CCE DeFi and Decentralized Applications 1 — Questions and Answers
Question 1: What is the primary function of a smart contract in a DeFi protocol?
- To automatically execute agreement terms when predefined conditions are met (Correct answer)
- To store private keys for wallet holders
- To validate blockchain node identities
- To generate new cryptocurrency tokens
Correct answer: To automatically execute agreement terms when predefined conditions are met
Smart contracts self-execute coded logic on the blockchain when specified conditions are fulfilled, removing the need for intermediaries in DeFi.
Question 2: In DeFi, what does TVL (Total Value Locked) measure?
- The number of users on a protocol
- The total USD value of assets deposited in a DeFi protocol (Correct answer)
- The transaction fees collected by a protocol
- The circulating supply of a governance token
Correct answer: The total USD value of assets deposited in a DeFi protocol
TVL is a key DeFi metric representing the aggregate value of crypto assets currently deposited and staked in a protocol's smart contracts.
Question 3: Which mechanism allows users to earn rewards by providing liquidity to a DEX?
- Proof of Work mining
- Liquidity mining / yield farming (Correct answer)
- Atomic swaps
- Hard forking
Correct answer: Liquidity mining / yield farming
Liquidity mining (yield farming) rewards users who deposit token pairs into a DEX liquidity pool with trading fees and often additional governance tokens.
Question 4: What is an Automated Market Maker (AMM)?
- A centralized exchange algorithm that matches buy and sell orders
- A decentralized protocol that uses mathematical formulas to price assets in liquidity pools (Correct answer)
- A bot that automatically purchases cryptocurrencies at market price
- A consensus mechanism for validating DeFi transactions
Correct answer: A decentralized protocol that uses mathematical formulas to price assets in liquidity pools
AMMs replace traditional order books with algorithmic pricing models (e.g., x*y=k) that determine asset prices based on the ratio of tokens in a liquidity pool.
Question 5: What is impermanent loss in DeFi liquidity provision?
- A permanent loss of funds due to a smart contract hack
- The temporary reduction in value a liquidity provider experiences compared to simply holding the tokens (Correct answer)
- Gas fees consumed by failed DeFi transactions
- The loss caused by slippage on large trades
Correct answer: The temporary reduction in value a liquidity provider experiences compared to simply holding the tokens
Impermanent loss occurs when the price ratio of deposited tokens changes after deposit, making the LP's position worth less than if they had just held the tokens.
Question 6: Which token standard is most commonly used for fungible tokens on the Ethereum blockchain?
- ERC-721
- ERC-1155
- ERC-20 (Correct answer)
- BEP-2
Correct answer: ERC-20
ERC-20 is the Ethereum standard defining a common interface for fungible tokens, enabling seamless interoperability across wallets and DeFi protocols.
CCE DeFi and Decentralized Applications 1
What is the primary function of a smart contract in a DeFi protocol?