A.I. and Crypto: The Next Frontier of Innovation

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12 Jul 2023

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The crypto industry is constantly evolving and innovating, with new technologies and applications emerging every day. One of the most exciting trends in the crypto space is the convergence of artificial intelligence (A.I.) and blockchain, which promises to unlock new possibilities for smart contracts, decentralized protocols, and digital asset custody.

In this article, we will explore some of the latest developments and news in the A.I. and crypto hybrid space, and how they could impact the future of finance, gaming, security, and more.

Giza Raises $3 Million to Bring Machine Learning to the Blockchain

One of the most recent examples of A.I. and crypto hybrid is Giza, an open source platform that aims to make machine learning accessible to smart contracts and web3 protocols.
Giza was founded in October 2021 by Cem Dagdelen, Fran Algaba, and Renç Korzay, who met through web3 events in Madrid and Barcelona. On July 11, 2023, the firm announced that it had received $3 million in a pre-seed round led by CoinFund, a leading cryptonative investment firm and registered investment adviser.

Other participants included Arrington Capital, StarkWare, TA Ventures, and prominent angels like Rand Hindi and Julien Bouteloup.
Giza’s vision is to enable smart contracts to classify, contextualize, and adapt to real-world data and scenarios using machine learning models. This would expand the capabilities and use cases of smart contracts beyond their current limitations.

However, integrating machine learning into smart contracts is not easy, as blockchains like Ethereum are slow and expensive to run complex computations. Moreover, smart contracts cannot trustlessly access off-chain data without relying on oracles, which introduce potential points of failure or manipulation.

That’s why Giza leverages zero-knowledge proofs (ZKPs), a cryptographic technique that allows proving that a computation happened correctly without revealing any details about it. ZKPs enable running machine learning models on regular computers and verifying them on the blockchain with minimal gas costs.

Giza’s platform will provide web3 and A.I. developers with tools and libraries to easily generate ZKPs for machine learning models and integrate them into smart contracts and decentralized protocols.

According to Algaba, Giza’s CEO:

“Smart contracts are not as smart as their name would suggest. They lack the capabilities and ease of use of many web2 applications because, until now, smart contracts cannot trustlessly integrate machine learning. Giza is on a mission to unlock the capabilities of machine learning for web3 smart contracts and protocols leveraging collective and open development. The successful integration of A.I. into web3 will not only expand the capabilities of smart contracts but will also enable the possibility of new models of ownership for A.I.”

Giza plans to launch its platform by the end of 2023, after releasing its infrastructure next week. Some of the potential applications of Giza’s platform include biometric access and account recovery for web3 users, risk assessment mechanisms for DeFi protocols, autonomous agents and difficulty adjustment for web3 gaming, and security enhancements for NFTs and metaverse.

Einar Braathen, an investor at CoinFund, said in a statement:

“We are thrilled to support Giza’s efforts to be one of the first projects that make A.I. models available to smart contracts and dramatically expand their design space.”

Source: A.I. and crypto hybrid Giza raises $3 million to bring machine learning to the blockchain

Crypto Custody Market Reached $448 Billion in 2022: Report

Another important aspect of the crypto industry is custody, which refers to the safekeeping and management of digital assets. Custody services are essential for institutional investors who want to gain exposure to crypto without dealing with the technical challenges or risks of holding them directly.

According to a joint report by PricewaterhouseCoopers (PwC) and Aspen Digital, a wealth tech platform, the crypto custody market reached $447.9 billion in 2022, up from $250 billion in 2021.

The report surveyed 120 custody service providers as of April 2023, dividing them into two categories: third-party service providers (such as Coinbase Custody or BitGo) and self-custody solutions (such as Ledger or Trezor).

The report identified some of the key trends and developments in the custody market, such as:

The rise of interest in crypto staking, which allows users to earn rewards by locking up their coins in proof-of-stake networks, such as Ethereum 2.0 or Solana. Staking requires reliable and secure custody solutions that can handle the technical and operational complexities involved.
The emergence of non-fungible tokens (NFTs) and metaverse, which have attracted institutional investors who want to diversify their portfolios and access new forms of digital art, entertainment, and social interaction. NFTs and metaverse assets also require specialized custody solutions that can support their unique features and standards.
The increasing demand for insurance policies, which are an important criterion for institutional investors when choosing a custody provider. Insurance policies can protect investors from losses due to theft, hacking, or negligence by the custodian. However, not all custody solutions offer insurance policies, and the coverage and terms may vary significantly.

The report also highlighted some of the challenges and risks facing the custody industry, such as:

The lack of regulatory clarity and harmonization, which creates uncertainty and complexity for custody providers and their clients. Different jurisdictions may have different rules and requirements for crypto custody, such as licensing, auditing, reporting, or taxation. Moreover, some regulators may not recognize crypto assets as legal property or securities, which could affect their legal status and protection.
The threat of fraud and manipulation, which could compromise the integrity and security of the crypto markets and assets. The report cited the example of FTX’s failure in 2022, which resulted in $150 million worth of losses for its users due to a malicious attack on its oracle system. The report suggested that institutions should safeguard their assets through self-custody solutions or reputable digital asset custodians, rather than simply holding them with exchange platforms.
The difficulty of finding qualified and experienced talent, which is essential for building and maintaining robust and scalable custody solutions. The report noted that the crypto industry suffers from a talent shortage, especially in areas such as cryptography, blockchain development, security engineering, compliance, and risk management.

The report also provided a five-step approach for investors to select a suitable custody service provider, which includes:

Mapping the market: identifying the available options and evaluating their features, benefits, and drawbacks.
Creating a grades system: establishing a set of criteria and scoring each option based on their performance and suitability.
Conducting due diligence: verifying the credentials, reputation, track record, and financial stability of each option.
Negotiating terms: discussing the fees, service level agreements, insurance policies, and dispute resolution mechanisms of each option.
Reviewing performance: monitoring the quality, reliability, security, and efficiency of each option on an ongoing basis.

Source: Crypto custody market reached $448 billion in 2022: Report

Spot Bitcoin ETF Approval Could Open Door for Other Crypto Products

One of the most anticipated events in the crypto industry is the approval of a spot Bitcoin ETF in the US. A spot Bitcoin ETF is a type of fund that tracks the actual price of Bitcoin and can be bought on a standard securities exchange.

A spot Bitcoin ETF would offer investors direct access to Bitcoin without owning it and expose them to its potential and pitfalls. A spot Bitcoin ETF would also represent a major step in Bitcoin becoming a mainstream asset class with respectability.

However, the SEC has not approved any spot Bitcoin ETFs in the US, citing concerns about fraud and manipulation in the Bitcoin markets. Instead, the SEC has only approved Bitcoin futures ETFs (such as ProShares Bitcoin Strategy ETF or Valkyrie Bitcoin Strategy ETF), which track the prices of futures contracts rather than spot prices.

What’s the difference? Futures contracts are agreements to buy or sell an asset at a predetermined price and date in the future. Futures prices are influenced by factors such as supply and demand, interest rates, market sentiment, and speculation.

Spot prices are how traders refer to asset prices for immediate delivery rather than future delivery. Spot prices are determined by the actual balance between buyers and sellers in the market.

Futures prices may differ from spot prices due to various reasons such as:

Contango: when futures prices are higher than spot prices due to higher demand or lower supply in the future.
Backwardation: when futures prices are lower than spot prices due to lower demand or higher supply in the future.
Basis risk: when futures prices do not move in sync with spot prices due to market inefficiencies or disruptions.

Therefore, investing in a Bitcoin futures ETF may not reflect the true performance of Bitcoin itself. Moreover, investing in a Bitcoin futures ETF may incur additional costs such as management fees, trading fees, margin requirements, rollover costs (when switching from one contract to another), or tracking errors (when the fund deviates from its benchmark).
On June 15 2023 BlackRock filed for SEC approval of a spot Bitcoin ETF. BlackRock’s filing seemed to embold several other financial firms to resubmit their own applications for a spot Bitcoin ETF, such as Ark Investment Management and Grayscale.

What makes BlackRock’s application different from the previous ones is that it includes a surveillance-sharing agreement (SSA) with Coinbase, the largest US-based crypto exchange and custodian. An SSA is a mechanism for sharing information about trading, clearing, and customer identity among market participants, regulators, and law enforcement agencies.
An SSA is intended to enhance transparency and oversight, and potentially mitigate some of the SEC’s concerns about market manipulation. This feature was absent in former filings and appeared for the first time with BlackRock’s initial filing.

However, an SSA may not be enough to convince the SEC to approve a spot Bitcoin ETF. According to a report by Bloomberg, the SEC is not satisfied with the level of detail provided by BlackRock and other applicants regarding their SSA proposals. The SEC reportedly wants more specifics on how the SSA would work and what kind of data would be shared.

Moreover, an SSA may come with some trade-offs for the crypto industry, such as:

Privacy: an SSA may compromise the anonymity and confidentiality of crypto users and transactions, which are some of the core values of the crypto community.
Centralization: an SSA may favor certain exchanges or custodians over others, creating a concentration of power and influence in the crypto market.
Compliance: an SSA may impose additional regulatory burdens and costs on crypto service providers and users, which may hamper innovation and adoption.

Therefore, while a spot Bitcoin ETF may seem like a desirable goal for the crypto industry, it may also entail some challenges and risks that need to be carefully weighed and addressed.

Source: Spot Bitcoin ETF approval could open door for other crypto products

Conclusion

The convergence of A.I. and crypto is one of the most exciting trends in the crypto space, as it promises to unlock new possibilities for smart contracts, decentralized protocols, and digital asset custody. However, it also faces some challenges and risks, such as regulatory uncertainty, security threats, insurance gaps, talent shortage, privacy concerns, centralization issues, and compliance costs.

The approval of a spot Bitcoin ETF in the US is one of the most anticipated events in the crypto industry, as it would offer investors direct access to Bitcoin without owning it and expose them to its potential and pitfalls. However, it also faces some hurdles and trade-offs, such as market manipulation, surveillance-sharing agreements, privacy compromises, centralization tendencies, and compliance burdens.

The future of A.I. and crypto is still uncertain and evolving, but it is also full of opportunities and innovations. As investors, developers, regulators, and users navigate this new frontier of technology and finance, they need to be aware of the benefits and drawbacks of each option and make informed decisions based on their goals and preferences.

What do you think about A.I. and crypto? Do you think a spot Bitcoin ETF will be approved in the US? Share your thoughts in the comments below!