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Smart Contracts, DeFi and AI: Innovative Business Ideas and their Legal Challenges in IT Law

This post is also available in: Deutsch


I recently made an announcement on LinkedIn that I will be looking more deeply into the interplay of Smart Contracts, DeFi and Artificial Intelligence. Now the time has come. The digital revolution is advancing at breathtaking speed. Particularly in focus: smart contracts, DeFi (decentralized financing) and artificial intelligence (AI). These technologies are not only fascinating, but are also shaping the next generation of business ideas that have the potential to fundamentally change our industry and everyday life. But as with any technological advancement, especially in such a dynamic and complex field, legal issues arise. These are often as complex and multi-layered as the technologies themselves. With my many years of experience in IT law and as an entrepreneur, I would like to provide a deep insight into this world. In this article, we will look together at five such business ideas that leverage the power of smart contracts, DeFi, and AI. In doing so, we will not only shed light on the potential and possibilities of these combinations, but also thoroughly examine the legal hurdles and challenges that arise.

Automated financial advisors with AI:

In our advanced digital era, DeFi (Decentralized Finance) and Artificial Intelligence (AI) represent two impressive technology innovations. Their synergy opens up captivating opportunities, especially in the financial services sector. One such opportunity is the introduction of automated financial advisors based on algorithms to make investment decisions, optimize portfolios and provide personalized financial advice.

The combination of DeFi platforms and AI-driven decisions is revolutionizing the traditional financial advisory model. Think of a consultant who is always available, who continuously keeps an eye on the market, and who reacts to market changes within seconds. This could not only increase efficiency, but also potentially increase returns for investors.

However, there are also significant legal concerns associated with this advanced technology. A critical problem is that smart contracts cannot technically enter into legally binding contracts in the traditional sense. While they represent automated agreements, they often lack the formal elements and terms of a legally enforceable contract.

Another key concern is the security of deposits, especially when the automated advisor needs access to personal financial instruments such as wallets. The issue of protection and security of funds and cryptocurrencies is of paramount importance. Who is responsible if a security breach occurs? How can users ensure that their deposits and investments are protected?

Data protection also remains a key issue. An automated financial advisor needs access to extensive personal and financial data. It is essential to ensure that this data is handled securely and in accordance with data protection regulations.

Now for a little tongue-in-cheek: It’s no secret that AI recommendations for stock or bitcoin purchases have also been the subject of a lot of shenanigans in the past. Many an “AI consultant” bears more resemblance to a crystal ball than to real AI. However, while some are using this technological advancement to make a quick buck, there are also very serious and promising approaches in this area. It is always advisable to take a close look at who or what exactly is behind such “recommendations”!

DeFi lending platforms with AI risk assessment:

With the ability to analyze massive amounts of data in seconds, AI can help optimize borrower risk assessments to make loans both more efficient and safer.

Imagine if, instead of hours of meetings, paperwork and manual reviews, an algorithm could evaluate an applicant’s credit score in real time. AI systems can not only analyze financial data, but also incorporate other factors into their assessments, such as behavioral patterns and social interactions, which have traditionally been difficult to quantify.

But with such innovative approaches come legal challenges. A critical concern in this context is the risks of discrimination in AI decisions. While algorithms may appear objective, they are based on data that can often contain unconscious biases. This means that if an AI system is not carefully monitored and calibrated, it could potentially make discriminatory decisions. This could violate standards such as the General Equal Treatment Act (AGG), which prohibits discrimination in various areas, including lending.

Another legal issue relates to compliance with lending regulations. In Germany, credit institutions are strictly regulated by the German Banking Act (KWG) and the Consumer Credit Directive. These standards set out clear criteria and processes for granting credit, which must also be adhered to by AI-driven systems. It is critical to ensure that these algorithms are not only efficient, but also compliant.

Finally, there is the problem of liability for loan defaults. If an AI system mistakenly awards credit to an applicant who later defaults, who bears responsibility? Is it the credit institution, the development team behind the algorithm, or the DeFi platform? This question of responsibility has not yet been fully resolved and remains a hotly debated issue.

In summary, the integration of AI into the lending process on DeFi platforms offers an exciting prospect that could revolutionize the process. But as with any technological innovation, the legal aspects must be carefully considered. And those are not without and the providers are – still – strictly monitored by.

Smart contracts for automated insurance:

Imagine a future where the entire process of filing and paying insurance claims is automated, lightning fast, and virtually error-free. It sounds like science fiction, but thanks to the combination of AI and blockchain-based smart contracts, that future is getting closer.

Smart contracts are self-executing contracts (I’ll call it that – very non-legalistic -) , whose agreements are written directly into lines of code. When combined with AI technologies, these contracts can automatically respond to events in real time. This means that in the event of a car accident, for example, the insurance claim could be automatically detected, verified and paid out without the insured having to lift a finger. This synergy of AI and smart contracts has the potential to increase efficiency, reduce costs, and provide a seamless experience for customers.

But of course there are legal hurdles here as well. A key concern is the accuracy and fairness of AI decisions. Algorithms are only as good as the data they are trained with. An insufficiently trained or biased AI could lead to unfair decisions. Insurance compliance is also critical. Insurers are bound by a variety of laws and regulations, including the ISA. These standards were developed to protect the rights of insureds and to ensure that insurers meet their obligations. It is of utmost importance that automated systems strictly comply with these regulations.

Another risk that must be considered is potential fraud. With an automated system, fraudsters could try to exploit vulnerabilities and make unjustified claims. This requires advanced security mechanisms and constant monitoring.


Decentralized trading platforms with AI-supported pricing


Decentralized trading platforms combined with artificial intelligence (AI) could represent the next stage of the trading revolution. The integration of AI into such platforms enables dynamic and efficient pricing. By analyzing a wealth of data, from market conditions to trading volumes to global economic news, AI can determine optimal prices in real time. This not only improves market liquidity, but also allows market participants to make more informed trading decisions.

However, this technology also poses challenges. A major concern is the risk of market manipulation. Algorithms, if not properly monitored and calibrated, could be vulnerable to undesirable influences, which could affect confidence in the platform.

In addition, the question of responsibility in the event of incorrect pricing is critical. When an AI sets a price that leads to financial losses, it needs to be clarified who is responsible: the algorithm developer, the platform, or the market participants themselves?

Despite these concerns, the integration of AI into decentralized trading platforms shows impressive potential. While technological advances can transform commerce, it is important that all stakeholders remain vigilant to ensure that development is both innovative and safe.

AI-powered identity verification for DeFi transactions:

Decentralized Finance (DeFi) has emerged as a groundbreaking development in the financial world, but with its growth, security and authenticity challenges have emerged. This is where Artificial Intelligence (AI) comes into play, especially in identity verification.

Identity verification is a critical step in many financial transactions. Traditional finance often uses physical documents and human review processes that can be time-consuming and prone to error or fraud. AI-powered systems can change this paradigm. They may be able to scan identity documents in seconds, use facial recognition technologies, and even analyze behavioral patterns to ensure a person’s authenticity. This not only significantly speeds up the verification process, but also reduces the risk of human error.

But these technological advances are not without legal challenges. Data protection is at the top of the list. The amount of personal data processed by AI systems can be significant. It is essential to ensure that this data is protected and not misused for unwanted purposes.

In addition, there are questions about the accuracy of AI verification. What happens when a system incorrectly rejects a legitimate transaction or allows a fraudulent transaction to occur? Such errors could result in significant financial and reputational costs.

Know-Your-Customer (KYC) and Anti-Money Laundering (AML) compliance is also a key consideration. These regulations were developed to prevent financial fraud and money laundering. AI systems must be programmed and monitored to comply with these standards at all times, even when operating autonomously.

Another interesting aspect is how AI systems deal with more complex forms of identity, such as enterprises or even autonomous software agents. Can an AI system effectively verify the identity and integrity of such entities, especially in a decentralized environment?

In conclusion, AI-powered identity verification systems for DeFi transactions offer a promising opportunity to increase security and efficiency. They could pave the way for a new age of financial transactions that is both more secure and more user-friendly. However, it is critical that developers, regulators, and end users work together to ensure that these systems are ethically, legally, and technically robust.


While the merging of smart contracts, DeFi and AI offers immense opportunities for innovative business ideas, it is essential to understand and prepare for the legal challenges. A sound understanding of the technology, combined with legal know-how, is the key to success in this exciting area of technology.

Marian Härtel

Marian Härtel

Marian Härtel is a lawyer and entrepreneur specializing in copyright law, competition law and IT/IP law, with a focus on games, esports, media and blockchain.


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