CCE DeFi and Decentralized Applications 2 — Questions and Answers
Question 1: What is a flash loan in DeFi?
- A long-term collateralized loan on a lending protocol
- An uncollateralized loan that must be borrowed and repaid within a single blockchain transaction (Correct answer)
- A loan issued by a centralized exchange to margin traders
- A microloan for small crypto purchases
Correct answer: An uncollateralized loan that must be borrowed and repaid within a single blockchain transaction
Flash loans are unique to DeFi — they allow borrowing any amount without collateral as long as the loan is returned within the same transaction block.
Question 2: What is the role of a governance token in a DeFi protocol?
- To pay transaction gas fees on the network
- To give holders voting rights over protocol parameter changes and upgrades (Correct answer)
- To represent staked collateral in a lending protocol
- To serve as the base trading pair for all assets on a DEX
Correct answer: To give holders voting rights over protocol parameter changes and upgrades
Governance tokens grant holders the ability to propose and vote on changes to protocol rules, fee structures, and treasury allocations.
Question 3: What distinguishes a DEX (Decentralized Exchange) from a CEX (Centralized Exchange)?
- DEXs support more trading pairs than CEXs
- DEXs allow peer-to-peer trading via smart contracts without custody of user funds (Correct answer)
- DEXs require KYC verification while CEXs do not
- DEXs settle trades off-chain for lower fees
Correct answer: DEXs allow peer-to-peer trading via smart contracts without custody of user funds
DEXs execute trades directly on-chain through smart contracts, meaning the exchange never holds user funds, eliminating counterparty custodial risk.
Question 4: In the context of DeFi lending (e.g., Aave, Compound), what is the collateralization ratio?
- The percentage of interest earned on deposited assets
- The ratio of collateral value to the borrowed amount, used to ensure loan solvency (Correct answer)
- The fraction of transaction fees allocated to liquidity providers
- The proportion of governance tokens required to submit a protocol proposal
Correct answer: The ratio of collateral value to the borrowed amount, used to ensure loan solvency
Collateralization ratio ensures that loans are over-collateralized so lenders are protected even if the borrower's collateral value declines.
Question 5: What is a liquidity pool in a DeFi protocol?
- A pool of validators that confirm DeFi transactions
- A smart contract holding reserves of two or more tokens used to facilitate trading (Correct answer)
- A fund managed by DeFi developers to cover protocol exploits
- A staking mechanism that locks tokens for network security
Correct answer: A smart contract holding reserves of two or more tokens used to facilitate trading
Liquidity pools are smart contracts funded by liquidity providers that hold token pairs, enabling decentralized trading without a traditional order book.
Question 6: What does 'composability' mean in the DeFi ecosystem?
- The ability to write smart contracts in multiple programming languages
- The capacity for DeFi protocols to interoperate and build on each other like financial Legos (Correct answer)
- The process of composing a new token from multiple existing assets
- The method by which validators compose new blocks in DeFi chains
Correct answer: The capacity for DeFi protocols to interoperate and build on each other like financial Legos
Composability allows DeFi protocols to integrate and stack with each other, enabling complex financial strategies by combining lending, trading, and yield protocols.
CCE DeFi and Decentralized Applications 2
What is a flash loan in DeFi?