can be compromised. Even after almost a decade of blockchain transactions, smart contract hackings still pose a significant problem. With anomaly-detecting AI smart contract scanners, you can quickly scan contracts of interest and protect your funds from theft.
These tools are also useful in futures and derivatives trading. AI bots like Fluid AI forecast crypto prices using advanced machine learning technology, enabling you to make informed bets on future price movements.
It’s important to understand that human experts can do all these. However, these DeFi AI tools exist to automate these processes, making for a more streamlined, secure, and efficient trading system.
Applications of AI in DeFi Trading
Now that we’ve established why AI tools are important in DeFi trading, let’s take a deeper look at how they are used. AI technology is still in a rapid growth phase, and there are several ways that crypto enthusiasts use it in the web3 space.
However, the following are the most popular applications of AI in DeFi trading.
- Crypto coin sniping
- Smart contract and wallet deployer scanning
- API scrapers and blockchain analytics bots
- Price prediction and trading
- Liquidity management
DeFi Sniper Bots
DeFi sniper bots or crypto sniper bots are AI-enabled automated trading tools that execute buying action immediately after a token is launched and sell it when its price reaches a predetermined value. These bots are very precise and use pre-programmed algorithms to carry out these trading actions. Click here to learn more about crypto sniper bots.
The process of buying a new crypto asset or token the moment it’s listed on a DEX is known as coin sniping. It’s a very lucrative strategy requiring extreme speed, so few traders profit from it.
Thankfully, decentralized AI trading bots like Maestro and Shibarium can help you use this trading strategy.
Our list of the top 3 best crypto sniper bots:
- Maestro Sniper Bot
- Banana Gun Bot
- Shibarium
1. Maestro Sniper Bot
Maestro sniper bot is a coin-sniping bot available on Telegram. It allows you to trade newly launched tokens, benefiting from swift price spikes. At the moment, it is supported by the Ethereum, BNB, and Arbitrum blockchains.
Once you connect your wallet and configure the bot on Telegram, you can use it for coin sniping. Currently charging 1% tax for every transaction, the Maestro sniper bot is one of our best recommendations for AI DeFi sniping.
2. Banana Gun Sniper Bot
Banana Gun is a more popular crypto sniper bot, with almost 60k followers on their official Twitter account. Like Maestro, Banana Gun is an AI trading bot offered over Telegram. However, it has a much sleeker, beginner-friendly UI.
After hitting 1M trades in October, this bot became extremely popular and even caught our attention. We highly recommend using the Banana Gun sniper bot if you prioritize ease and security when coin sniping.
3. Shibarium Sniper Bot
Shibarium is another crypto sniper bot that has been getting a lot of hype lately. Like the SHIB token, it is based on the famous dog breed Shiba Inu.
The bot on Telegram offers swift trading features and broad blockchain support. Currently, Shibarium’s fee is $0.01, and it claims to confirm transactions in 0.01 seconds as well.
AI Smart Contract/Deployer Wallet Scanners
As aforementioned, DeFi smart contracts can be compromised. Overlooked vulnerabilities could lead to invalid transactions and potential asset losses.
Initially, only blockchain developers and experts were capable of scrutinizing smart contracts and detecting anomalies in their codes that could cause these problems.
Thankfully, there are now smart contract scanners that you can use to analyze DeFi smart contracts without any programming knowledge. The only popularly available one at the moment, however, is Etherscan’s Code Reader Beta.
This revolutionary tool utilizes Open AI’s GPT-3 and GPT-4 to scan smart contracts, providing information about them in such a way that even newbies can understand. It’s currently free and requires only an OpenAI API key to work.
Deployer wallet scanners are also handy in DeFi trading. Deployer wallets create smart contracts. So, having a tool that analyzes the wallet for sketchy activity can help you identify potential rugs and avoid them.
Tools like Unibot’s Token Deployment Scanner are useful for this specific functionality.
Crypto Scraper Bots
Crypto Web Scraper Bots are AI-powered APIs you can use to collect data about a specific blockchain or token. They scour price-tracking and on-chain data websites to provide you with all the information you need for analysis in one place, saving you time and effort.
Most currently available crypto web scraping bots collect data from CoinMarketCap and other websites for technical and on-chain analysis. However, you can build your own web scraping bot with Python to collect data from web3 data-tracking sites like DeFi Llama. But even this requires decent programming skills and machine learning expertise.
We would have recommended downloading one from online repositories, but there’s a high risk of getting hacked if you install them on your PC. So, it’s best to wait until commercially available automated solutions have been launched.
AI Prediction and Trading Bots
One essential use of decentralized AI tools is token price prediction. Some DeFi tools have powerful machine learning technology that enables them to analyze historical data and perform thorough technical and fundamental analyses to extrapolate future prices. They can do this pretty accurately, especially for extremely short-term price movements within 30 seconds to 6 hours.
For major coins on CEXes, we have excellent tools like Crypticorn’s AI Price Prediction tool and CoinScreener. But for DeFi price prediction specifically, we can only recommend Fluid AI. It is an excellent option for short-term price predictions, most accurate within 30 seconds.
Pairing this with a swift sniper bot can enable you to make insane profits from DeFi trading.
Artificial Intelligence in Liquidity Management
Liquidity management is critical in DeFi. Trading in the decentralized market differs from trading on centralized platforms like Binance and Coinbase with “unlimited liquidity.”
In DeFi, liquidity providers (LPs) deposit funds into liquidity pools, providing funds for transactions and earning yields off them. However, negative price movements can induce fear and cause LPs to withdraw their liquidity. This can lead to further volatility and cause slippage in the market.
Thankfully, AI can help optimize the asset allocation process and provide valuable tips for
strategic liquidity pooling. Furthermore, since individual FOMO eventually results in mass withdrawal, intelligent machine learning systems can tailor liquidity pools and trading strategies to individual risk profiles and investment goals.
AI tools for personalized liquidity management are still under development. ClipFinance, for instance, has an array of automated yield solutions in the works. They have secured partnerships with significant blockchains and hope to revolutionize liquidity optimization when they launch their products.
Benefits and risks associated with Decentralized AI Trading
Decentralized AI trading is beneficial in the web3 ecosystem. It helps automate several tasking processes, such as gathering data for blockchain analytics, smart contract scanning, and much more.
However, it is not without risks. Since DeFi AI bots were only recently introduced into the web3 space, there is still a lot of room for improvement and optimization, and sometimes hackers take advantage of them, siphoning people’s funds in the process.
But before we discuss the risks, let’s examine the benefits of decentralized AI trading.
Benefits of AI trading in DeFi
The following are some of the benefits of decentralized AI trading:
- Automation and ease
- Speed and efficiency
- Cost-effectiveness
- Safety from rugs and impermanent loss
1. Automation and ease
Using AI tools such as trading and data scraping bots helps automate the trading and research process. This saves time that can be spent on more important things and generally eases the process of DeFi trading.
Rather than scrolling through different price-tracking and on-chain data sites, you could quickly get them in one place with an AI crypto data scraping API. Furthermore, automated trading and sniper bots help you execute trades automatically, saving time and helping you make data-driven decisions more efficiently.
2. Speed and efficiency
AI tools like sniper bots provide speed and efficiency by executing trades precisely and swiftly. These bots leverage algorithms to identify optimal entry and exit points in real time, allowing traders to capitalize on market opportunities instantly. They also help you take advantage of the upsurge in prices as soon as new tokens are launched.
By automating trade execution and reacting swiftly to market fluctuations, sniper bots enable you to achieve faster transaction speeds and maximize efficiency within the dynamic DeFi landscape.
3. Cost-effectiveness
There are several ways decentralized AI trading helps you save costs. Firstly, AI-driven algorithms can optimize trading strategies to mathematical precision, reducing the likelihood of costly mistakes and minimizing losses.
Additionally, automation reduces the need to manually trade and oversee the process, giving you time to focus on other income streams. Moreover, AI tools can efficiently analyze vast amounts of data, enabling you to make informed decisions without the need for expensive human analysts.
4. Safety from rugs and impermanent loss
Smart contract/deployer wallet scanning AI tools can thoroughly analyze a project to determine whether it is a rug pull, saving you from losing liquidity when you invest in it.
Furthermore, impermanent loss is common in DeFi trading because most DEXes operate on liquidity pools.
Impermanent loss occurs when the price of the pool’s assets changes relative to each other after the liquidity provider has deposited their assets. Suppose the price of one asset increases significantly compared to the other. In that case, traders often arbitrage by buying the undervalued asset from the pool, causing the pool’s ratio of assets to differ from the external market price.
As a result, liquidity providers might find fewer total assets (in USD value) than they would have had if they simply held their assets. The loss is “impermanent” because it is reversible and will be recovered if the assets’ prices return to their original ratio.
Liquidity management AI tools can help solve this problem by providing optimal investment strategies for liquidity providers.
Setbacks of Decentralized AI trading
As valuable as decentralized AI tools are, they have risks. Let’s discuss some of them below.
- Dependence on automation
- Increased risk of asset loss due to vulnerabilities
- Limited accessibility due to ongoing development
1. Dependence on automation
There is a significant risk of becoming entirely dependent on automated tools for trading, analysis, and even price prediction. While using these tools in moderation is good, we always recommend that you don’t sideline human judgment in favor of AI.
For one, they were designed to mimic us and save time, not replace us. Furthermore, there are insights and data between the lines that only expert analysts can detect. AI has yet to advance to the level of human sophistication.
2. Increased risk of asset loss due to vulnerabilities
Wallet compromises are more common in centralized AI trading tools. But even DeFi trading bots experience vulnerabilities, too. Banana Gun, for instance, was reported to have a vulnerability in its token contract, which was eventually fixed. However, $BANANA token holders experienced some losses.
As more AI tools emerge, there are bound to be more mistakes like this, as early-stage vulnerabilities are one of the burdens of development in the crypto space.
3. Limited accessibility due to ongoing development
Many DeFi AI solutions are still in the works compared to their centralized counterparts. For instance, price prediction models like Crypticorn’s AI Price Prediction Dashboard have since been launched for major coins listed on CEXes. But there aren’t any publicly available DeFi price prediction models yet.
It’s important to note that these delays exist because of DeFi’s highly technical and sensitive nature. It’s unwise to rush products that should be carefully developed to avoid vulnerabilities.
Tips for navigating privacy and security while using AI DeFi tools
As we’ve mentioned, AI use in DeFi trading is still relatively new. So, there are a lot of ways your wallet could be compromised. Therefore, it’s crucial that you take the following steps to ensure your safety while using decentralized AI tools.
Use only trusted platforms
Use only AI tools from platforms you trust and that have a good rep in the crypto space. Because of how profitable the AI niche is becoming, it’s attracted many scams, and these providers are out to take your money.
So, take recommendations from trusted parties or us, or do your own research to determine which AI DeFi trading tools to subscribe to.
Secure your DeFi wallet
Ensure you properly secure your DeFi wallet when integrating AI tools into your trading setup. If you don’t use hardware wallets, keep your seed phrases secure and private. We typically recommend off-web storage, such as in your journal or on a securely hidden piece of paper.
Furthermore, be careful of the APIs you share. Never grant any of your tools access to your private wallet. Always create one on the platform you can fund and use. This will help you avoid losing all your funds if a breach occurs.
Thoroughly audit smart contracts
Ensure you thoroughly check the associated smart contracts of any DeFi AI project you use. This will help you spot potential vulnerabilities in the code and stop potential losses before they occur.
If you cannot do the audit yourself, you could use Etherscan’s Code Reader or hire an expert.
Avoid sketchy sites
Several fake sites claim to have AI solutions for your DeFi needs. When you interact with these sites, you risk draining your wallet.
Once you notice that an AI tool looks too good to be true, make sure to leave it. Furthermore, there are duplicates of original AI tools that could fool even the most vigilant observer.
Ensure you open links from the project’s official social media accounts and save them to avoid missing them in the future.
Avoid downloading APIs from online repositories
Since many AI tools are still in development and aren’t available for public use yet, many APIs offer similar functionality. These APIs are often posted in online repositories such as GitHub and some Discord servers.
Avoid downloading and using these APIs, as they could be harmful. Anyone with malicious intent could publish these APIs and wait for someone to install them. Once on a PC, they can access and drain your wallets.
Conclusion
Decentralized AI trading tools are significant innovations that make blockchain transactions easier, safer, and faster. Different kinds of AI-powered decentralized solutions exist, ranging from sniper bots to smart contract scanners.
In this article, we’ve discussed these machine learning-powered technologies, their advantages, and the risks that come with them. Hopefully, with the information in this piece, you can add AI tools to your DeFi trading repository.
FAQ
Is Decentralized AI trading possible?
Yes, decentralized AI trading is possible. Tools like Maestro sniper bot and Unibot are proof that AI DeFi solutions exist and are gaining popularity.
Does DeFi AI trading work?
Yes, DeFi AI trading works. Once configured, you can use tools like sniper bots and other AI trading bots to execute trades on DEXes.
What is the best DeFi AI trading bot for crypto?
There aren’t many DeFi AI trading bots, and your individual preference may differ from ours, but Banana Gun’s bot is one of the best decentralized AI trading bots we’ve used. So, we highly recommend it.
