Decentralized Finance or DeFi for short has seen explosive growth in recent years. According to CoinGecko, there was more than $93 billion worth of DeFi assets within the crypto market as of June 2021, up from $4 billion just three years ago.
DeFi is a catch-all term for a blockchain-based approach to banking that drives person-to-person borrowing and lending, access to high-yield investments, digital asset trading, and more. 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.”
- According to a Federal Reserve report, less than half of small businesses say their credit needs are met.
- A report from the Small Business Roundtable found that 28 percent of surveyed SMBs stated that their biggest short-term challenge was adequate cash flow.
- The Small Business Administration finds that more than 80 percent of businesses fail because of cash flow issues.
- And since December 2020, an average of 30 percent of SMBs closed in the following business sectors: food/accommodations, arts/entertainment, services, manufacturing, and retail.
SMB founders are foundering because, rather than lending, banks are choosing to bolster their cash reserves and buy U.S. Treasuries in advance of the next 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 promises and pitfallsWhile DeFi holds a lot of promise for SMBs, there are pitfalls that need to be considered as well.
First, decentralized finance is not currently regulated. If your DeFi account gets hacked, the U.S. Securities and Exchange Commission can’t step in and provide recourse. But you can report crypto hacks and cyber-attacks directly to the FBI.
Second, DeFi accounts are not FDIC insured. If your funds get stolen, they’re likely gone for good. However, you can acquire your own crypto insurance to protect your stored funds.
Lastly, DeFi smart contracts are software and any type of software can have programming bugs or glitches. Sometimes those bugs simply prevent the software from running properly. Other times, bad actors exploit them to weasel their way into an account. While rare, bugs have been detected in smart contracts before. To be safe, only consider proven DeFi platforms and start with less than $100 in a secure, fiat-backed Stablecoin.
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. However, DeFi has the potential to keep small businesses moving forward on your terms, while big banking continues its steady retreat from relevance on its own terms.
On The Flipside
- DeFi currently accounts for only 5% of the total crypto-sphere, however, interest in it continues to grow.
- Unfortunately, a lot of that interest is coming from regulators and policy makers especially in Washington, D.C.
Why You Should Care?
DeFi is the nearly perfect embodiment of Satoshi Nakamoto’s articulated vision for Blockchain outlined in his white paper that conceptualized Bitcoin back in 2009. As regulatory pressure grows, we need to become more actively engaged in letting our representatives know that a laissez faire approach might be the best approach regarding DeFi regulation.