Crypto Trading Advanced Topics 3 — Questions and Answers
Question 1: In an automated market maker (AMM), what determines the price of a token in a constant-product pool?
- The ratio of the two reserves (x*y=k) (Correct answer)
- A centralized order book
- The exchange CEO
- Random number generation
Correct answer: The ratio of the two reserves (x*y=k)
Constant-product AMMs price assets based on the changing ratio of reserves under the x*y=k formula.
Question 2: What is 'impermanent loss' for a liquidity provider?
- Value lost versus simply holding when pool prices diverge (Correct answer)
- A permanent hack of funds
- A trading fee rebate
- Gas spent on transactions
Correct answer: Value lost versus simply holding when pool prices diverge
Impermanent loss is the underperformance of providing liquidity compared to just holding the tokens when their relative price changes.
Question 3: What is a 'sandwich attack' in DeFi trading?
- A bot front-runs and back-runs a victim's swap to profit (Correct answer)
- Stacking three exchanges
- A multi-sig wallet setup
- A type of cold storage
Correct answer: A bot front-runs and back-runs a victim's swap to profit
In a sandwich attack a bot places orders before and after a target trade to exploit the price impact.
Question 4: Setting a high slippage tolerance on a DEX swap exposes a trader primarily to:
- MEV/sandwich attacks executing at a worse price (Correct answer)
- Lower gas fees
- Guaranteed best price
- Account suspension
Correct answer: MEV/sandwich attacks executing at a worse price
High slippage tolerance lets the trade fill at a much worse price, which bots exploit via MEV.
Question 5: What does 'TVL' (Total Value Locked) measure in a DeFi protocol?
- Total assets deposited in the protocol's contracts (Correct answer)
- Twitter follower count
- Token vesting length
- Validator latency
Correct answer: Total assets deposited in the protocol's contracts
TVL is the aggregate value of crypto assets staked or deposited within a protocol.
Question 6: A flash loan allows a trader to borrow funds with what key condition?
- It must be borrowed and repaid within a single transaction (Correct answer)
- It requires 150% collateral
- It takes 30 days to settle
- It needs a credit score
Correct answer: It must be borrowed and repaid within a single transaction
Flash loans are uncollateralized but must be repaid in the same atomic transaction or the whole thing reverts.
Question 7: What is the main risk of providing liquidity to a newly launched token pool?
- Rug pull where developers drain liquidity (Correct answer)
- Excessive trading fees earned
- Guaranteed price appreciation
- Automatic insurance coverage
Correct answer: Rug pull where developers drain liquidity
New pools carry rug-pull risk, where creators remove liquidity and leave LPs with worthless tokens.
Crypto Trading Advanced Topics 3
In an automated market maker (AMM), what determines the price of a token in a constant-product pool?