Decentralized Finance (DeFi) Risk Management Using Blockchain and AI

Abstract

Decentralized finance (DeFi) is indeed transforming the financial ecology, offering technological solutions for lending, borrowing, and trading that operate without intermediaries. However, with the rapidity of DeFi's growth comes immense risks like smart contract vulnerabilities, untypical market behavior, or scams. The objective of this study is to investigate the application of Artificial Intelligence (AI) and Blockchain technology to efficiently manage risks in DeFi platforms. Transparency, nonrepudiation, and decentralized control are the qualities guaranteed by Blockchain, and on the other hand, predictive analytics, proactive anomaly detection, and fraud prevention are the strengths of AI. The best use of these technologies in terms of risk assessment would be to design a system based on AI and blockchain - real-time risk assessment directly from the blockchain, secure data sharing assistance, and automating the risk mitigation strategies. We developed an artificial intelligence-based risk prediction model that was trained using past DeFi transaction data and we also drew up a framework that helps smart contracts provide automated responses to cybersecurity incidents. Our framework is more accurate in comparison with existing methods through simulations and case studies when it comes to risk detection and mitigation. This study proposes a reliable and resilient approach to the DeFi ecosystem that will boost further acceptance and credibility of blockchain-based financial systems.