Decentralized Finance (DeFi) promises a future where financial services won’t be in the hands of just a handful of big banks. In the future, users might not have to rely on financial institutions as middlemen. Instead, they will have access to open protocols and smart contracts that would have replaced banks as efficient, cost-effective, and transparent alternatives. As the DeFi space evolves, it is becoming increasingly clear that Artificial intelligence (AI) will play a major role in it. AI is solving one of the biggest issues for DeFi – liquidity. The decentralized finance (DeFi) space consists of various decentralized protocols offering financial services on blockchain platforms. Most of these DeFi protocols are on Ethereum, the largest smart contract blockchain network. Compared to traditional finance and even the rest of crypto, the DeFi space is still tiny. According to Messari, DeFi makes up just 0.2% of the global financial services market. The relative size of DeFi means finding willing buyers or sellers at any moment can be difficult. This translates into liquidity issues for DeFi, and wild price swings during booms and busts. For instance, 2022 saw most crypto and tech markets slump due to an unfavorable macroeconomic environment. This is because interest rate hikes hurt high-growth businesses the most. However, few industries were hit as hard as DeFi. By the end of 2022, the total value locked (TVL) in DeFi was $40 billion, or just 25% of what it was at the start of the year. Due to its relative size to financial markets, analysts at firms like Messari still believe that DeFi will grow in 2023. However, a lack of liquidity will be a continuous roadblock to its growth.
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