That is a cute cake....I know a lot of people are using modeling chocolate as a cake decorating medium. You can even mix it with gum paste to give it more rigidity. My guess is modeling chocolate or gumpaste.
That's very cute. I think I would use gumpaste and frill the edges. You'll have to make it in advance and let it dry. And then put it on the top and bottom and do the rest of the decorating. But I love the idea!
I agree with cylstrial. Roll out 2 rounds with gumpaste/fondate mix and use a ball tool to frill the edges. Let them dry. Then sit the iced cake on one round and top it with the other one. Make several in case of breakage!