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Bitcoin prompted the emergence of an entire industry around blockchain technology and digital currencies. Some cryptocurrency market participants argue that decentralized solutions would gradually replace traditional financial services.
While it’s too early to make such claims confidently, we can agree that an exciting competition and interaction between decentralized finance (DeFi) and centralized finance (CeFi) is taking place precisely within the cryptocurrency industry. In the present article, we’ll discuss the main contrasts between the two trends.
The main difference between DeFi and CeFi is that the former involves decentralized infrastructures, where the financial services are governed by communities rather than single entities. In CeFi, all operations are managed by a business or a consortium of companies and organizations. Consequently, the mechanisms differ as well.
What Is DeFi in Crypto?
Before understanding the differences between DeFi vs CeFi, we’ll start by defining each approach separately. While CeFi came first to address the Bitcoin adoption, DeFi is the buzzword this year, and we’ll start with it.
In a nutshell, DeFi represents a trend or movement that promotes blockchain-powered infrastructures and open-source software to create all kinds of financial services and products, including traditional ones.
You can think about services such as lending, trading, issuance of money, payments, insurance, over-the-counter (OTC) trading, staking, financial data, asset management, and more. To visualize it, DeFi is all about transforming traditional banking services to decentralized architectures. So that communities could manage them instead of banks, governments, or regulators.
DeFi is a formidable trend right now, resembling the craze of initial coin offerings (ICOs) from late 2017. The new ecosystem revolves around financial applications developed on blockchain networks. The decentralized applications (dApps) integrate secure permissionless, trustless networks, and eradicate central authority managing the services.
Most DeFi projects currently rely on Ethereum, a public blockchain that offers an open network with intelligent features such as the smart contract. The latter is a critical feature that enables the development of dApps.
A smart contract is a blockchain code that can automatically execute and settle whenever predetermined conditions are met. In this way, there is no need for intermediaries like banks and regulators to handle sales, transactions, and other deals involving two or more parties.
What Is CeFi in Crypto?
As the name suggests, in CeFi, users trust centralized companies and institutions that store their funds to provide various services. Currently, most CeFi solutions are related to cryptocurrency trading, though other applications are also popular.
Most CeFi service providers implement Know Your Customer (KYC) and Anti Money Laundering (AML) practices to abide by their respective jurisdictions’ rules. That means users have to share their personal information and make sure the funds are not coming from criminal activities.
Many CeFi services operate with custodial wallets, which store users’ private keys. Custodians would do everything possible to keep and manage clients’ crypto funds conveniently.
Whenever you trade on popular crypto exchanges like Coinbase, Binance, Bybit, you deal with a CeFi service. These are platforms run by centralized entities responsible for matching buyers and sellers, offering the required features, and making sure the rules are followed by everyone accordingly. As with any business, the profits from fees are shared among company stakeholders.
Besides trading services, companies fall under the CeFi umbrella that offers borrowing, lending, margin trading, and other financial services.
Some large companies, such as Binance, merge all these crypto services to access them from a single account. Most of the clients agree with sharing their data or storing funds into the custody of these companies providing that they are trustworthy institutions. However, even the most reputable exchanges have faced hacking attacks or thefts that compromised user funds. So this is a risk that CeFi users must know.
Other CeFi crypto firms providing non-trading services are Cred, BitGo, Crypto.com, and Nexo.
DeFi vs CeFi: Similarities
DeFi and CeFi share some similarities in the sense that they both involve the same financial services. Sometimes the end-user wouldn’t even notice if a crypto service relies on a DeFi or a CeFi infrastructure. At the moment, both CeFi and DeFi enable the same group of financial services, including spot trading, derivatives trading, margin trading, borrowing and lending, payments, and the creation of stablecoins.
Speaking about trading, both CeFi and DeFi platforms can create intuitive interfaces so that newbies could be onboarded effortlessly.
Often, the same people and organizations are involved in the development of both CeFi and DeFi projects. After all, both trends are advocating the use of blockchain and digital currencies.
DeFi vs CeFi: Differences
Even though both trends’ fundamental goals are the same – to promote the adoption of decentralized ledger technologies (DLTs) – several significant differences split DeFi and CeFi into two different worlds. Here are the main aspects that differ:
As mentioned, CeFi projects are controlled by a single entity or group of entities that run every business aspect. Elsewhere, even though distinct groups of people and organizations develop most DeFi projects, the resulting platforms are governed by communities via different mechanisms.
Any DeFi project would try to mimic Bitcoin or any other public blockchain in decentralization, though the consensus algorithms differ from case to case.
Some DeFi projects offer governance tokens that enable holders to take part in decision-making processes. An example of a governance token that exploded in the summer of 2020 is Compound (COMP).
CeFi and DeFi services provide various features that are unique for each group. For example, most CeFi projects offer custody solutions and have dedicated customer service teams, generally not available in DeFi.
On the other side, trading on DeFi platforms happens on blockchain as there is no single authority involved. This achievement is possible thanks to several key features, including automated market-making (AMM), liquidity pools and yield farming, and non-custodial swaps. Usually, there are no KYC requirements in DeFi, while the funds are stored in personal wallets until the transaction’s execution. The crypto exchanges built on blockchain infrastructures are called decentralized exchanges (DEX).
While some companies provide both centralized and decentralized exchanges, Binance is one such example. Its DEX platform doesn’t require registration or KYC verification.
Another great feature of DeFi is the tokenization of traditional assets. Thus, blockchain can be used to create digital units of any asset or investment, including commodities, company shares, forex pairs, and stock indexes, among others.
Initially, when the first crypto exchanges facilitated fiat conversions, there was no regulation whatsoever, as governments didn’t fully understand Bitcoin and blockchain. Nevertheless, today most jurisdictions try to regulate crypto operations directly or indirectly. So, this is one of the reasons why most CeFi platforms require KYC verification.
In the US, Coinbase is registered with the Securities and Exchange Commission (SEC), while other global platforms moved their headquarters to crypto-friendly jurisdictions like Malta or Estonia. Meanwhile, the European Commission is about to create the most comprehensive legal framework aimed at cryptocurrencies. All in all, there are more jurisdictions in correlation to CeFi services.
As for DeFi, this is a new trend, and it is not regulated anywhere given the nature of decentralized networks. However, even if it’s more difficult to impose regulation on DeFi markets, a research paper by BCG Platinion and Crypto.com concluded that the rapid boom in DeFi created conditions for money laundering will attract regulators sooner than later.
Usually, centralized exchanges charge higher fees to maintain the platform, pay salaries to the staff, improve their products, and more. Elsewhere, DEX platforms are more affordable to trade on, as they don’t provide custody services and don’t have any team involved in the governance process.
Generally, the fee revenue is shared among liquidity providers and token holders that choose to stake their tokens. An example is Uniswap, a crypto swap platform that distributes the funds from fees among liquidity providers.
The way liquidity is achieved in DeFi is very different. In CeFi projects, the platforms match buyers’ and sellers’ orders similarly to forex or stockbrokers. In DeFi, all trading is not carried out automatically on blockchain. Instead, DEX platforms rely on AMMs, an innovative concept in which both sides of a trade are pre-funded by liquidity providers incentivized to locate their funds.
Eventually, the trading fees are shared between liquidity providers, as mentioned in the previous paragraph. Usually, liquidity pools comprise two constituents representing a trading pair, e.g., BTC/ETH. Liquidity providers have to contribute equal values by locking both BTC and ETH based on the current rate.
Even though CeFi platforms do their best to maintain a high degree of security, you can regularly find out about some significant exchange being hacked. At the beginning of the year, Chainalysis said that 2019 saw the most hacking attacks ever, though the number of stolen funds had declined drastically compared to 2018.
Photo by Chainalysis
There is no such risk for decentralized exchanges, as the platform doesn’t store user funds. The only thing users should pay attention to is the code and the consensus algorithm used by the DeFi project. Sometimes the underlying technology may come with bugs and other issues.
The execution speed is relatively high in both CeFi and DeFi, though it depends on each platform individually. Most exchanges can provide almost instant performance for market orders.
CeFi platforms are the simulations of traditional banks, and they have already demonstrated their potential and still do. On the other hand, DeFi is only at its nascent stage. Many industry onlookers predict a vast revolution in which DeFi services would gradually replace traditional ones and threaten the banking system.
Still, as of today, both DeFi and CeFi have their places in the crypto industry. They provide faster transactions, attractive yields, and excellent infrastructure aimed at communities.
DeFi vs CeFi: The Applications
Both DeFi and CeFi can be applied to all kinds of traditional and crypto-related financial services, such as spot trading, derivatives trading, lending and borrowing, and more. Fiat to crypto conversions and vice versa is also available in both ecosystems. Also, both DeFi and CeFi platforms may provide cross-chain services, though the mechanisms differ.
In general, the two trends have similar applications, but the approach is very different. One thing specific for DeFi alone is the tokenization of assets. For example, Synthetix hosts a DeFi ecosystem where users can create so-called synthetic assets (synths), which are ERC20 tokens representing real-world assets. Users can eventually provide liquidity to those synths and trade them on a dedicated exchange.
Synthetic assets have great potential, capable of making derivatives trading more flexible, accessible, and transparent.
DeFi vs CeFi: Which to Invest?
There are good projects in both sectors, but DeFi runs the show these days, at least from an investor’s perspective. You can get direct exposure to CeFi projects by investing in the native tokens of cryptocurrency exchanges. At the moment, Binance Token (BNB), Crypto.com Coin (CRO), and Huobi Token (HT) are the most popular CeFi tokens. Arguably, XRP is a CeFi constituent, given that Ripple is a centralized company.
That said, there are way more DeFi options to choose from now. That’s especially when this sector is still at its infant stage.
DeFi tokens are way more volatile than the rest of cryptocurrencies, which is very telling of the risks. It would be best if you stuck to proper risk management techniques when investing and never deposit more than you’re ready to lose.
Another problem with DeFi is that it hosts an increased number of scams and pump-and-dump schemes, the same as the ICO space did a few years ago. That’s why you should better invest in well-established DeFi projects.
Impact on Profitability
DeFi tokens can boost your profitability, especially if you managed to catch the trend right after Bitcoin’s nosedive back in March 2020. Tokens like UNI, COMP, Maker, SNX, and KNC have demonstrated impressive returns this year. The same is right about projects that benefit from the DeFi boom, such as Chainlink and Polkadot. Here is how the most popular DeFi tokens performed so far this year:
Bitcoin (blue line) has performed better than most DeFi tokens year-to-date as it hit the highest level in almost three years as of November 2020. Still, LINK and KNC have provided impressive yields. Despite Bitcoin domination, DeFi tokens have much room to grow.
What to Expect from DeFi and CeFi in the Future?
The medium-term future is bright for both DeFi and CeFi, as the financial crisis will highlight the importance of refuge assets with low correlation to traditional markets. It will also stress the importance of blockchain solutions for all kinds of financial services that governments should not manipulate.
In the long-term future, DeFi will thrive as it has the potential of making financial services accessible to everyone. Investors should keep an eye on Ethereum’s transition to Proof of Stake and the regulatory changes related to DeFi, which will impact the emerging sector.
This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.
Nuclear waste recycling is a critical avenue of energy innovation
No single question bedevils American energy and environmental policy more than nuclear waste. No, not even a changing climate, which may be a wicked problem but nonetheless receives a great deal of counter-bedeviling attention.
It’s difficult to paint the picture with a straight face. Let’s start with three main elements of the story.
First, nuclear power plants in the United States generate about 2,000 metric tons of nuclear waste (or “spent fuel”) per year. Due to its inherent radioactivity, it is carefully stored at various sites around the country.
Second, the federal government is in charge of figuring out what to do with it. In fact, power plant operators have paid over $40 billion into the Nuclear Waste Fund so that the government can handle it. The idea was to bury it in the “deep geological repository” embodied by Yucca Mountain, Nevada, but this has proved politically impossible. Nevertheless, $15 billion was spent on the scoping.
Third, due to the Energy Department’s inability to manage this waste, it simply accumulates. According to that agency’s most recent data release, some 80,000 metric tons of spent fuel—hundreds of thousands of fuel assemblies containing millions of fuel rods—is waiting for a final destination.
And here’s the twist ending: those nuclear plant operators sued the government for breach of contract and, in 2013, they won. Several hundred million dollars is now paid out to them each year by the U.S. Treasury, as part of a series of settlements and judgments. The running total is over $8 billion.
I realize this story sounds a little crazy. Am I really saying that the U.S. government collected billions of dollars to manage nuclear waste, then spent billions of dollars on a feasibility study only to stick it on the shelf, and now is paying even more billions of dollars for this failure? Yes, I am.
Fortunately, all of the aggregated waste occupies a relatively small area and temporary storage exists. Without an urgent reason to act, policymakers generally will not.
While attempts to find long-term storage will continue, policymakers should look towards recycling some of this “waste” into usable fuel. This is actually an old idea. Only a small fraction of nuclear fuel is consumed to generate electricity.
Proponents of recycling envision reactors that use “reprocessed” spent fuel, extracting energy from the 90% of it leftover after burn-up. Even its critics admit that the underlying chemistry, physics, and engineering of recycling are technically feasible, and instead assail the disputable economics and perceived security risks.
So-called Generation IV reactors come in all shapes and sizes. The designs have been around for years—in some respects, all the way back to the dawn of nuclear energy—but light-water reactors have dominated the field for a variety of political, economic, and strategic reasons. For example, Southern Company’s twin conventional pressurized water reactors under construction in Georgia each boast a capacity of just over 1,000-megawatt (or 1 gigawatt), standard for Westinghouse’s AP 1000 design.
In contrast, next-generation plant designs are a fraction of the size and capacity, and also may use different cooling systems: Oregon-based NuScale Power’s 77-megawatt small modular reactor, San Diego-based General Atomics’ 50-megawatt helium-cooled fast modular reactor, Alameda-based Kairos Power’s 140-megawatt molten fluoride salt reactor, and so on all have different configurations that can fit different business and policy objectives.
Many Gen-IV designs can either explicitly recycle used fuel or be configured to do so. On June 3, TerraPower (backed by Bill Gates), GE Hitachi, and the State of Wyoming announced an agreement to build a demonstration of the 345-megawatt Natrium design, a sodium-cooled fast reactor.
Natrium is technically capable of recycling fuel for generation. California-based Oklo has already reached an agreement with Idaho National Laboratory to operate its 1.5-megawatt “microreactor” off of used-fuel supplies. In fact, the self-professed “preferred fuel” for New York-based Elysium Industries’ molten salt reactor design is spent nuclear fuel and Alabama-based Flibe Energy advertises the waste-burning capability of its thorium reactor design.
Whether advanced reactors rise or fall does not depend on resolving the nuclear waste deadlock. Though such reactors may be able to consume spent fuel, they don’t necessarily have to. Nonetheless, incentivizing waste recycling would improve their economics.
“Incentivize” here is code for “pay.” Policymakers should consider ways that Washington can make it more profitable for a power plant to recycle fuel than to import it—from Canada, Kazakhstan, Australia, Russia, and other countries.
Political support for advanced nuclear technology, including recycling, is deeper than might be expected. In 2019, the Senate confirmed Dr. Rita Baranwal as the Assistant Secretary for Nuclear Energy at the Department of Energy (DOE). A materials scientist by training, she emerged as a champion of recycling.
The new Biden administration has continued broadly bipartisan support for advanced nuclear reactors in proposing in its Fiscal Year 2022 Budget Request to increase funding for the DOE’s Office of Nuclear Energy by nearly $350 million. The proposal includes specific funding increases for researching and developing reactor concepts (plus $32 million), fuel cycle R&D (plus $59 million), and advanced reactor demonstration (plus $120 million), and tripling funding for the Versatile Test Reactor (from $45 million to $145 million, year over year).
In May, the DOE’s Advanced Research Projects Agency-Energy (ARPA-E) announced a new $40 million program to support research in “optimizing” waste and disposal from advanced reactors, including through waste recycling. Importantly, the announcement explicitly states that the lack of a solution to nuclear waste today “poses a challenge” to the future of Gen-IV reactors.
The debate is a reminder that recycling in general is a very messy process. It is chemical-, machine-, and energy-intensive. Recycling of all kinds, from critical minerals to plastic bottles, produces new waste, too. Today, federal and state governments are quite active in recycling these other waste streams, and they should be equally involved in nuclear waste.
Watch Ubisoft’s Forward event at E3 2021 in 12 minutes
To say Ubisoft had a busy E3 2021 would be an understatement — it touched on many of its biggest game franchises, including relatively new ones that didn’t get more than a teaser in years past. Thankfully, you don’t have to wade through the gaming giant’s entire presentation to see the star attractions. We’ve produced a video that captures the highlights of Ubisoft Forward in 12 minutes. Rainbow Six Extraction and Avatar: Frontiers of Pandora are just some of the attention-getters — you’ll also see news for Far Cry 6, Mario + Rabbids and more.
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5 New NFT Platforms Riding Crypto’s Latest Wave
With NFT sales having topped $2 billion during the first quarter of 2021, a raft of new platforms have come online seeking to capitalize on crypto’s latest gold rush.
The appeal of a blockchain-based token that confers proof of ownership can be debated all day long, but to date the public’s appetite has been insatiable. NFTs representing digital merchandise, in-game collectibles, trading cards, artworks, audiovisual content and even albums have been minted, bought and sold at a frankly dizzying rate, and though talk of a “bubble” has been more or less ceaseless since the train left the station, investors continue to dream up ways of both exploiting the current mania and advancing the industry as a whole.
Here are five new platforms hoping to become mainstays of the burgeoning NFT landscape.
An online marketplace built for both creators and fans, the web app is refreshingly simple to use: all influencers need to do is take a photo with their smartphone, mint it as an NFT, post it on Nafter, then share and sell to the highest bidder. Keen fans can also “stake” on a creator’s profile in order to qualify for access to exclusive content by that creator; stakers also get to earn additional NAFT tokens into the bargain. This governance token enables 0% on Nafter transactions and also allows holders to vote on platform upgrades.
Interestingly, Nafter content creators – models, fashion bloggers, photographers, fitness gurus – can customize who can see their NFTs, choosing between making posts public or for collectors/stakers only. Essentially, the platform lies at the intersection of Instagram, Defi, and NFTs, representing a new monetization strategy for influencers the world over.
Opulous is another newly-launched NFT platform that leans on defi – decentralized loans, specifically. Designed to alter the way musicians access the funding they need, Opulous also represents a launchpad for the release of copyright-backed music NFTs.
With the likes of Kings of Leon and Aphex Twin having already proven the music-as-NFT use case, Opulous has partnered with Binance for a series of exclusive drops featuring work from artists including Lil Yachty and Kyle. Products in the pipeline include defi loans backed by future royalties, which will allow musicians to forward-plan production without relying on record labels.
Within the Opulous ecosystem, artists earn royalty revenue directly from copyright shares, giving them a passive income and providing something the music industry sorely lacks – transparency. And lest you think Opulous is a shameless music-NFT cash-in, it was actually founded by Lee Parsons, the boss of music distribution platform Ditto Music.
NFTs aren’t, on the face of it, the most environmentally-friendly commodities. After all, the vast majority are built on Ethereum – an energy-intensive Proof-of-Work blockchain with a considerable output. On a more positive note, Ethereum plans to transition to greener Proof-of-Stake in the near future – and there are dedicated NFT platforms tackling the problem in the here and now. Step forward, Voice.
Voice is an environmentally-conscious NFT platform built on EOSIO, one that specializes in the creation of carbon-neutral NFTs which are free to mint for all creators. Currently in private testing – but scheduled for a public beta launch later this summer – Voice is on a mission to empower creatives in multiple creatives. To that end, it has teamed up with leaders in arts and culture to launch an NFT Residency through which creative minds can connect with true fans.
“Our residency brings emerging artists into the fold by partnering them with internal technologists to leverage our shared experience and create digital collectables, deep in thought and practice,” says William Anderson, VP of Engineering at Voice.
Curators of the Residency in question, incidentally, include cultural commentator Misan Harriman, data protection expert Brittany Kaiser, 3D Instagram artist Chad Knight, and Paddle8 co-founder Alexander Gilkes. We expect we’ll be hearing lots about Voice in the coming months.
NFT marketplaces might seem kind of ubiquitous, but Bitski has some serious muscle behind it: Jay-Z, Serena Williams and the Winklevoss brothers contributed to its latest funding round led by Andreesen Horowitz, which raised $19 million.
Described as “Shopify for NFTs,” the San Francisco startup does what you’d expect a marketplace to do: it enables users to create, sell and own unique digital content. That content can include everything from custom AR skins for use in various gaming apps, art drops with built-in royalty schemes, golden tickets that grant holders early access to exclusive content, and even NFTs representing a real-world item.
Bitski is free until the moment you create an NFT, whereafter you can choose between three subscription tiers, easily mint and sell NFTs from your own online storefront, and access round-the-clock customer support. Users, meanwhile, can bid on and sell items at their leisure, interacting with emerging and established artists and accessing a range of nifty tokenized goods.
Users tend to be able to interact with NFTs via their digital wallets, but as time goes on, such tokens will, and indeed already are acquiring more functionality. Anima, for example, combines the worlds of non-fungible tokens and Augmented Reality (AR), with tokens on its platform usable in what it calls the “camera metaverse.”
Having recently raised $500,000 from investors including Coinbase, Anima is preparing to launch its Consensys Palm-based marketplace later this month and has already dropped a few NFTs on Nifty Gateway. Augmented Reality NFTs theoretically enable users to interact with them as they would in the real world – thus, you could mount an AR NFT of a painting on your very own (virtual) living room wall.
The potential for bringing unique digital art objects into an immersive AR environment is enormous, and it’s easy to imagine the domino effect when VR and AR really starts motoring in the years ahead: Apple is rumored to have hundreds of employees working on VR/AR projects, and an AR product could be only a year away.
With so many platforms busy building, it’s easy to forget that NFTs are a new and emerging technology. The mind boggles at how the landscape might look in a year or two. In any case, don’t expect the NFT hype to die down anytime soon.
Disclaimer: This material is not sponsored by any organization mentioned in the article.
Global Economic Impact of AI: Facts and Figures
Summarization of Research Insights from Emerj, Harvard Business Review, MIT Sloan, and Mckinsey
Wall Street, venture capitalists, technology executives, data scientists — all have important reasons to understand the growth and opportunity in the artificial intelligence market to access business growth and opportunities. This gives them insights on funds invested in AI and analytics as well potential revenue growth and turnover. Indeed, the growth of AI, continuing research, development of easier open source libraries and applications in small to large scale industries are sure to revolutionize the industry the next two decades and the impact is getting felt in almost all the countries worldwide.
To dive deep into the growth of AI and future trends, an insight into the type and size of the market is essential along with (a) AI-related industry market research forecasts and (b) data from reputable research sources for insight into AI valuation and forecasting.
The blog is structured as follows :
- To provide a short consensus on well-researched projections of AI’s growth and market value in the coming decade.
- To understand the per capita income and GDP of each country from businesses driven by AI and analytics.
Impact of AI is so widespread, touching and vivid that:
IBM’s CEO claims a potential $2 trillion dollar market for “cognitive computing”).
Google co-founder Larry Page states that “Artificial intelligence would be the ultimate version of Google. The ultimate search engine is capable of understanding everything on the web. It will become so much AI driven that in near future ,it would understand exactly what you wanted and it would give you the right thing. We’re nowhere near doing that now. However, we can get incrementally closer to that, and that is basically what we’re working on”.
Different sectors exhibit dynamics in terms of adopting and absorbing AI, leading to different levels of economic impact.
On comparing different industry-sectors we see from the figure above:
In high-tech industries like Telecom and media has already adopted AI relatively rapidly and looking for transformations in all possible avenues. They are then followed by Consumer, Financial Services and Professional Services.
Healthcare and Industrial Sector are adopting AI slowly. Energy and Public Sector are the slowest adaptors to this transition.
Further, the economic impact in the telecom and high-tech sector could be more than double that of healthcare in 2030. If the national average of macroeconomic impact is 100, healthcare might experience 40 percent lower impact (i.e. 60). The fast and rapid adopters like the telecom and high-tech sector are highly influenced by AI and could experience 40 percent higher impact (i.e. 140) than the national average.
Several internal and external factors specific to a country or a state, have been known to affect AI-driven productivity growth, including labor automation, innovation, and new competition. In addition, certain micro factors, such as the pace of adoption of AI, and macro factors such as a country’s global connectedness and labor-market structure also plays a certain factor to the size of the impact.
The end result is to grow the AI value chain and boost the ICT sector, making an important economic contribution to an economy.
Production channels: Direct economic impact of AI aims to automate production and save cost. It primarily considers three production dimensions. Firstly it includes calling labor and capital “augmentation”, where new AI capacity is developed, deployed, and operated by new engineers and big data analysts. Second, investment in AI technologies saves labor as machines take over tasks that humans currently perform. Thirdly, better AI-driven innovation saves overall cost (including infrastructure), enabling firms to produce the same output with the same or lower inputs.
Augmentation: Relates to increased use of productive AI-driven labor and capital.
Substitution: AI-driven technologies offer better results in the field like automation, where it has been found to be more cost-effective. It has also discovered ways and means to substitute other factors of production. Advanced economies could gain about 10 to 15 percent of the impact from labor substitution, compared with an impact of 5 to 10 percent in developing economies.
Product and service innovation and extension: Motivation for investment in AI beyond labor substitution can produce additional economic output by expanding firms’ portfolios, increasing channels for products and services (for e.g. AI-based recommendations), developing new business models, or combination of the three.
Externality channels: It serves as one of the external channels where the application of AI tools and techniques can contribute to economic global flows (for e.g. chatbots, news aggregation engines). Such flow happens inter-country (states and geographical boundaries) and even between countries that facilitate more efficient cross-border commerce. It is found that countries that are more connected and participate more in global flows would clearly benefit more from AI. Further AI could boost supply chain efficiency, reduce complexities associated with global contracts, classification, and trade compliance.
Wealth creation and reinvestment: AI is contributing to higher productivity of economies, efficiency gains. Further innovations result in an increase in wages for workers, entrepreneurs, and firms in the form of profits, higher consumption, and more productive investment.
Transition and implementation costs: Several costs incurred while executing the transition to AI like organization restructuring costs, adoption to new solutions, integration costs, and associated project and consulting fees are known to affect the transition in a negative way. Businesses should do a trade-off between cost and benefit analysis and correctly strategize their roadmap.
Negative externalities: AI could induce major negative distributional externalities affecting workers by depressing the labor share of income and potential economic growth.
The following figure illustrates the detailed overall economic impact sustained due to the wider adoption of AI techniques and strategies by businesses.
AI-driven businesses have led to a positive impact on the growth of revenue over consecutive years. More so, the statements made by renowned founders, CEOs, entrepreneurs and visionary leaders is evident from the figure below as it shows the impact of AI on global GDP, the maximum being obtained from venture-backed startups.
“Tractica forecasts that the revenue generated from the direct and indirect application of AI software is estimated to grow from $643.7 million in 2016 to $36.8 billion by 2025. This represents a significant growth curve for the 9-year period with a compound annual growth rate (CAGR) of 56.8%.”
Tractica has taken a conservative adoption of AI in the hedge fund and investment community, with an assumption that roughly 50% of the hedge fund assets traded by 2025 will be AI-driven. Under this estimate, the algorithmic trading use case remains the top use case among the 191 use cases identified by Tractica.
Further as per reports from Tractica, the market for enterprise AI systems will increase from $202.5 million in 2015 to $11.1 billion by 2024, as depicted in the following figure.
View of Worldwide growth of AI revenue, Source — Tractica
The growth forecasts over the next decade clearly show China’s dominance over the AI market yielding a significant increase in GDP, followed by USA, Nothern Europe, and other nations.
In China, AI is projected to give the economy a 26% boost over the next 13 years, measuring an equivalent of an extra $7 trillion in GDP, helping China to rise to the top. As North America’s companies are widely using AI, the adaptation is at an accelerating phase that it can expect a 14.5% increase in GDP, worth $3.7 trillion.
As the GDP growth varies across continents and nations, the level of AI absorption also varies significantly between the country groups with the most and the least absorption. The below figure demonstrates statistics of economies with higher readiness to benefit from AI. Such countries achieve absorption levels about 11 percentage points higher than those of slow adopters by 2023, and this gap looks set to widen to about 23 percentage points by 2030. This further gives an indication of the digital divide created from AI, between advanced and developing economies.
The resulting gap in net economic impact between the country groups with the highest economic gains and those with the least is likely to become larger, for e.g. a large gap in economic impact between the leading and the lagging — between Sweden and Zambia. The gap could widen from three percentage points in 2025 to 19 percentage points in 2030 in terms of net GDP impact.
AI is internationally recognized as the main driver of future growth and productivity, innovation, competitiveness and job creation for the 21st century. However, there remain certain technical challenges, that need to be overcome to take it to the next step. The key challenges include
Labeled training data
Obtaining sufficiently large data sets.
Difficulty explaining results
Difficulty generalizingScaling challengesRisk of bias
Apart from the common technical challenges, risks, and barriers faced by organisations implementing AI are evident.
It is now the responsibility of policymakers and business leaders to take measurable actions to address the challenges, support researchers, data scientists, business analysts, and all included in the AI ecosystem to drive the economy with huge momentum.
As rightly quoted by Stephen Hawking, Famous Theoretical Physicist, Cosmologist, and Author:
“Success in creating AI would be the biggest event in human history. Unfortunately, it might also be the last, unless we learn how to avoid the risks.”
- Valuing the Artificial Intelligence Market, Graphs and Predictions: https://emerj.com/ai-sector-overviews/valuing-the-artificial-intelligence-market-graphs-and-predictions/
- NOTES FROM
THE AI FRONTIERMODELING THE IMPACT OF AI ON THE WORLD ECONOMY: https://www.itu.int/dms_pub/itu-s/opb/gen/S-GEN-ISSUEPAPER-2018-1-PDF-E.pdf
- USA-China-EU plans for AI: where do we stand: https://ec.europa.eu/growth/tools-databases/dem/monitor/sites/default/files/DTM_AI%20USA-China-EU%20plans%20for%20AI%20v5.pdf
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