What are AI-Powered Smart Contracts?

Smart contracts have stood out as a disruptive innovation in the evolution of blockchain technology. Originally introduced by Vitalik Buterin in 2013, they set the stage for web3 biggest ideas to come to fruition, such as ICOs, DeFi, or NFTs. Although smart contracts enable automation and are highly secure, they still have limitations. Limitations that could be overcome with the use of AI.

Who hasn’t used the world’s most famous AI Bot, ChatGPT? You can use the Large Language Model (LLM) by OpenAI for various tasks like coding, writing, workflow automation and even create new marketing concepts in an inch of a second. No wonder the popular Bot gained over 200 million users in 15 months, making it the fastest-adopted technology in human history.

Today, LLMs can read, understand and make sense of human language. With the power to search the Internet for basically any information and the increasing amount of publicly available data, these LLMs will gain more power. Now, what would happen if those capabilities were available on the blockchain?

Limitations of Smart Contracts: How AI Can Help

Although we call Smart contracts “smart,” they are very simple: Self-executing by nature with the terms of the agreement directly written into code. When predetermined conditions are met, they deploy on a blockchain and ensure that transactions are processed securely, transparently, and without needing a third party.

Smart Contract functionality. Source: Gemini.com

Smart Contracts execute automatically as soon as the digital contract terms are met. We refer to them as simple IF->THEN transactions. One example is receiving money from an insurance company once the underlying Smart Contract determines that the last hurricane has hit your house. IF the storm hits your home, THEN the insurance will pay you.

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While they have simplified processes in different sectors like art, finance, insurance or supply chain management, their deterministic nature makes them inflexible and unable to adapt. Smart contracts only follow specific instructions and cannot handle unexpected situations or complex requirements not in their programming. On the other hand, LLMs such as ChatGPT, can react to unforeseen situations as well as achieve non-deterministic outputs.

Oracles and Their Importance for the Blockchain Ecosystem

Apart from the limitation of their deterministic execution, smart contracts are also unable to access external data independently. This has led to the emergence of oracles. These third-party services feed external data to smart contracts, enabling them to react to real-world events.

Oracles add trust to the blockchain system, which is otherwise trustless. Smart contracts need external sources for their data: Chainlink or The Band Protocol are examples of oracles that try to address this limitation. For instance, Chainlink has amassed a whopping $20 billion at its all-time high due to the limitation of smart contracts in communicating with the outside world.

Explanation of Oracles; Source: Chainlink, Youtube

However, even with oracles, traditional smart contracts still face challenges. Their rigid execution model does not allow adjustments based on real-time data or complex, nuanced decision-making processes. This lack of flexibility and external connectivity has been a significant barrier to the broader application of smart contracts in more complex real-world scenarios.

A limitation that could be overcome with the introduction of artificial intelligence.

AI-powered Smart Contracts: Expanding the Horizons

AI-powered Smart Contracts are a huge step forward. They combine the automation and security of traditional smart contracts with LLMs adaptability and learning abilities. AI agents can understand and carry out complex instructions in natural language. This makes them easier to use and more versatile. AI-powered Smart Contracts can also use real-time data from the web to make informed decisions. They can respond to current events, trends, and changes, which traditional smart contracts can’t do.

Integrating artificial intelligence into smart contracts introduces non-determinism, which means that outcomes can adapt based on the analysis of external data and evolving circumstances. This capability allows AI-powered Smart Contracts to perform tasks that were previously unimaginable:

  • They can analyze many types of data. These contracts can examine specific information, such as market sentiment, consumer behavior, environmental data, and geopolitical events. This ability allows them to adjust to various situations and make decisions based on current analysis.
  • AI algorithms can make informed decisions based on the data they analyze. For instance, they can instantly evaluate a new interest rate for a DeFi protocol based on the changing interest rates of central banks and their impact on financial markets.
  • Automated Actions: AI-powered Smart Contracts can engage in complex activities beyond simple transactional operations. For example, they could dynamically adjust insurance premiums based on real-time data analysis of an individual’s health activity or driving behavior. This provides a more personalized and fair pricing model.

As LLMs can process natural language and read data from the World Wide Web, integrating blockchain networks would significantly broaden the horizon of what can be built in these systems.

The Potential Use Cases of AI-powered Smart Contracts

The potential applications of AI-powered Smart Contracts are vast, opening up new ideas for innovation and efficiency. Here are some examples that illustrate their transformative potential.

AI-enhanced Oracles

Unlike traditional oracles, which feed data to smart contracts, Oracles powered by artificial intelligence can fetch, verify, and interpret data from multiple web sources in real time. Say Goodbye to third-party services. This ensures decisions are made based on the most accurate and current information, enhancing the reliability and effectiveness of smart contracts. Here are a couple of examples:

Insurance

AI-powered smart contracts can revolutionize the insurance industry by automating the claims process. Instead of waiting for manual assessments, these contracts can instantly evaluate claim data against policy conditions. Going back to the example before: In case of a natural disaster, such as a Hurricane, the AI Oracle could analyze news articles to assess the full scope of damage. This would ensure timely and individually precise claim settlements.

Finance

In the financial sector, AI-powered smart contracts can be used to create more dynamic financial products. For example, they can analyze market conditions, investor behavior, and economic indicators. They can use this information to adjust investment portfolio allocations automatically, set the interest rate in a DeFi lending protocol, or increase the liquidation price for a loan. This optimizes returns while managing risk in real-time.

Legal Arbitration

AI-powered smart contracts could resolve disputes automatically based on contract terms and relevant laws. These contracts could suggest fair solutions by analyzing contract clauses and applicable legal precedents. This would avoid lengthy litigation processes.

Prediction Markets

AI-powered smart contracts can significantly enhance the efficiency of prediction markets by instantly settling bets based on real-world event outcomes. For example, they could automatically process election results, sports scores, or financial market performances. This would settle predictions and ensure fair, timely payouts.

TrueDAOs

They also enable the creation of fully autonomous decentralized organizations. TrueDAOs can operate independently, analyze data, make decisions, and execute actions without human intervention. They are governed by principles and goals encoded into their AI-powered smart contracts. Imagine a scenario where these intelligent contracts analyze community preferences, market trends, and technological developments. They could propose new features or products on platforms like Uniswap, streamlining innovation based on collective interests.

World Database

Envision a decentralized, AI-managed repository of knowledge where AI-powered smart contracts continuously curate and verify information from diverse sources. This could be an invaluable resource for researchers, policymakers, and businesses, providing real-time access to verified data across disciplines.

Using an AI-managed World Database could increase our access to verified information. We could also develop advanced methods for tracking the origin and usage of AI-generated content or help navigate the determination of intellectual property rights.

This would enable creators and users to check if their AI-assisted creations are unique. It would address copyright concerns by providing a transparent, unchangeable record of data and content provenance. The World Database proves AI-powered Smart Contracts can effectively manage information. It also offers a promising solution to the challenges we explored earlier in the world of AI-powered Smart Contracts.

Conclusion

AI-powered Smart Contracts stand at the frontier of blockchain innovation, promising more flexible, intelligent, and connected applications. This technology shatters the limitations of traditional smart contracts. It lays the way for a future where blockchain can interface more seamlessly with the complexity and dynamism of the real world. Bridging the gap between the publicly available data without relying on a third party and compromising security.

Wouldn’t it be great to have the powers of LLMs on-chain?

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