"Elevation" Ethereum's composite network effect: digital financial stack (1)

Foreword: Why is Ethereum a hierarchical financial network? How does it form a composite network effect? The author of this article is David Hoffman, translated by the "HQ" of the Blue Fox Notes community.

Ethereum is a platform to build a financial superstructure. The user behavior in this superstructure creates the power to drive the operation of its internal assets. Indicators at each level of the financial stack will show the economic status of Ethereum. The following article will summarize this.

Ethereum is a set of hierarchical structures that are superimposed on each other. Each level provides the foundation and stability for the hierarchy above it for efficient expression. Each level has its own built indicators that respond to market forces within the Ethereum economy.

Layer 0 — Ethereum Ethereum mortgage rate

Layer 1 — MakerDAO Stabilization Fee; Dai Savings Rate

Layer 2 — Loan + Borrowing Dai Quantity Weighted Average Lending Rate / Supply Rate

Layer 3 — Application layer Ethereum locked in DeFi

Layer 4 — Liquidity Asset trading volume

The stability of each level increases the stability of the upper level. This is why Ethereum development is very important, so that we can develop smoothly. Similarly, although not as important as building Ethereum, it is also important to build MakerDAO correctly.

If the infrastructure of these two Ethereum economies is complete, a dynamic financial application ecosystem that is fully code-managed and fully interacts with market participants will be built.


Layer 0: Global Bond Market

Indicator: Ethereum mortgage rate

Ethereum 2.0 will support ETH mortgages. Those with 32 ETHs can verify online transactions on their computers and benefit from them. The amount of revenue varies depending on the size of the certifier's pool of funds.


(Blue Fox Notes: The above picture is the Ethereum 2.0 ETH mortgage yield, from the Ethereum document)

This PoS proves to be the beginning of a single digital bond market, with ETH as a currency, and those holding capital can mortgage and get low-risk returns. This benefit is proportional to the size of the capital and the total mortgage time. It is a stable investment strategy for those who want low risk, low maintenance fees, and exposure to ETH and Ethereum digital economies.

In the traditional bond market, you can buy bonds or notes from the US Treasury. When a bond or note is redeemed, the buyer typically receives 1-3% of the proceeds. However, these interest rates are variable because these securities are freely traded in the secondary market, producing a yield curve.

In other words, when you buy a bond, you mortgage your dollar in the US economic network, and you will get a guaranteed investment income proportional to the size of the mortgaged capital and the bond maturity (mortgage period).

"I used to think that if there is an afterlife, I want to be the president or the pope, or a baseball batsman of a.400. But now I just want to go back to the bond market, you can scare everyone."

— James Carville, political adviser to President Clinton The bond market controls everything. To date, the bond market is the world's largest securities market ($18 trillion) and may even be the most powerful guiding force for global capital.

The bond market has such a great strength because they are the foundation of all markets. The cost of capital (or bond interest rate) ultimately determines the value of stocks, real estate, and even virtually all asset classes.

This is because the bond market, and the ETH mortgage rate are the bottom of their respective financial markets, which determine the market dynamics of all upstream markets.

ETH 2.0: Reshaping the bond market


In Ethereum 2.0, centralized management and its Fed functions have been integrated into the code of the agreement. The fixed and pre-determined mortgage rate in Ethereum 2.0 solves the problem of centralized institutions spamming money.

In addition, the ETH mortgage rate creates incentives to fund the network and provide security for the blockchain.

In other words: the government issues bonds to form an economy that can finance the military to protect the government and the economy. In Ethereum, blockchains issue incentives to mortgagers as a way to maintain the security of their digital economy.

Layer 1: MakerDAO: Cornerstone indicator: Dai savings rate, stability fee

MakerDAO is where Dai is created. Dai's issuer, the CDP holder, promised to pay a stabilization fee. The stabilizing cost is the interest rate of the loan and is the tool used to manage the price of Dai in the secondary market. Higher cost = higher Dai price.

It also determines the cost of capital. The stabilizing fee measures the expected return of a CDP holder in a particular year, which is estimated by the loan proceeds obtained from its mortgage assets. If the stabilization fee is 20%, that is, CDP holders issue Dai, they think that Dai in their hands will generate more than 20% of the proceeds. The stability fee "pulls" the total market value of Dai. The higher the SF, the smaller the supply of Dai.

MakerDAO announced Dai's savings rate in 2018. DSR is a tool that helps MakerDAO manage Dai's price while increasing its ability to expand its market capitalization. All stabilization fees paid by CDP holders will be used to destroy MKR (or PETH) prior to the introduction of the DSR. This is the risk management fee charged by MakerDAO.

However, not all assets have the same risks, and some have little risk (for example, Certified US Treasury bonds). The lower the risk, the more stable the cost of Dai's savings rate, rather than destroying MKR. The higher the DSR, the greater the supply of Dai, because those who lock Dai in the DSR can get more rewards.


Left: Risk-free fees paid to DSR||| Right: Risk paid to MKR

The Dai savings rate is a twin indicator of the ETF's mortgage rate. DSR enables you to obtain risk-free returns in the form of a stable value currency, which has a high predictive value for the value of the return. DSR is the gravitational pull of Dai from the secondary market because risk-free returns are sustainable.

As long as Dai is present, someone will pay a stabilization fee. As long as someone pays a stabilization fee, someone can get Dai's income from the Dai savings rate. The more people pay the stability fee, the more people get the DSR rate.

Layer 2: Borrowing and Loans

Indicator: Dai Quantity Weighted Average Loan Rate (WABR) / Supply Rate (WASR)

Introduction to Vishesh Choudhry:


From visavishesh tweet (Vishesh Choudhry)

Dai Weighted Average Borrowing (WABR) and Supply Rate (WASR) are derived from the London Interbank Offered Rate (LIBOR), a traditional financial instrument that measures the average cost of bank loans.

Quantity Weighted Average Loan Rate (WABR) & Supply Rate (WASR)

Dai's WABR and WASR are the average interest rates offered to all Dai lending platforms or borrowed from all Dai lending platforms. Through the weighted average price, and the quantity in each market (Compound, DYDX), the loan rate and supply rate show the interest rate of providing Dai to the "market" or borrowing Dai from the "market". These two values ​​will be a useful tracking indicator, and money managers often look for data to support their decisions.

Dai market rate on June 29, 2019

WASR: 16.5%

(The average annual loan yield is 16.5%)

WABR: 19.5%

(The annual average loan rate is 19.5%)

Since the current daily price reflects the current daily market conditions, these rates may change significantly in the future. (Blue Fox notes: WARS was 14.4% on July 31 and WAB was 18.4%)

Layer 3: Application layer

Indicator: The LEGO building layer of the ETH funds in DeFi, the expressive level, and the middle layer of the algorithm.


(from defipulse)

The application layer of Ethereum is a place where Ethereum becomes interesting.

What is the application layer of Ethereum?

A major innovation in Ethereum is the integration of the Ethereum Virtual Machine (EVM) into its blockchain. "Virtual machine" is what programmers call "computer." The EVM of Ethereum is a way of calculating the local processing of the Ethereum blockchain on the blockchain.

In other words, with EVM, Ethereum can run software that can process digital assets (ie, currency, property, tokens) on its blockchain. This is the origin of the term "programmable currency." The Ethereum application is basically a computer software that is used to program the way money or other assets work.

Ethereum's application layer: "Value Internet"

Programmable currency is powerful. Ethereum researchers and developers are just beginning to touch the “possible” surface. Similar to the possibility of Internet development in the 1990s, it was difficult to imagine later developments. The Value Internet also showed early signs of great imagination in future applications and application scenarios. An important difference is that the Internet relies on data to run, while Ethereum relies on value to run.

Early important apps in Ethereum

· MakerDAO: Native Digital Stabilizer, Dai

· Compound: Native Digital Automated Asset Lending

· Kyber Network: Integrating Ethereum's liquidity chain-based liquidity agreements

· Uniswap: Native Digital Assets Automated Exchange

· Augur: Native Digital Forecasting Market

· DYDX: Algorithm Management Derivatives Market

· UMA (Universal Market Access) Protocol: Integrated Asset Platform

· 0x ('Zero-X'): ​​a platform for orders placed on order-based exchanges

These applications represent some form of financial primitives; each adds important components to a growing network of financial applications. Among them, many applications are similar to the traditional financial services of the centralized company.

The UMA protocol, which generates tokens that track the value of other assets, like the stocks of the NYSE, allows investors to invest in the stock market globally. DYDX, a platform that can do more or short assets, is a replacement for other margin trading platforms such as TD Ameritrade or Robinhood.

Augur, a market for probabilistic trading shares of future outcomes, is a theoretically centralized offering, but is always subject to government regulation. Uniswap, the same exchange as the NYSE, but controlled by the algorithm to match the buyers and sellers of the asset. Similarly, Compound, who needs to borrow money, can provide collateral and pay the lender.

Below are examples of transactions between different agreements.


This picture shows one of the early ideas of cryptocurrency enthusiasts: the network of currencies. The Internet we know relies on data, and this new type of Internet relies on value. As more and more valuable assets enter Ethereum, more and more applications can program these assets, and Ethereum's network is growing in its ability to create new financial products.

This is how Ethereum develops a composite network effect. Each financial prototype has been added to another dimension based on the original, these dimensions are built on the Ethereum. Each financial prototype is a separate LEGO, and in Ethereum, the total number of LEGO is constantly increasing.


– To be continued –