A new AI-based technology aims to detect fraud risks on the decentralised financial market and protect investors from losses. The so-called “DeFi – Risk Advisor AI” technology is being developed by the Stuttgart-based startup company Blockbrain, in cooperation with Ulm University. The risk advisor AI will assist with investments in cryptocurrencies, non-fungible tokens (NFTs) and other blockchain-based financial products using automated decisionmaking tools. A data-based early warning system helps with this. The state of Baden-Württemberg is funding the project for two years with about 900,000 euros as an innovation and technology project within the scope of the Invest BW programme.
Investments in cryptocurrencies or other blockchain-based financial products promise unbelievable returns, but the risks are also very high. In the past year alone, investors on the decentralised financial market (DeFi) lost around 4 billion US dollars to frauds. How can potential investors protect themselves from losses and make the best possible investment decisions? This is where “DeFi – Risk Advisor AI”, developed by Stuttgart startup Blockbrain and Ulm University, will be helping out in the future. The lengthy title of the joint project, “Artificial intelligence for investment recommendations, portfolio optimisation and fraud detection in the area of blockchain-based decentralised financial products”, refers to a new technology. “The aim is to use artificial intelligence to assist people in optimising their own portfolios, making good investment decisions and avoiding fraudulent projects”, explains Professor Andre Guettler. The head of the Institute of Strategic Management and Finance is involved in the project on behalf of Ulm University.
“Artificial Intelligence uses large amounts of structured data, for instance blockchain-based financial products or DeFi marketplaces, as well as unstructured data from social media, blogs or news platforms. The objective is to recognise patterns that will provide information on risks and dangers and ultimately help people to optimise their portfolios through risk-aware decisions”, explains Antonuis Gress, one of the founders of Blockbrain. “DeFi – Risk Advisor AI” is intended to make this special investment class of blockchain-based financial products available to a broader range of people.
Non-fungible tokens are like digital Panini trading cards that can be used to make money
Blockchain-based financial products also include so-called non-fungible tokens (NFTs). These are digital, clearly verifiable items that represent specific digital or physical objects. “You can think of an NFT like a digital Panini trading card. You can keep it forever and show it to your friends, for instance. But you can also sell it to someone else if you want to. And these sales can be clearly traced on the blockchain, making it considerably more difficult to counterfeit”, Guettler relates.
Billions are already being turned over via NFTs in the metaverse, gaming or art sectors. And other increasingly digitally dominated areas such as the music industry are becoming more attractive for trading with NFTs as well. “In the real estate sector, on the traditional financial market and in trading with CO2 certificates, NFTs have to be physically deposited, ie they require a physical equivalent in order to be spread. This is why it will probably still take some time for NFTs to gain a foothold in these areas. However, these markets will then be significantly bigger than digitally deposited NFTs”, the local economist predicts.
“Non-fungible tokens not only stand for a novel kind of design and usage culture for digital art. In the long term, they have a much stronger impact on the economy and society due to their decentralised nature. In particular, they enable an improved distribution of power, away from a few US- or China-dominated digital corporations or even totalitarian state actors, and over to the users”, explains Professor Andre Guettler. This is because the blockchain, which ensures safekeeping and traceable transactions of NFTs, is organised in a decentralised manner via a large number of computers. However, the enormous growth and return potential of NFTs, cryptocurrencies and other DeFi financial products also come with considerable risks. The technical processing is considered secure, but it is not uncommon to see issues with the implementation or criminal intentions.
In order to make the market of decentralised financial products more secure for investors and get more people interested in these financial products, the Stuttgart-based startup Blockbrain, in cooperation with the Institute of Strategic Management and Finance, would like to establish an AI-based advising system that is able, for example, to show signs of a possible fraud with NFT projects or detect when providers want to withdraw from a project prematurely. “The system sends out early warning signals and can thus hopefully protect investors from losses”, the Stuttgart-based startup founder Gress explains. The development team is also working on optimisation techniques for NFT portfolios. “Our hope is that we can prevent investors from investing too much money in too few projects or projects that are strongly linked. These techniques are also widely used with traditional financial investments such as stocks. The challenge now is to transfer them to the NFT sector, which is still in its teething stage”, the DeFi experts from Ulm and Stuttgart explain.
Background information: What does DeFi stand for? What is a blockchain?
The abbreviation DeFi stands for the decentralised financial market or decentralised finance. It refers to a financial system that operates without banks, stockbrokers or currency institutions and in which it is possible to process transactions directly from person to person, in a transparent and anonymous manner, without any intermediaries. The technological side is based on so-called blockchain technologies, which also form the technical basis for cryptocurrencies. The German Federal Office for Information Security defines blockchain as a technical solution for managing data in a decentralised infrastructure without a central entity, in a transparent and tamper-proof way, by consensus. With blockchain, it is possible to verify transactions, for example with cryptocurrencies, without a central entity, in a way that is counterfeit-proof and transparent. The term “blockchain” comes from the documentation of the data: blocks of data sets are strung together to form a continually growing blockchain. Cryptographic procedures ensure that once data has been included in the blockchain, it can no longer be altered. Some of these procedures, however, require enormous amounts of computing capacity, which is made available decentrally by so-called data miners.
Further information: Prof Dr Andre Guettler, head of the Institute of Strategic Management and Finance, E-mail: andre.guettler(at)uni-ulm.de
Antonius Gress, co-founder & chief technology brain of Blockbrain, E-mail: info(at)theblockbrain.io
Text and mediacontact: Andrea Weber-Tuckermann
Translation: Kate Gaugler