The stack and the incentives

The four layers DeFi runs on — and the question of who actually pays for any one of them to keep running.

This lesson has had no expert review. It was written for this platform and against the evidence it cites; nobody has gone through it independently.

Learning objectives

You can place an application in the four layers and say what it relies on.
You can tell whether a return comes from usage or from a distribution.
You can apply the question “who actually decides here” to each layer.

Check your prior knowledge

Answer these for yourself before reading on. Wherever you hesitate is where this lesson pays off.

Who receives money when you send a transaction?
What does an application you use for free live on?
What happens to an application when the layer beneath it fails?

Core concept

Fact

Four layers that rely on one another

At the bottom sits settlement: the chain itself, producing ordering and finality. Above it the assets: tokens, stablecoins, interest-bearing deposit receipts. Above those the protocols: trading venues, lending markets, derivatives. At the top the access layer: front ends, aggregators, portfolio views. Every layer presupposes the one below — and none can substitute for what the one below fails to deliver.

Interpretation

The top layer is the most replaceable

A front end can be switched off without the position beneath it disappearing — the contract still holds it. Conversely the best front end is worth nothing if the contract beneath it is halted. For assessment this means: the question “how good is the application” is almost always the least important of the four layers.

Fact

Two ways of paying users

A protocol can pay users out of what it takes in — fees other users pay. Or it can pay them in its own tokens, newly issued for the purpose. The first is a business: it works as long as there is usage. The second is a distribution: it works as long as somebody wants to hold the issued tokens, and it ends when the issuance ends.

Risk

Governance is the question of who changes the incentives

Whoever decides on the distribution decides on the larger part of many returns. That decision rarely rests with users and often with a group that shares in the distribution itself. This is not automatically a failing — but it is a constellation of interests that belongs in the assessment, and before the return is turned into an expectation.

Definitions

Settlement layer in the glossary: The chain on which ordering and finality of transactions arise.
Access layer: Front ends and aggregators through which users reach protocols — technically replaceable.
Incentive distribution in the glossary: Payment to users out of newly issued own tokens rather than out of revenue.

Model

Settlement — who can halt processing?
Assets — who holds the backing, and is there a redemption claim?
Protocols — who may change parameters and code?
Access — and only here: how easy is it to use?

The four layers, one question each — Three questions about decision-making power, one about usability. The ratio is not accidental.

Worked example

One position, four dependencies

Access: an aggregator's front end
Protocol: lending market
Asset: a stablecoin from one issuer
Settlement: a layer 2 with its own operator

If access fails the position remains and is reachable another way. If the protocol fails it is affected. If the stablecoin loses its backing it is affected. If the settlement layer halts, everything above it is affected.

Three of the four layers can hit the position; the top one is the only one with an easy substitute.

Reading: The order of examination follows directly: bottom-up, not from the front end. Starting with usability examines the one replaceable layer first.

Retrieval

It is lost.It continues to exist in the contract and is reachable through another access path.It is unwound automatically.

On usage of the protocol.On a decision to keep issuing — and on somebody wanting to hold the tokens.On the amount of capital deposited.

Exercise on real data

Read the guiding questions and determine which of them distinguish “return from usage” from “return from distribution”.

Dimension 2: business model →

Application

Place a position you know in the four layers and note one dependency for each.

Related case studies

Institutional reading

Bank: At which layer does your risk register currently record this position?
Asset management: How much of the quoted return comes from usage and how much from distribution?

Metrics in this lesson

Key takeaways

Four layers: settlement, assets, protocols, access — examined from the bottom.
The access layer is replaceable; the three below are not.
A return from usage and a return from distribution end for different reasons.