Blockchain and artificial intelligence – competition or convergence ahead?
At the end of this – in many aspects – a very eventful year, we observe two technologies with the potential to significantly shape our future; blockchain technology and artificial intelligence (AI). These are likely to change many aspects of our daily lives. So far, we have seen mixed signals as to how the two technologies will influence each other.
Competition for funding
In 2023, the landscape for venture investments has shifted. Factors like higher interest rates and inflation have caused many blockchain projects to face strong headwinds when trying to secure new investor funds. Venture capital investments have been shrinking this year. For instance, crypto and blockchain firms received USD 2.3 billion during the second quarter of 2023 compared to more than USD 8 billion in the same period last year. Artificial intelligence represents a new investment opportunity that promises strong returns and rapid growth. This new technology is also benefiting from other factors, namely the very outspoken backing of and strong financial support from leading technology giants like Microsoft, Google and others. This is something that blockchain technology is still longing for.
Some companies are now trying to attract investors interested in either technology simply by adjusting their projects. Start-ups are embracing the newest trend and promising to combine artificial intelligence and DLT to implement solutions that will save the world – or at least solve real-world problems. However, simply adding a label does not fundamentally change a projects nature or its service offering. Investors remain critical – even more so as combined use of the technologies is still rare, with examples of successful implementation likewise thin on the ground
Trend of convergence
Despite challenges, it isn’t a completely bleak picture for blockchain, as we are also seeing signs of convergence in two pivotal areas. One is the convergence of digital finance and traditional finance. Institutional adoption and maturing regulations promise to provide the basis for a growing market in digital assets and more reliable investment opportunities for all participants.
The launch of ChatGPT in November 2022 surprised the world. It was suddenly all about artificial intelligence and a new competitor for investors’ attention emerged. We are also noticing a convergence in the application of artificial intelligence and blockchain, two technological megatrends that are separated by some 15 years of development – maybe we can learn lessons from blockchain’s history to gain insights into the future of artificial intelligence.
Convergence in financial services – at last
Today, more banks, financial institutions and institutional investors are increasingly open to investments in digital assets and the technical application of blockchain. Regulators around the globe are also accepting digital assets as a reality that will not go away any more. As a result, the regulatory framework is becoming more comprehensive, detailed and sometimes more restrictive. It remains to be seen whether the new rules implemented and those still to come will be balanced or too restrictive to foster further growth and innovation.
Convergence for faster application
In the past, we have seen blockchain technology being applied most rapidly and most prominently to financial and payment services. However, the biggest impact on our daily life, our economy and our administration is still to come. The promise of broader applications is almost as old as the first blockchain manifesto, with investors now getting somewhat impatient to see the promised applications come to fruition. Legacy systems represent a problem in many industries – not only in financial services. People’s reluctance to move away from traditional ways of working is another obstacle to change. A combination of blockchain technology and artificial intelligence may help to overcome such hurdles.
With the emergence of ever more powerful artificial intelligence engines, experts expect the more widespread use of blockchain technology in new industries and new areas of application. Artificial intelligence can dissect blockchain data to identify trends, predict future behavior and provide insights for making informed decisions. For example, artificial intelligence can analyze trading patterns and market sentiment on blockchain-based exchanges. Analysing mass blockchain data in logistics, medicine or various research fields promises to deliver more accurate and faster results. This may lead to the more efficient application of resources, shorter times to market or simply better decisions.
On a technical level, artificial intelligence can also enhance smart contract oracles. Data controlled and monitored by artificial intelligence allows for higher quality in terms of decision data and may detect fraudulent data manipulations or simple data errors much earlier than the solutions currently in place. Similarly, artificial intelligence can analyze data from devices and sensors along the supply chain and verify the accuracy of information recorded on the blockchain.
The logistics industry, for example, is one sector that would suitably benefit from using the two technologies in tandem. Supply chains still heavily rely on paper-based confirmations and proofs of origin, completion and production. Almost every step is prone to error or manipulation. With trained artificial intelligence systems that check the validity of data and record the quality checks on the blockchain, better results at a lower cost can be expected. Tracking the movement of goods and documenting every transfer on the blockchain makes it easier to document each step in the value chain electronically, from the factory to the lorry and from the lorry to the train and ship. Imagine having all that data at our disposal and training an artificial intelligence solution to optimize the flow of goods along the hundreds of potential paths they could take on the way from producers to consumers. One would expect significant improvements in efficiency!
Reality check
The reality test of innovative technologies always hits when new solutions are put into practice, implemented as part of everyday processes and exposed to the merciless judgment of users and clients. While both technologies may be developed rather quickly in an isolated environment, the challenge lies in integrating them within existing environments. And this is a point where many promising projects fail. Too many and overly costly adjustments are necessary to make blockchain technology a part of incumbent applications. The first reality check for artificial intelligence systems is in the training with real data, which is by its very nature partly inconsistent, inaccurate, outdated or distorted in some other form. Another particular obstacle for both technologies to overcome lies with small and medium-sized companies (SMEs) that have limited resources, limited numbers of clients and products and various restrictions that hamper the implementation of innovative technologies. However, it is essential for start-ups to work with such SMEs, as they have one big advantage. They dare to implement new technologies fast, and have the capacity to adopt and change in a similar way to start-up entities.
In the end, there can be nothing without regulation
This year, we also saw the adoption of the Markets in Crypto Assets Regulation (MiCA) by the European Parliament. Although not yet implemented in national law, we are seeing positive regulatory trends worldwide. Following the lead of Switzerland, Liechtenstein and Singapore as the avant-garde, the largest economic bloc is now adopting advanced regulations in the crypto sector. We have seen both positive and negative examples that can either foster or strangle innovation and the development of innovative companies.
Many initiatives are underway regarding the regulation of artificial intelligence. Europe, in particular, needs to do better, move faster and be more consistent and supportive than it was in the case of blockchain technology. Europe has fewer competitive companies in the field of artificial intelligence, meaning regulatory support is essential if it is to remain able to compete. An increased focus on education is also key, with leading tech universities needing to emphasize AI and blockchain development courses. It is regrettable that the negotiations between the European Parliament and the European Council regarding the regulatory framework have been suspended, potentially allowing other nations to extend their competitive advantage in this crucial area. However, the future remains positive!
About the Author
Article authored by Milko Hensel, Head Digital Partnerships, Maerki Baumann & Co. AG