# DeFi and CeFi By [bluebulls.eth](https://paragraph.com/@bluebulls-2) · 2022-12-10 --- ![](https://storage.googleapis.com/papyrus_images/4da1ed8616b6f59d6b6e7748218a2d550e84cf83189a449e4196cbe312cc376b.png) DeFi is no longer a new concept in the market. And surely when you participate in the Crypto market, whether you are new or old, you already know this concept. This is basically a financial system built on the development of Bitcoin, Blockchain, Smart Contract, etc. and has a lot of similarities with traditional finance. Built and inherited many features of traditional finance, DeFi will certainly have certain similarities in the development process. Therefore, in this article, I will explore the similarities between DeFi and CeFi with you, as well as make market projections. The development history of CeFi The traditional financial system has a history of thousands of years, even finance was formed before the development and popularity of money. I can simplify the development process of CeFi as follows: Borrow and lend The basic element that makes up the current financial system is borrowing and lending, when in the economy there are individuals who accumulate a lot of wealth, while there are also other individuals who need resources. it for production. Borrowing and lending has existed for a long time. From the years 3000 - 1900 BC, borrowing took place and then people thought about using collateral such as land, food, slaves, ... as a way to secure protect the interests of the lender. Borrowing and lending continues to evolve today with more diversified loans, loan purposes and collaterals. At the same time, banks or financial intermediaries were also born to connect lenders and borrowers. Exchange During the period of the first expeditions, merchants discovered the difference in currency rates in the territories, from which they made arbitrage trades to earn money. profit (or now commonly known as Forex Trading). In addition, because the monetary system at that time was not yet developed, the payment often used precious metals such as gold, silver, etc. The transportation of a large volume of goods accompanied by a lot of gold and silver such as very hard work and exist many risks (insurance also started here). Therefore, around the 13th century, financial intermediaries, banks, merchants, etc. invented a tool to limit the need to transport a large amount of gold and silver as above. It is a proof so that traders can be paid at banks when they have successfully made a transaction. This is the premise for the birth of the exchange and trade as well as the formation of valuable papers later. Securities was born From the idea of being able to "document" and exchange like above, people have "documented" many things such as loans, goods, companies, ... and created securities. Securities (or valuable papers) are actually papers behind assets such as loans, businesses, goods, etc., born with the purpose of helping the transaction of assets. above is easier. And from here, the first stock exchanges were also established in many parts of the world around the 15th - 17th centuries. Derivative products In fact, derivative products have also been used since the appearance of stock exchanges. Products such as futures contracts, options contracts, etc. have been traded by traders to avoid the risk of falling in the price of commodities. Securitization and Structured Products All in all, these are complex financial products that require the coordination of a wide variety of products and the integration of many different financial institutions in today's modern financial system. Some examples can be mentioned as investment funds, stock indices such as S&P500, etc. In summary, you can see that the traditional financial system is developed vertically from simple to complex, based on the foundation of Lending and the needs related to economic activities. The development history of DeFi Due to the latter development, DeFi tends to develop horizontally, just copying and improving the model available from traditional finance. ![](https://storage.googleapis.com/papyrus_images/c755949b356e3d9cf3ff0713ff53009df329605f630c54e5427ee79b42031e1f.png) Starting with Bitcoin and Blockchain set the stage for a trend of decentralization in the field of money. Then, with the advent of Ethereum and Smart Contracts, Blockchain gave the possibility to build Dapps that work on it. This was followed by the introduction of DeFi in the early stages with Maker DAO (Lending) and EtherDelta (DEX with Order-book mechanism). In 2017 with the ICO trend, many DeFi platforms have been created in different categories such as AAVE, Synthetix, Ren Protocol, Kyber Network, 0x, Bancor, etc. From here, we see DeFi has grown horizontally due to the calculation inherited from the products and models available in traditional finance. ![](https://storage.googleapis.com/papyrus_images/cd269ddc965ca3c23282bedd8c094b01b3679eff85b1f9ab521ae6db86af3893.png) DeFi platforms continued to be built and developed and really exploded into “DeFi Summer 2020” and growing to this day. However, there is one point where DeFi sets itself apart from CeFi and that is the automation of the market. Specifically, in CeFi, every transaction needs to have a seller, but in the DeFi market it is not necessary with automated market-setting protocols (typically AMM). So it won't be a matter of whether anyone is buying and selling but with how much liquidity ⇒ Liquidity is very important in DeFi. From there, DeFi will have completely different products from CeFi to optimize Liquidity and capital efficiency, which protocols belonging to the DeFi 2.0 group are a typical example. In short, in general, DeFi has many similarities in its development history. However, due to inheriting and developing from CeFi's Model, DeFi has had very fast horizontal development steps with the birth of many protocols belonging to many different categories at the same time. Besides, with certain points, DeFi will also have products built completely differently from CeFi. **What if DeFi and CeFi have the same development trend?** Some figures on traditional financial markets The reason I give these figures is based on the assumption that DeFi tends to develop similar to CeFi in certain categories. They are therefore directly related to estimating the growth potential of categories in the DeFi market. ![](https://storage.googleapis.com/papyrus_images/2f2ec037bfa46fefead853525c88420037bb8c31ea73ddf0d643b68d06dd6022.png) In CeFi, the puzzle pieces will be developed vertically: From Lending/Debt ⇒ Securities Market (Stock, Bond, ...) ⇒ Derivatives ⇒ Complex products like Asset Management, Securitization & Structured Products. Therefore, the foundational and pre-existing sectors usually have a larger market size. However, as you can see in the data above, the Assets Management array and the Derivatives array have an equal or even larger Market Size than sectors like Lending/Debt and Stock Market. Especially for Derivatives the number of market estimates is very large, this is because: Due to the structure of asset management and optimization, Sector Assets Management will take advantage of market size from all markets from Lending, Stock even Insurance and Derivatives ⇒ Market size is so big . In the Derivatives segment, due to some differences in calculation as well as inaccurate statistics related to the OTC market, Derivatives' Market Size can reach hundreds of trillions of dollars. However, based on the Open Interest data of BIS's OTC Derivatives Market, I think the Derivatives Market Size will be in the range of $10T - $20T. **Trends of DeFi** Thus, if there is the same development trend with CeFi, there are currently 3 categories you need to pay attention to in the DeFi market, which are: Assets Managements, Derivatives & Insurance. Why the above categories? Firstly, DeFi is quite "boring" nowadays. DeFi in the current context develops a lot horizontally with the emergence of many ecosystems. ![](https://storage.googleapis.com/papyrus_images/0ea5b955f527c2ed85c22bfab89dd68e0b3dc2b2e720336ad3cc7fa9eb71f4eb.png) A fast and cheap Blockchain (than Ethereum), some basic Dapps plus news about Incentive Program to pump in short term. And the typical result of developing in this direction is the money pump in the short term, of which Polygon or Avalanche is a fairly typical example today. Read more: "Contest" launches stimulus packages of Blockchain platforms Second, the cash flow has not flowed to these categories: As the data of some of the ecosystems I gave above, you can see that there are only 3 main categories that receive most of the cash flow that is AMM, Lending and Assets. Only a small portion of Derivatives and Others. If you refer to the Weekly DeFi Report of Coin98 Analytics, you will also see that this situation occurs in the majority of all ecosystems. Therefore, the above puzzle pieces are very saturated and need new pieces in DeFi for the money to flow ⇒ This is an inevitable need for the development of the market. Third, the products are not really good and have depth: Especially for the Assets array, you can see that Assets is a category that occupies a fairly large market share in DeFi as above, but most of the protocols are just Yield Aggregators with Auto Compound feature, or a little more complicated. Leveraged Farming feature. Complex products like Yearn Finance or Convex Finance are almost absent on other ecosystems ⇒ Lack of depth. For Insurance and Derivatives, there are hardly many good projects on the market. Especially for Derivatives, the products are hardly comparable to CEX exchanges like Binance and FTX. Fourth, these are the products that develop in the following phase of the market: Although DeFi grows horizontally, the money will flow vertically like CeFi. In the CeFi market, complex products such as Derivatives or Assets Management will develop in stages after the upper layers are complete. For example: For Derivatives, it is necessary to have a Blockchain that is fast enough and offers a smooth experience, a good enough Oracles system, a large enough amount of Liquidity to be able to provide great leverage when Trading, etc. The same is true for Assets Management, to be able to get products like Yearn Finance, it is necessary to have the development of many Protocols with complex mechanisms such as Curve Finance or SushiSwap - which currently only available Protocol on Ethereum owned. For categories that have shown signs of saturation at the moment such as Lending or DEX, there is no longer a chance for development: The current Crypto market cap is around $2.5T while the TVL of the entire DeFi market is only around $130B, only about 1/20 of the Crypto market cap ⇒ Growth potential is still huge. For Lending, when the market capitalization reaches a new peak ⇒ TVL will increase accordingly, plus more Stablecoins issued on the market will be an abundant source of Liquidity for Lending's development. For DEX, the category is quite similar to Stock Market in CeFi. As more and more projects appear, the token will be Add Liquidity on DEXs plus the large transaction volume will continue to make this category grow. In CeFi, although it is already a very large market, the S&P 500 index still gives a compound return of about 10%/year ⇒ Category DEX still has many growth opportunities. However, if you are looking for investments with huge ROI, then I think you should pay more attention and study the pieces that the cash flow has not yet directed in DeFi. Epilogue If we map from the traditional financial market to DeFi, there are many similarities. Therefore, based on the history of CeFi, we can get more perspective on the destination of DeFi in the future. --- *Originally published on [bluebulls.eth](https://paragraph.com/@bluebulls-2/defi-and-cefi)*