Decentralized Finance (DeFi) as a Catalyst for SME Resilience

Abstract

SMEs are the foundation of world economies, but have a high financing gap that is estimated at US $5.7 trillion in emerging markets and developing economies (EMDEs) that will restrict their growth, innovation and their ability to withstand economic shocks. Conventional banking systems compound this difficulty by providing excessive collateral requirements, time consuming procedures, expensive services and risk aversion that serves to disfavor small or informal enterprises disproportionately. Decentralized Finance (DeFi) is proposed as a disruptive alternative, utilizing blockchain technology, smart contracts, permissionless protocols, asset tokenization (particularly invoices and real-world assets), stablecoins, decentralized lending (e.g., Aave, Compound) and on-chain credit assessment to circumvent intermediaries, lower costs, global access to capital, and can access rapid liquidity. The mechanisms increase financial inclusion of SMEs, shock absorption, and operational efficiency, which lead to increased agility and recovery potential in unstable environments. Although the rapid expansion of DeFi is proven by the phenomenal increase in total value locked (TVL) over time, with a negligible amount in 2020 to more than 100 billion in 2025, there are issues, namely market volatility, liquidation risk, scalability, and regulatory uncertainty that remain. An intermediary TradFi-DeFi strategy that is facilitated by policy frameworks that facilitate safe on-ramps, entrenched oversight, and internationalization standards on the real-world asset tokenization is suggested to allow sustainable adoption. DeFi will have the potential to close the credit gap in the SME environment, democratize finance, and create more inclusive and resilient entrepreneurial networks across the globe.