DeFAI and DeFAIN'T: A Reality Check on AI in DeFi
If you’re not entirely exhausted on the topic, let's talk about AI and DeFi.
No, not the "Jarvis, make me rich by trading crypto while I go surfing" kind – the real kind.
The crypto space is flooded with visions of AI agents that can trade like Renaissance Technologies, identify the next 100x gem before CT catches wind, and probably make you coffee while they're at it. It's an exciting future, sure - but would it really be that shocking if we were (yet again) getting a bit ahead of ourselves?
The Current State of “Aiffairs”
Look, I'm as bullish as anyone on the fusion of AI and DeFi. The potential is undeniable. I’ve literally described it as “transcendent” and I stand by that position. But there's a world of difference between "AI can help optimize technical or tedious operations" and "AI can replace human judgment in complex situations riddled with incomplete information."
Right now, the discourse around DeFAI feels a bit like people thinking we’re for self-driving Formula 1 cars when the reality is we are still figuring out how to make them parallel park reliably… and remember where they parked. We need to walk before we can run, and right now we’ve only just begun crawling.
I’m not saying we shouldn’t shoot for the moon - but if I’ve learned anything in crypto it’s that a dose of reality is often the best medicine in any situation, especially euphoria. Yes, there are some agents that can take a written command and execute a swap on it, or maybe a series of swaps - but it’s frankly hard to imagine that someone would spend the time doing that when it’s literally faster and easier to just make those same trades on the protocol front end. For that narrative to be compelling a trading AI has to be capable of a LOT more than that - people are immediately extrapolating this caveman fire to laser precision and sophistication. Luckily there are plenty of things that seem like much lower hanging fruit, and they’re interesting as standalones - they don’t need to be compiled into a “Rube Goldberg” AI trading megalith before they are useful. So here’s my hot take:
What AI Almost Certainly Can't Do (Yet)
An (incomplete) list of examples that seem too good to be true right now:
1. Complex Market Analysis
Filtering genuine alpha from noise, or even just sarcasm from truth
Identifying sustainable trends vs. chart manipulation or transaction stuffing
Understanding complex market narratives and their interactions, and the fundamental drivers behind them
2. Comprehensive Portfolio Management
Portfolio optimization across uncorrelated assets, or understanding hidden correlation
Position sizing, entries, exits, general portfolio management “tactics” derived from high level goals
Game-time execution and subjective decision-making during periods of high volatility or all-too-frequent “edge cases”
3. Due Diligence and Risk Management
Identifying sophisticated scams, rug pulls, or frauds from true value in novel opportunities
Underwriting or even simply identifying the risk vectors around complex smart contract exploits or latent vulnerabilities
Detecting new forms of market manipulation, metrics stuffing, or even baiting tactics that targeting these hypothetical AI systems
The Path Forward: What AI Could Do, Now or Very Soon
Instead of trying to boil the ocean, let's focus on what we can build reliably today. Here's where I think plenty of real opportunity lies:
1. Yield and Income Optimization
AI agents that monitor and optimize lending positions
Automated refinancing when better rates become available
Rate arbitrage and first-mover execution on market inefficiencies and rate mismatch
2. Liquidity and Position Management
Optimal LP position management, rebalancing and compounding
Impermanent loss mitigation and volatility management
Multi-protocol transaction routing and abstraction
3. Onchain Execution Optimization
Smart transaction timing and cost optimization
MEV protection and privacy preservation
Bundled transactions and sophisticated order execution
Why This Matters
The promise of DeFi has always been about opening finance. AI will play a crucial role in that future, but only if we build it right. Rushing to create "AI that makes you rich" is more likely to create "AI that loses your money in exciting new ways."
Instead - by focusing on foundational problems and building reliable solutions, we can collectively create the infrastructure for truly transformative applications. It's like the early internet – before we got to social media and streaming video, we needed reliable protocols for sending email and hosting static websites.
The Size Perspective
At Size Credit, we're taking this measured approach. Rather than trying to build the ultimate trading AI, we're focused on bringing useful smart contracts to these markets. That means being a first mover on launching a VIRTUAL collateralized market to borrow USDC - and doing so with sophisticated term structure and predictable rates that can be a foundation to build upon.
Looking Forward
The next time someone tells you their AI agent can "trade better than a human," ask them how it handles gas optimization or rate arbitrage. Because those who are actually building the future of DeFAI are probably starting there.
The revolution will come, but like many times before it'll be built on “boring” innovations that actually work, not exciting promises that don't.
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