C4 C4 DeFi & Smart Contracts

Question 1

What is decentralized finance (DeFi)?

Accepted Answer

A financial ecosystem built on public blockchains that provides financial services without centralized intermediaries

Answer

DeFi refers to open, permissionless financial protocols built on smart contract platforms (primarily Ethereum) that replicate and extend traditional financial services without banks or brokers.

Question 2

What is a smart contract?

Accepted Answer

Self-executing code deployed on a blockchain that automatically enforces predefined rules when conditions are met

Answer

A smart contract is immutable, self-executing code on a blockchain that automatically enforces terms without the need for intermediaries.

Question 3

What is an Automated Market Maker (AMM) in DeFi?

Accepted Answer

A smart contract protocol that uses liquidity pools and a pricing formula to enable permissionless token swaps

Answer

AMMs like Uniswap use liquidity pools and formulas (e.g., x*y=k) to price and execute token swaps without an order book or central counterparty.

Question 4

What is a liquidity pool in a DeFi protocol?

Accepted Answer

A smart contract holding reserves of two or more tokens contributed by liquidity providers to facilitate trading

Answer

A liquidity pool is a smart contract that holds token reserves deposited by liquidity providers, enabling decentralized trading and earning fees for providers.

Question 5

What is impermanent loss in the context of providing liquidity to an AMM?

Accepted Answer

The temporary reduction in value a liquidity provider experiences compared to simply holding tokens, caused by price divergence between pooled assets

Answer

Impermanent loss occurs when the price ratio of pooled assets changes from deposit time, leaving the LP with less dollar value than if they had just held the tokens.

(C4) CryptoCurrency Certification Consortium Practice Test

(C4) CryptoCurrency Certification Consortium Practice Test

C4 C4 DeFi & Smart Contracts