Crypto Trading Advanced Topics 3

Question 1

In an automated market maker (AMM), what determines the price of a token in a constant-product pool?

Accepted Answer

The ratio of the two reserves (x*y=k)

Answer

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?

Accepted Answer

Value lost versus simply holding when pool prices diverge

Answer

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?

Accepted Answer

A bot front-runs and back-runs a victim's swap to profit

Answer

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:

Accepted Answer

MEV/sandwich attacks executing at a worse price

Answer

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?

Accepted Answer

Total assets deposited in the protocol's contracts

Answer

TVL is the aggregate value of crypto assets staked or deposited within a protocol.

Crypto Trading Practice Test