Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji)Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

, Author: David Hoffman, Translation: HQ, published by Odaily with permission.

Ethereum is a platform with the purpose of building a financial superstructure. The user behavior in this superstructure produces the power to promote the operation of its internal assets. Metrics for each layer on the financial stack will show the economic state of Ethereum. The following article will summarize this.

Ethereum is a set of layers stacked on top of each other. Each level provides the base and stability for the level above it to express effectively. Each layer has metrics built into it that respond to market forces within the Ethereum economy.

Layer 0 — Ethereum

Layer 1 — MakerDAO

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Stability Fee; Dai Savings Rate

Layer 2 — Loans + Borrowings

Dai Quantity Weighted Average Borrowing Rate/Supply Rate

Layer 3 — application layer

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asset trading volume

Layer 4 — Liquidity

The stability of each level increases the stability of the level above it. This is why Ethereum development is important so that we can develop smoothly. Likewise, while not as critical as building Ethereum, getting MakerDAO right is very important.

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

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Metric: Ethereum Collateralization Ratio

Ethereum 2.0 will support ETH collateral. Those with 32 ETH can verify network transactions on their computers and earn money for it. The amount of income varies depending on the size of the verifier's fund pool.

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

This PoS proves that it is the beginning of a single digital bond market, treating ETH as a currency, and those who hold capital can mortgage and obtain low-risk returns. This return is proportional to the capital size and total collateral time. It is a stable investment strategy for those who want to obtain low risk, low maintenance fees, and exposure to ETH and Ethereum digital economies.

In the traditional bond market, you buy bonds or notes from the U.S. Treasury. When a bond or note is called, the buyer typically gets a 1-3% yield. However, these rates are variable because these securities trade freely in secondary markets, creating the yield curve.

— James Carville,In other words, when you buy a bond, you mortgage your dollars in the U.S. economic network, and you will receive a guaranteed investment return proportional to the size of the mortgaged capital and the maturity of the bond (mortgage period).

"I used to think that if there was an afterlife, I'd want to be the president or the pope or a .400 baseball batter. But now I just want to go back to the bond market and you can scare everybody."

political adviser to president clinton

The bond market controls everything. So far, 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 reason bond markets are so powerful is that they are the foundation of all markets. The cost of capital (or, bond rates) ultimately determines the value of stocks, real estate, and basically all asset classes.

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

ETH 2.0: Reshaping the bond market

Additionally, the ETH collateralization rate forms an incentive to fund the network and provide security to the blockchain.

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Layer 1: MakerDAO: Cornerstone

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Metrics: Dai Savings Rate, Stability Fee

MakerDAO is where Dai is generated. Issuers of Dai, i.e. CDP holders, commit to paying a stability fee. The stability fee is the interest rate on the loan and is a tool used to manage the price of Dai on the secondary market. Higher fees = higher Dai prices.

MakerDAO announced the Dai savings rate in 2018. DSR is a tool that helps MakerDAO manage the price of Dai while increasing its ability to grow its market cap. Before the introduction of DSR, all stability fees paid by CDP holders would be used to burn MKR (or PETH). This is the risk management fee charged by MakerDAO.

However not all assets are equally risky and some have little to no risk (e.g. tokenized US Treasuries). The less risky asset, the stability fee goes to the Dai savings rate instead of burning MKR. The higher the DSR, the greater the supply of Dai, because those who lock up Dai in the DSR can get more rewards.

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The Dai Savings Rate is the twin indicator of the Ethereum Collateralization Rate. DSR enables you to obtain risk-free income in the form of stable value currency, thus having a high predictive ability on the value of income. DSR is the gravitational force that pulls Dai out of the secondary market, because risk-free returns are sustainable.

As long as there has been Dai, there have been people paying stability fees. As long as someone pays the stability fee, then someone can earn Dai benefits from the Dai Savings Rate. The more people who pay the stability fee, the more people get the DSR rate.

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Metrics: Dai Quantity Weighted Average Borrowing Rate (WABR) / Supply Rate (WASR)

Introduction by Vishesh Choudhry:

Sourced from vishesh tweet (Vishesh Choudhry)

The Dai Weighted Average Borrowing (WABR) and Supply Rate (WASR) is derived from the London Interbank Offered Rate (LIBOR), a traditional financial instrument that measures the average cost of lending across banks.

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Dai's WABR and WASR are the average interest rates offered to or borrowed from all Dai lending platforms. By weighted average price, and quantity in each market (Compound, DYDX), lending rate and supply rate show the interest rate of supplying Dai to the "market" or borrowing Dai from the "market". These two numbers would be a useful tracker, and money managers often look for data to support their decisions.

WASR: 16.5%

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WABR: 19.5%

(Annual average Dai loan yield is 16.5%)

(Annual average loan Dai interest rate is 19.5%)

These rates may change significantly in the future as current daily prices reflect current daily market conditions. (Blue Fox Note: WASR was 14.4% on July 31, and WABR was 18.4%)

Indicator: ETH locked in DeFi

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The application layer of Ethereum is what makes Ethereum interesting.

(from defipulse)

The application layer of Ethereum is what makes Ethereum interesting.

A major innovation in Ethereum is the integration of the "Ethereum Virtual Machine (EVM)" into its blockchain. A "virtual machine" is what programmers call a "computer". Ethereum's EVM is the way the Ethereum blockchain handles computation natively on the blockchain.

In other words, with the EVM, Ethereum can run software that handles digital assets (i.e. money, property, tokens) on its blockchain. This is where the term "programmable money" comes from. An Ethereum application is basically a piece of computer software that programs how a currency or other asset works.

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The Application Layer of Ethereum: "Internet of Value"

Programmable money is powerful. Ethereum researchers and developers are only just beginning to scratch the surface of what is possible. Similar to the possibility of the development of the Internet in the 1990s, it was difficult to imagine the subsequent development at that time. The Internet of Value also shows early signs that future applications and application scenarios have great room for imagination. An important difference is that the Internet runs on data, while Ethereum runs on value.

Early Important Apps on Ethereum

MakerDAO: native digital stablecoin, Dai

Compound: native digital automatic asset lending

· Kyber Network: an on-chain liquidity protocol that integrates the liquidity of various parts of Ethereum

· Uniswap: automatic exchange of native digital assets

Augur: Native digital prediction market

· DYDX: Algorithm-managed derivatives market

· UMA (Universal Market Access) Protocol: Comprehensive asset platform

0x ('Zero-X'): ​​a platform that provides order books for order-based exchanges

Each of these applications represents some primitive form of finance; each adds an important component to the ever-growing web of financial applications. Among them, many applications are also similar to traditional financial services of centralized companies.

The UMA protocol can generate tokens that track the value of other assets, like stocks on the NYSE, allowing investors to invest in the stock market globally. DYDX, a platform with the ability to go long or short an asset, is an alternative to other margin trading platforms like TD Ameritrade or Robinhood.

Augur, a marketplace for buying and selling shares of the probability of future outcomes, a product theoretically offered in a centralized form, but always subject to government regulation. Uniswap, an exchange like the NYSE, but algorithms control the matching of buyers and sellers of assets. Similarly, with Compound, people who need to borrow money can post collateral and pay lenders a fee.

This image shows one of the early ideas of cryptocurrency enthusiasts: a network of currencies. The Internet we know operates on data, but this new type of Internet operates on value. As more and more valuable assets enter Ethereum, and more and more applications can program these assets, the Ethereum network continues to grow in its ability to create new financial products.

financial stack

All of these platforms operate using Dai and ETH. The amount of Dai and ETH, as well as the daily transaction volume of these platforms will be affected by the Ethereum Collateralization Rate (Layer 0), Stability Fee/DSR (Layer 1), and Dai WABR & WASR. These three metrics represent the three market generation rates that will determine the availability of capital for all applications in the above layers.

composite stack

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composite stack

Layer 0 is an algorithm-controlled commodity currency issuance layer. All new Ethereum is issued on Layer 0, which is the layer responsible for the security of the Ethereum blockchain. Layer 0 issues more ETH when security is low and less ETH when security is high. This ensures the security of Ethereum while allowing enough ETH to be used for migration to higher layers of the financial stack.

The ETH mortgage rate determines the guiding force of Layer 0 to the bottom of the stack and ETH.

Layer 1 is the stable layer. Layer 1 converts the ETH issued at Layer 0 into a stable form of Dai. Layer 1 enables individuals to calculate how to manage their long-term capital because they can make informed economic decisions now, knowing that Dai will represent similar value in the future.

Layer 1 is also the capital generation layer. Layer 1 allows individuals to directly generate currency and add it to the total currency pool of the macro economy. The cost is a stability fee, which represents the cost of capital within Ethereum.

The stability fee creates a proportional Dai savings rate that, like the ETH collateralization rate, also exerts a greater steering force on Dai in the financial stack. The Dai savings rate controls the scarcity of Dai in the same way that the ETH collateral rate controls the scarcity of ETH.

Compared with MakerDAO, the borrowing and lending of assets has fewer restrictions and less systemic risk. At this layer, you can borrow Dai and generally have lower fees and penalties in liquidations.

ETH exists in one of the following three situations

1. Mortgage

Ethereum, as a capital asset, provides regular dividend income.

2. ETH is locked in Apps

Ethereum, as a store of value, as a trustless/permissionless global financial collateral.

3. In the secondary market

The price that must be paid to obtain the above two services in the secondary market.

This diagram also applies to Dai. 1. DSR 2. SF 3. Dai price

The price of ETH is determined by the total pull of 1+2 acting on 3

The mortgage layer (2-ETH mortgage rate) determines the basic rate of return of ETH. Risk-free ETH Yield provides a promised rate of return regardless of the rate of return on the application layer above.The application layer (1-ETH locked in Apps) reflects the market's financing preferences, that is, supply or borrow to the market. Collectively, suppliers and borrowers put far more capital in than they take out, since borrowers can only borrow less than the value of their staked ETH. For example, mortgage $1,500 of ETH, borrow $1,000 of ETH: overall lock-in: 1/3 of the loan value ETH. (Blue Fox Notes: 2/3 of them have become DAI and entered the circulation, while 1/3 of the value of ETH has been locked.)》。

Ethereum: Digital Finance Stack (1)

1 and 2 pull the ETH price of 3. In order to provide an equal and opposite force to the pull of 1 and 2, the price of ETH rises in the secondary market. This is also the basis of Ethereum’s bull run. Ethereum's virtual machine computer has created many meaningful applications, and Ethereum's collateralization rate has risen due to the scarcity of Ethereum. Both mechanisms have exerted a powerful collective pull on the price of Ethereum's secondary market.

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Layer 4: User Aggregation

The last layer. Liquidity providing layer, middleware layer, interface layer, effective market assumption layer.

Layer 4 is the last layer to come up because it is completely dependent on the structure and purpose of the application below it. The most successful example of a Layer 4 application is InstaDapp's cross-protocol bridge.

InstaDapp built a service that automatically transfers debt from MakerDAO to Compound, and from one lending platform to another, for better rates. InstaDapp creates 13 internal transactions to complete a single transaction performed by a user.

InstaDapp builds a bridge between MakerDAO and Compound, allowing users to cross the bridge with a single transaction. By enabling easy and automated migration from protocol to protocol, InstaDapp will help add liquidity to Ethereum where it is needed or deserved.

Settle Finance offers a similar service: a decentralized exchange interface that aggregates market data and offers the best rates across all exchanges. By creating a liquidity service with a good user interface, Settle can acquire users and reduce the friction of their financial interaction with Ethereum, and Settle can optimize the general liquidity and efficiency of the Ethereum ecosystem.

RealT is a tokenized real estate platform. Investors buy shares in real estate and receive daily rent payments. RealT increases the number of daily Dai buys and sells as it aggregates users into its service and moves Dai throughout the Ethereum ecosystem. As more and more users come to RealT, and more and more properties are sold, more rental income is exchanged for Dai, and then sent to RealToken holders, increasing the liquidity of the application layer. (I work for RealT! Check it out!)

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3. These indicators will illustrate crowd psychology more clearly than ever before.