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Lesson # 2
Understanding & Providing Liquidity on DEXs
Blockchain Basics
1. What is the primary function of an Automated Market Maker (AMM) in DeFi?
A. To act as a centralized exchange for token sales
B. To allow users to trade tokens using order books
C. To enable token swaps through liquidity pools without intermediaries
D. To set fixed prices for all tokens
2. What is a key risk that liquidity providers (LPs) face when token prices diverge in an AMM pool?
A. Gas fee reduction
B. Smart contract freezing
C. Impermanent loss
D. Liquidity mining
3. Which type of AMM design is typically optimized for trading assets that should remain close in value (e.g., stablecoins)?
A. Constant product AMMs
B. Weighted portfolio AMMs
C. Stable swap AMMs
D. Order book DEXs
4. What does it mean when a liquidity pool uses customizable token weights instead of a 50/50 ratio?
A. The AMM does not allow withdrawals
B. The pool allows varied asset proportions, acting like a self-balancing portfolio
C. The pool is limited to stablecoins only
D. It prevents token swaps in volatile markets
5. How can liquidity providers track their impermanent loss and compare it to simply holding the tokens?
A. By watching DEX token prices only
B. By using analytics dashboards that calculate IL and fee earnings
C. By checking gas fees regularly
D. By switching AMMs weekly