Crypto and AI: Shaping the Future of the Internet

October 1, 2024

Crypto and AI: Shaping the Future of the Internet

By Todd Kanaster, Andrew O’Neill, Rebecca Mun, Josh Stokesberry, Matta Uma Maheswara Reddy, and Ava Yang

This report represents a special report issued by S&P Global. Please note that it does not constitute a rating action and was not discussed by a rating committee.

Over the last three decades, the internet has become a central part of modern life, transforming how businesses and consumers interact. More recently, the rise of Artificial Intelligence (AI) has created even greater potential for innovation. This report examines the intersection of AI and blockchain-based cryptocurrencies (collectively referred to as ‘crypto’), exploring the opportunities and challenges that lie ahead for the internet.

Key Highlights:

• AI’s rapid expansion is linked to a surge in accessible online information, presenting significant technological opportunities, alongside inherent risks. These include centralization around major tech firms, information traceability issues, challenges of identity management, cyber security vulnerabilities, and increased energy consumption.
• Blockchain and its cryptographic technologies (or crypto) offer decentralized network solutions, information ownership features, and security tools with the potential to mitigate some of these risks.
• The current combination of AI and crypto technologies is nascent and evolving quickly. Even modestly applied, these combined technologies should bring important power and network optimization opportunities, and accelerated adoption could lead to a crypto-supported decentralized internet.

The Evolution of Information and the Rise of AI

The growth of online information has been exponential, driven by web-based communication, online publishing, and e-commerce over the last thirty years. AI enhances the ability to create, store, and share data, as it employs advanced data analytics to identify patterns and derive insights from large datasets.

This data explosion presents technological development opportunities, but also carries risks. These include: challenges in information traceability, risks to identity management, increased cyber threats, and increased data center energy consumption. Crypto offers the means to identify, track, and protect data, potentially opening paths to new ways of operating decentralized networks that could mitigate these risks.

Three Potential Development Scenarios

Developments at the intersection of AI and crypto technologies will have important implications for the internet’s evolution. To understand this potential, S&P Global developed three forward-looking scenarios, considering the benefits and issues over the next five to ten years:

1. Incremental advancements in AI and crypto: This scenario anticipates that AI and crypto technologies evolve, leading to modest efficiency gains for enterprises. IoT applications will have a slow expansion and Decentralized Physical Infrastructure Networks (DePINs) would leverage blockchain tokenomics to enable autonomous real-time interactions. These networks could optimize scarce computational resources.
2. A rapid expansion of AI that exacerbates centralization risks: This scenario assumes AI is centralized within a few large technology incumbents, increasing corporations’ power and potentially creating opaque governance. Blockchain technology would be used to decentralize information and facilitate privacy maintenance but with limited effect. AI applications would extend beyond crypto into traditional financial markets, with associated and significant risks.
3. Decentralized internet powered by crypto and AI: This scenario envisions a decentralized internet that uses blockchain architecture to distribute data and decision-making across multiple nodes, reducing bias, censorship, and privacy risks associated with centralization. Blockchain’s inherent transparency underpins the data’s integrity, immutability, and traceability. This scenario could enhance accountability and reduce personal data exploitation.

These scenarios offer insights into the combined effect of AI and crypto across different industries. The synergistic applications of AI and crypto could cause specific effects on business, the economy, and the environment across these five key areas:

• Cyber security
• Financial markets
• Computational resources
• Internet of Things (IoT) and networking smart devices
• Supply chains

The impact of AI and Crypto Across Key Areas

Cyber Security

The increasingly sophisticated nature of cyber threats, combined with increased use of AI by malicious actors, increases the likelihood of attacks. Organizations face greater financial and reputational risks, leading to higher cyber insurance costs.

• Opportunities: AI threat detection and automated responses can significantly enhance cyber security in blockchain networks, especially in DePINs and decentralized finance (DeFi) applications. AI can also help ensure the security of validated code, especially for DeFi applications. Models can analyze large datasets for vulnerabilities and patterns of attack.
• Risks and Challenges: Data bias in training sets can negatively influence AI’s performance. AI models risk targeting and manipulation, potentially compromising their effectiveness. Constant updates and validation are essential to maintain AI-driven security.

Financial Markets

Traditional financial markets face rising costs due to inefficiencies, fraud, and manual oversight, as well as difficulties in timely transactions.

• Opportunities: Smart contracts stored on a blockchain can improve the transparency and efficiency of financial markets. AI’s ability to process datasets provided by oracles can generate streamlined inputs for smart contracts. The combination of smart contracts and AI could automate routine tasks and reduce human error. Multi-party computation protocols can secure the accuracy of data. AI compliance tools can identify anomalies and potential fraud. Crypto wallets can enable AI agents to transact with each other via on-chain payments.
• Risks and Challenges: Vulnerabilities in oracles can compromise financial systems. Liability determination can be complex, due to an uncertain legal and regulatory environment. AI models’ complexity can render decision-making opaque, posing audit and accounting challenges. Smart contract enforceability may be legally uncertain.

Computational Resources

Compute power and data storage are often siloed, leading to inefficient resource utilization, and AI demands further strain already stressed energy resources.

• Opportunities: DePINs facilitate peer-to-peer resource exchanges, and incentivize use by rewarding participants with crypto tokens. AI-driven pricing can effectively match infrastructure with demand, reducing computing costs and improving efficiency.
• Risks and Challenges: Token price volatility can affect DePIN reliability. Aggregating responses from multiple AI models can be complex. Bitcoin mining and AI computations have different hardware requirements.

IoT and Networking Smart Devices

Smart devices have thus far provided convenience, but opportunities exist in the future to build smart networks. Inefficient use of collective data and underutilized resources at the municipal level lead to higher operational costs and less optimal services.

• Opportunities: Municipalities can leverage crowd-sourced sensors and AI-driven analysis to optimize infrastructure management software, including mapping of energy grids, traffic flow, and water/sewer systems, resulting in cost savings for government agencies. AI can also dynamically adjust resource allocation to match real-time demand, reduce waste, and predict maintenance needs.
• Risks and Challenges: Tamper-proofing is critical for the data’s integrity. Data privacy concerns can arise, necessitating compliance with data protection regulations. Managing and scaling network infrastructure becomes increasingly complex, and maintaining high data quality/accuracy is crucial to operational efficiencies.

Supply Chains

Manual processes and a lack of real-time data integration result in inefficiencies and risks of delays and excess inventory costs.

• Opportunities: AI can be used to predict delays and dynamically adjust operations in real time to reduce inventory and optimize routes. Smart contracts can automate payments and offer real-time tracking to provide a seamless logistics system with immutable records.
• Risks and Challenges: Evolving legal frameworks create compliance difficulties, while the enforceability of smart contracts remains legally ambiguous. Scalability issues may arise as supply chains expand and ethical considerations regarding job displacement and decision-making biases need to be managed.

The Transformative Potential of AI and Crypto

The synergy between AI and crypto technologies can drive growth, reduce centralization risks, and enable impactful applications across various sectors. While the rate of adoption remains uncertain, the key question is not if this will happen, but when. S&P Global will monitor the growth of decentralized physical infrastructure networks and the potential mitigation of centralization risks by crypto technology, new regulations, and legal initiatives. The collaboration of AI and crypto could revolutionize processes across industries, offering improvements in a wide array of areas where challenges are complex or where new efficiencies can be unlocked.