Tokenization & Digital Assets Flashcards

What is token vesting in blockchain projects and why is it commonly used?

Answer: A process where tokens are locked for a defined period before recipients can access them, aligning long-term incentives

Token vesting locks allocated tokens for a defined schedule, preventing immediate selling by founders and team members, thus aligning their incentives with the project's long-term success.

What is the key difference between on-chain and off-chain asset representation in tokenization?

Answer: On-chain representation stores asset data directly in the blockchain, while off-chain data is stored externally and referenced by the token

On-chain representation embeds asset data directly in smart contracts on the blockchain, while off-chain storage keeps data externally (e.g., IPFS or traditional databases) with only a reference hash stored on-chain.

What is a liquidity pool in decentralized finance (DeFi) and how does it relate to token trading?

Answer: A smart contract holding token reserves that enables automated market making without a traditional order book

A liquidity pool is a smart contract containing reserves of two or more tokens that enables decentralized trading through automated market maker (AMM) algorithms, eliminating the need for a traditional buyer-seller order book.

In a token sale, what is the primary purpose of a whitelist?

Answer: To pre-approve participants who have completed KYC/AML verification before the sale

A whitelist pre-approves investor addresses after completing KYC/AML verification, ensuring the token sale complies with regulations and restricts participation to vetted individuals.

What does 'tokenomics' encompass in the context of a blockchain project?

Answer: The economic model governing token supply, distribution, incentives, and utility

Tokenomics (token economics) encompasses the entire economic model of a token, including total supply, distribution schedules, inflation/deflation mechanisms, utility, and incentive structures that drive ecosystem behavior.

What is a wrapped token and what problem does it solve in blockchain ecosystems?

Answer: A representation of a native asset from one blockchain that can be used on a different blockchain

A wrapped token (e.g., WBTC) is a tokenized version of a cryptocurrency from one blockchain that can operate on another blockchain, solving interoperability barriers between otherwise incompatible networks.

What is the primary risk associated with algorithmic stablecoins compared to collateral-backed stablecoins?

Answer: They depend on market incentives and algorithms to maintain their peg, which can fail catastrophically during market stress

Algorithmic stablecoins maintain their peg through code-driven supply adjustments and market incentives rather than hard collateral, making them vulnerable to death spirals when market confidence collapses, as demonstrated by the Terra/LUNA collapse in 2022.