DeFi Protocols and Their Financial Functions BDC Practice Questions (Page 10)

Questions 46–50

1. 46foundation · easy

   What is impermanent loss in the context of AMM liquidity provision?

   • AThe temporary loss in value of deposited assets compared to holding them outside the pool, which can become permanent if the price divergence is not reversed.
   • BThe fees paid to the protocol for using the AMM.
   • CThe loss of governance rights when providing liquidity.
   • DThe loss of funds due to a smart contract hack.
   Reveal Solution Discussion Select an answer first
2. 47foundation · easy

   How does an algorithmic stablecoin attempt to maintain its peg?

   • ABy pegging to a basket of commodities.
   • BBy using smart contracts to automatically adjust the supply of the stablecoin based on market demand.
   • CBy holding a reserve of fiat currency in a bank account.
   • DBy requiring users to lock up other cryptocurrencies as collateral.
   Reveal Solution Discussion Select an answer first
4. 48expert · hard

   A stablecoin protocol is considering switching from a fully collateralized model to a partially collateralized algorithmic model to improve capital efficiency. The team is concerned about maintaining the peg during a market downturn. Which design feature would best mitigate the risk of a death spiral while still improving capital efficiency?

   • AUse a fully algorithmic model with no collateral, relying on arbitrage to maintain the peg.
   • BSet a fixed collateral ratio of 50% and never change it, regardless of market conditions.
   • CRely on a large reserve of the protocol's governance token to back the stablecoin.
   • DMaintain a dynamic collateral ratio that increases when the stablecoin trades below peg, using the collateral to buy back the stablecoin.
   Reveal Solution Discussion Select an answer first
5. 49application · medium

   A yield farmer wants to maximize returns by depositing DAI into a lending protocol, borrowing USDC against it, and then depositing the USDC into a liquidity pool on a DEX to earn trading fees and liquidity mining rewards. Which risk should the farmer evaluate most carefully before executing this multi-step strategy?

   • AThe risk that the lending protocol's interest rate model changes and reduces the yield on the DAI deposit.
   • BThe risk of liquidation if the borrowed USDC position becomes undercollateralized due to DAI price fluctuations.
   • CThe risk of impermanent loss in the DEX liquidity pool if the relative price of the pooled assets changes.
   • DThe risk that the DEX's governance token price drops, reducing the value of liquidity mining rewards.
   Reveal Solution Discussion Select an answer first
6. 50expert · hard

   A lending protocol uses a decentralized oracle network that aggregates prices from multiple sources. However, the protocol is still exploited because the oracle returns a price that is manipulated on several sources simultaneously. What is the most effective additional mitigation?

   • AUse a TWAP oracle that averages prices over a longer period
   • BUse a single trusted centralized oracle
   • CAdd a circuit breaker that pauses the protocol when the oracle price deviates from a reference
   • DIncrease the number of sources in the oracle network
   Reveal Solution Discussion Select an answer first