DeFi and Decentralized Applications Flashcards

What is a rug pull in the DeFi context?

Answer: A scam where developers abandon a project and drain liquidity pool funds after attracting investors

A rug pull occurs when malicious project creators withdraw all liquidity or funds from a DeFi protocol, leaving investors with worthless tokens.

Which Ethereum upgrade transitioned the network from Proof of Work to Proof of Stake?

Answer: The Merge (Paris upgrade)

The Merge, executed in September 2022, replaced Ethereum's energy-intensive PoW consensus with PoS, reducing energy consumption by ~99.95%.

What is the purpose of an oracle in a DeFi smart contract?

Answer: To provide real-world off-chain data (e.g., asset prices) to on-chain smart contracts

Oracles (e.g., Chainlink) bridge the gap between blockchains and the external world by feeding verified off-chain data into smart contracts.

What is yield farming in DeFi?

Answer: The strategy of moving crypto assets across protocols to maximize returns from interest and rewards

Yield farming involves strategically deploying capital across multiple DeFi protocols to optimize returns from liquidity rewards, interest, and governance token incentives.

What is a wrapped token (e.g., WBTC)?

Answer: An ERC-20 token pegged 1:1 to another asset, allowing it to be used on a different blockchain or protocol

Wrapped tokens represent a native asset (like BTC) on another blockchain (like Ethereum) as a compatible token standard, enabling cross-chain DeFi participation.

In DeFi, what is slippage?

Answer: The difference between the expected trade price and the actual executed price due to market movement or low liquidity

Slippage occurs when a large trade moves the pool price, causing the executed price to differ from the quoted price, and is higher in low-liquidity pools.