C4 DeFi & Smart Contracts Flashcards

What is decentralized finance (DeFi)?

Answer: A financial ecosystem built on public blockchains that provides financial services without centralized intermediaries

DeFi refers to open, permissionless financial protocols built on smart contract platforms (primarily Ethereum) that replicate and extend traditional financial services without banks or brokers.

What is a smart contract?

Answer: Self-executing code deployed on a blockchain that automatically enforces predefined rules when conditions are met

A smart contract is immutable, self-executing code on a blockchain that automatically enforces terms without the need for intermediaries.

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

Answer: A smart contract protocol that uses liquidity pools and a pricing formula to enable permissionless token swaps

AMMs like Uniswap use liquidity pools and formulas (e.g., x*y=k) to price and execute token swaps without an order book or central counterparty.

What is a liquidity pool in a DeFi protocol?

Answer: A smart contract holding reserves of two or more tokens contributed by liquidity providers to facilitate trading

A liquidity pool is a smart contract that holds token reserves deposited by liquidity providers, enabling decentralized trading and earning fees for providers.

What is impermanent loss in the context of providing liquidity to an AMM?

Answer: The temporary reduction in value a liquidity provider experiences compared to simply holding tokens, caused by price divergence between pooled assets

Impermanent loss occurs when the price ratio of pooled assets changes from deposit time, leaving the LP with less dollar value than if they had just held the tokens.

What is a governance token in a DeFi protocol?

Answer: A token that grants holders voting rights over protocol parameters, upgrades, and treasury decisions

Governance tokens (e.g., UNI, COMP) allow holders to propose and vote on changes to the protocol's rules, fee structures, and smart contract upgrades.