Crypto Trading Crypto Trading DeFi and Exchanges

Question 1

What is a decentralized exchange (DEX)?

Accepted Answer

A peer-to-peer trading platform that operates via smart contracts without a central intermediary

Answer

A DEX uses smart contracts to facilitate peer-to-peer trades directly from users' wallets, eliminating the need for a centralized custodian.

Question 2

What is an Automated Market Maker (AMM) in DeFi?

Accepted Answer

A smart contract-based liquidity protocol that uses mathematical formulas to price assets instead of an order book

Answer

AMMs like Uniswap use constant-product formulas (x×y=k) to determine prices based on the ratio of tokens in a liquidity pool rather than using a traditional order book.

Question 3

What is 'impermanent loss' in DeFi liquidity provision?

Accepted Answer

A temporary reduction in value that liquidity providers experience compared to simply holding assets when prices diverge

Answer

Impermanent loss occurs when the price ratio of pooled assets changes after deposit, making the dollar value of the LP's share less than if they had just held the tokens.

Question 4

What is the primary function of a liquidity pool in DeFi?

Accepted Answer

To provide the reserves of tokens needed for a DEX to execute trades without a counterparty

Answer

Liquidity pools hold token reserves supplied by LPs, enabling the AMM to fill trades instantly without needing a matching buyer or seller.

Question 5

What is a 'gas fee' in the context of Ethereum-based crypto trading?

Accepted Answer

The transaction fee paid to Ethereum validators for processing and including a transaction on the blockchain

Answer

Gas fees compensate Ethereum validators (formerly miners) for the computational resources required to execute transactions and smart contract operations.

Crypto Trading Practice Test

Crypto Trading Practice Test

Crypto Trading Crypto Trading DeFi and Exchanges