DeFi Protocols and Their Financial Functions BDC Practice Questions (Page 3)

Questions 11–15

1. 11expert · hard

   An algorithmic stablecoin uses a seigniorage model where the supply expands and contracts to maintain a $1 peg. During a market downturn, the price falls to $0.80. The protocol's response is to burn stablecoins and issue debt tokens to reduce supply. What is the primary risk of this mechanism?

   • AThe debt tokens may not be attractive enough to incentivize burning, so the supply reduction is insufficient
   • BThe oracle will fail to provide an accurate price
   • CThe protocol will run out of collateral to back the stablecoin
   • DThe protocol will be vulnerable to a flash loan attack
   Reveal Solution Discussion Select an answer first
2. 12foundation · easy

   In a DeFi lending protocol, what is the primary purpose of requiring borrowers to provide collateral?

   • ATo secure the loan and protect lenders from default risk.
   • BTo enable the borrower to vote on protocol governance.
   • CTo ensure the borrower has a minimum credit score.
   • DTo increase the interest rate for the borrower.
   Reveal Solution Discussion Select an answer first
4. 13application · medium

   A decentralized insurance protocol uses a mutual model where users pay premiums into a pool and claims are paid out. The protocol wants to offer coverage for smart contract hacks. What is a key challenge in pricing this coverage?

   • AThe protocol cannot attract enough users to pool risk
   • BThe protocol cannot hold funds to pay claims
   • CThe probability of a hack is difficult to estimate due to the evolving nature of smart contract vulnerabilities
   • DThe protocol cannot verify if a hack occurred
   Reveal Solution Discussion Select an answer first
5. 14expert · hard

   A proof-of-stake network is considering introducing liquid staking to improve capital efficiency. The network's security model assumes that a certain percentage of tokens are staked. The team is concerned that liquid staking could reduce the effective security if too many tokens are delegated to a small number of validators. Which measure would best mitigate this risk?

   • AIncrease the staking reward rate to attract more total stake.
   • BEncourage users to delegate to the largest validators to maximize rewards.
   • CImplement a validator selection algorithm that limits the amount of stake any single validator can control.
   • DDisable liquid staking entirely to maintain the original security model.
   Reveal Solution Discussion Select an answer first
6. 15foundation · easy

   What is the primary incentive for users to participate in yield farming?

   • ATo gain voting rights in the protocol's governance.
   • BTo reduce the risk of impermanent loss.
   • CTo support the protocol's development team.
   • DTo earn additional tokens or rewards by providing liquidity or staking assets.
   Reveal Solution Discussion Select an answer first