CBE Tokenomics and Digital Assets 2 — Questions and Answers
Question 1: What distinguishes a security token from a utility token under US securities regulations?
- Security tokens are always built on Ethereum while utility tokens are not
- Security tokens represent an investment with an expectation of profit derived from others' efforts, making them subject to SEC regulations (Correct answer)
- Utility tokens must be registered with the SEC while security tokens do not
- Security tokens can only be used for peer-to-peer transactions between accredited investors
Correct answer: Security tokens represent an investment with an expectation of profit derived from others' efforts, making them subject to SEC regulations
Security tokens pass the Howey Test by representing an investment of money in a common enterprise with an expectation of profits from others' efforts, triggering full SEC regulatory oversight.
Question 2: What is an Initial Coin Offering (ICO)?
- A government-issued digital currency launch process
- A fundraising mechanism where blockchain projects sell newly created tokens to early investors (Correct answer)
- The first transaction recorded on a newly launched blockchain
- A competitive process for miners to earn the first block reward
Correct answer: A fundraising mechanism where blockchain projects sell newly created tokens to early investors
An ICO is a fundraising mechanism where blockchain projects sell newly created tokens to early investors in exchange for established cryptocurrencies or fiat, analogous to an IPO in traditional finance.
Question 3: What characteristic makes algorithmic stablecoins different from collateral-backed stablecoins?
- Algorithmic stablecoins are always pegged to gold rather than fiat currency
- Algorithmic stablecoins use smart contract supply-adjustment mechanisms to maintain their peg without holding equivalent reserves (Correct answer)
- Algorithmic stablecoins are issued and controlled by central banks
- Algorithmic stablecoins cannot interact with DeFi lending protocols
Correct answer: Algorithmic stablecoins use smart contract supply-adjustment mechanisms to maintain their peg without holding equivalent reserves
Algorithmic stablecoins maintain their price peg through automated supply expansion and contraction via smart contracts rather than holding equivalent collateral in reserve.
Question 4: In DeFi, what does 'Total Value Locked' (TVL) measure?
- The total number of unique transactions processed by a protocol per day
- The aggregate dollar value of all crypto assets deposited in a DeFi protocol's smart contracts (Correct answer)
- The maximum token supply that the protocol can ever mint
- The cumulative trading volume executed on a decentralized exchange
Correct answer: The aggregate dollar value of all crypto assets deposited in a DeFi protocol's smart contracts
TVL measures the aggregate dollar value of all cryptocurrency assets deposited and locked in a DeFi protocol's smart contracts, serving as a primary indicator of protocol adoption and trust.
Question 5: What is yield farming in decentralized finance?
- The process of mining new tokens through proof-of-work computational effort
- Generating returns by strategically providing liquidity or staking assets across multiple DeFi protocols (Correct answer)
- Creating NFTs to represent agricultural land and commodity ownership
- A method for validators to earn block rewards in proof-of-stake networks
Correct answer: Generating returns by strategically providing liquidity or staking assets across multiple DeFi protocols
Yield farming involves strategically deploying crypto assets across DeFi protocols—liquidity pools, lending markets, and staking contracts—to earn compounded returns through fees, interest, and token incentives.
Question 6: What does 'circulating supply' refer to when analyzing a cryptocurrency's tokenomics?
- The total number of tokens that will ever be created per the protocol's hard cap
- The number of tokens currently in the market and available for public trading (Correct answer)
- The quantity of tokens held exclusively by the founding team and early investors
- The tokens permanently locked in governance and treasury contracts
Correct answer: The number of tokens currently in the market and available for public trading
Circulating supply refers to the number of tokens that are publicly available and tradeable in the market, excluding locked, reserved, burned, or otherwise inaccessible tokens.
Question 7: What is a token airdrop in blockchain projects?
- A mechanism for permanently burning excess token supply to reduce inflation
- The free distribution of tokens to existing holders or target users as a promotional or reward strategy (Correct answer)
- The bridge process for transferring tokens from one blockchain to another
- An emergency smart contract function to freeze all token transfers during a security incident
Correct answer: The free distribution of tokens to existing holders or target users as a promotional or reward strategy
A token airdrop is the free distribution of tokens to wallet addresses, used to reward existing community members, incentivize new users, or bootstrap adoption of a newly launched protocol.
CBE Tokenomics and Digital Assets 2
What distinguishes a security token from a utility token under US securities regulations?