Decentralized Finance (or DeFi) has enjoyed explosive growth in the last few years. CoinGecko estimates that the total value of DeFi assets on the crypto market was $93 billion as of June 2021. This is a significant increase from just $4 billion three-years ago.

A blockchain-based bank approach called DeFi can be described as allowing person-to–person borrowing and lending. It also allows access to high yield investments and digital asset trade. What makes DeFi unique is that the blockchain software enables smart contracts– mini computing programs– to automatically execute DeFi deals without credit checks, banking gatekeepers, or loan officers in the middle. DeFi ensures fast loan approvals, low fees, and speedy transfer of funds – all of which are ideally suited for entrepreneurs, sole proprietors, as well as small- and medium-sized businesses (SMB).

DeFi is an option that’s increasingly viable as banks become less reliable when it comes to lending to SMBs, especially when you consider the following:

• Since the beginning of the year, the top-25 banks have set new lows in total lending at a time when “…small businesses and households find it harder to obtain reasonably priced credit.”
• Federal Reserve reports that only half of small-businesses say their credit needs have been met.
• According to the Small Business Roundtable, 28 percent of SMBs surveyed said that adequate cash flow was their greatest short-term problem.
• Small Business Administration found that cash flow issues are the reason for more than 80 percent failures in businesses.
• Since December 2020, 30 percent have closed their doors in these business segments: retail, food/accommodations and arts/entertainment.

SMB founders have a tendency to start businesses because instead of lending, banks choose to build their cash reserves and purchase U.S. Treasuries ahead of any market downturn. Unfortunately, many SMBs don’t have that luxury as they struggle to keep the lights on, and their employees employed right now.

DeFi has its pitfalls and promises. While DeFi is a great option for SMBs there are some pitfalls to consider.

Decentralized finance is currently not regulated. If your DeFi account gets hacked, the U.S. Securities and Exchange Commission can’t step in and provide recourse. You can however report hacks of crypto-assets and other cyber-attacks directly at the FBI.

DeFi accounts cannot be insured by the FDIC. If your funds get stolen, they’re likely gone for good. You can purchase crypto insurance to help protect your funds.

DeFi smart contracts, which are also software, can be affected by programming glitches or bugs. These bugs can sometimes cause software to stop working properly. Bad actors may exploit these bugs to get into accounts. Smart contracts are not prone to bugs, but they have been found. For safety, you should only choose proven DeFi platforms. You can start by investing less than $100 in secure, fiat-backed Stablecoins.

It’s worth noting that theft, hacks, and fraud do occur with traditional banking, credit cards, and financial institutions – and DeFi is similar in that regard. DeFi is able to help small business move ahead on their terms. Big banking, however, continues to retreat from relevancy on its terms.

Flipside

• DeFi is currently only 5 percent of total crypto-sphere. However, the interest in it keeps growing.
• Regulators and policymakers, especially Washington D.C., are responsible for a large portion of this interest.

What are the reasons to care?

DeFi is the nearly perfect embodiment of Satoshi Nakamoto’s articulated vision for Blockchain outlined in his white paper that conceptualized back in 2009. Regulative pressure is increasing. We must be more proactive in telling our representatives that a laissez faire approach to DeFi regulation might work best.

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