CCE DeFi and Decentralized Applications 5 — Questions and Answers
Question 1: What is the primary purpose of a 'veToken' model (e.g., veCRV in Curve Finance)?
- To enable cross-chain swaps without bridges
- To lock governance tokens and grant boosted rewards and voting power proportional to lock duration (Correct answer)
- To represent wrapped staked ETH on the beacon chain
- To mint synthetic assets backed by on-chain collateral
Correct answer: To lock governance tokens and grant boosted rewards and voting power proportional to lock duration
The vote-escrow model locks tokens for a chosen duration; longer locks yield more veTokens, granting greater governance influence and liquidity mining boosts.
Question 2: In a cross-chain bridge, what is a 'canonical' bridge versus a 'third-party' bridge?
- Canonical bridges are built by independent teams; third-party bridges are protocol-native
- Canonical bridges are officially deployed by the Layer 2 or chain team; third-party bridges are built by external developers (Correct answer)
- Canonical bridges use centralized custodians; third-party bridges are fully trustless
- Canonical bridges only support ETH; third-party bridges support any ERC-20
Correct answer: Canonical bridges are officially deployed by the Layer 2 or chain team; third-party bridges are built by external developers
Canonical bridges are the official bridges operated by the Layer 2 protocol team and are generally considered more secure, while third-party bridges offer faster withdrawals with different trust assumptions.
Question 3: What does 'Total Value Locked' (TVL) measure in DeFi?
- The market capitalization of a protocol's native governance token
- The cumulative dollar value of assets deposited across a protocol's smart contracts (Correct answer)
- The number of unique wallet addresses interacting with a protocol
- The annualized trading volume on a decentralized exchange
Correct answer: The cumulative dollar value of assets deposited across a protocol's smart contracts
TVL represents the aggregate value of crypto assets currently deposited and actively used within a DeFi protocol's smart contracts.
Question 4: Which vulnerability allowed the DAO hack in 2016 to drain approximately 3.6 million ETH?
- Integer overflow in the token transfer function
- Reentrancy attack exploiting recursive external calls before state updates (Correct answer)
- Front-running of the withdrawal transaction in the mempool
- A governance vote that bypassed the time-lock mechanism
Correct answer: Reentrancy attack exploiting recursive external calls before state updates
The attacker exploited a reentrancy vulnerability where the DAO's withdraw function sent ETH before updating the internal balance, allowing recursive calls to drain funds.
Question 5: What is 'yield farming' in DeFi?
- Mining new tokens through proof-of-work consensus on a DeFi-specific chain
- Actively moving assets across protocols to maximize returns from liquidity incentives and fees (Correct answer)
- Staking a single asset in a savings account at a fixed APY
- Generating synthetic yield by shorting volatile assets
Correct answer: Actively moving assets across protocols to maximize returns from liquidity incentives and fees
Yield farming involves strategically allocating assets across multiple DeFi protocols to maximize returns from a combination of trading fees, interest, and token incentives.
Question 6: In Uniswap v3, how do 'concentrated liquidity' positions differ from Uniswap v2?
- v3 uses an order book while v2 uses a bonding curve
- v3 allows LPs to allocate liquidity within custom price ranges, improving capital efficiency (Correct answer)
- v3 requires LPs to deposit equal USD values of both tokens
- v3 eliminates impermanent loss by hedging positions automatically
Correct answer: v3 allows LPs to allocate liquidity within custom price ranges, improving capital efficiency
Uniswap v3's concentrated liquidity lets LPs specify a price range, concentrating capital where trading occurs and potentially earning more fees per dollar deposited.
Question 7: What is the Aave protocol's 'health factor' used for?
- Rating the security audit score of deployed smart contracts
- Determining whether a borrower's collateral is sufficient to cover their debt and trigger liquidation if it falls below 1 (Correct answer)
- Measuring the annualized return of a lending position
- Calculating the fee tier applied to flash loan transactions
Correct answer: Determining whether a borrower's collateral is sufficient to cover their debt and trigger liquidation if it falls below 1
The health factor is a numeric representation of collateral safety; a value below 1.0 means the position is undercollateralized and eligible for liquidation.
CCE DeFi and Decentralized Applications 5
What is the primary purpose of a 'veToken' model (e.g., veCRV in Curve Finance)?