Quiz: DeFi Lending - Digital Finance

Question 1

Priya deposits 10 ETH at $3,000 each into Aave and borrows $20,000 USDC. What is her collateral ratio?

(A) 120%
(B) 200%
(C) 133%
(D) 150%

Answer: (D) Collateral Ratio = Collateral Value / Borrowed Amount = $30,000 / $20,000 = 150%. This means Priya has posted 1.5x the value she borrowed.

Question 2

Why does DeFi lending require overcollateralisation (posting more collateral than the loan amount)?

(A) Because DeFi protocols charge higher interest than banks
(B) Because regulators mandate collateral ratios above 100%
(C) Because blockchain transactions are slow and need extra time to process
(D) Because there is no credit check

Answer: (D) The smart contract does not care who the borrower is. Overcollateralisation protects the lender even if collateral prices drop, replacing the credit officer's judgment with a mathematical rule.

Question 3

In the lecture, typical DeFi collateral ratios range from 120% to 200%. Traditional bank mortgages require roughly 125% (a 20% down payment on a house). What is the key difference?

(A) There is no meaningful difference -- both serve the same purpose at similar levels
(B) Banks are legally required to accept lower ratios; DeFi has no such regulation
(C) DeFi uses volatile crypto as collateral
(D) DeFi ratios are set by government mandate; bank ratios are set by market forces

Answer: (C) Crypto prices can drop 50% in a single day (as on Black Thursday 2020). Banks can repossess a physical house that rarely loses half its value overnight. The collateral's volatility drives the ratio.

Question 4

Maria is a freelance designer from Sao Paulo who has been rejected for bank loans three times because she has no pay stubs. Can DeFi lending solve her problem?

(A) Yes -- DeFi requires no documentation at all
(B) Yes -- DeFi uses her reputation on social media instead of income proof
(C) No -- DeFi is only available in the US and Europe
(D) No -- DeFi requires crypto collateral worth more than the loan

Answer: (D) The lecture identifies Maria's case as DeFi's biggest limitation. DeFi eliminates credit checks but replaces them with overcollateralisation. A borrower must already have crypto assets worth more than the loan, which excludes those who need money most.

Question 5

In Aave's interest rate model, what happens when pool utilisation crosses the 80% "kink point"?

(A) Borrow rates spike sharply to attract new deposits and discourage
(B) The protocol shuts down and stops accepting new borrowers
(C) Interest rates drop to zero to encourage liquidity
(D) The smart contract automatically liquidates the largest positions

Answer: (A) The "kink" acts like a thermostat. Below 80%, rates stay low (2-5%) to encourage borrowing. Above 80%, rates spike sharply to attract new depositors and reduce borrowing, keeping the pool in a healthy range automatically.

Question 6

Who sets interest rates in a DeFi lending protocol like Aave?

(A) No one -- rates emerge automatically from a formula in the smart contract
(B) Borrowers and lenders negotiate rates directly in a peer-to-peer marketplace
(C) The central bank of the country where the protocol is registered
(D) A committee of Aave employees that meets weekly

Answer: (A) No committee sets DeFi rates. They are determined by a mathematical formula written into the smart contract, responding automatically to pool utilisation (the ratio of borrowed to deposited assets).

Question 7

The lecture shows that banks keep a 6.5 percentage point "spread" between what they pay savers (0.5%) and charge borrowers (7%). DeFi compresses this to roughly 1 percentage point. What explains this compression?

(A) DeFi protocols operate at a loss and subsidise rates with token incentives
(B) DeFi pools connect savers and borrowers more directly
(C) DeFi interest rates are artificially low because of government regulation
(D) DeFi takes on more risk than banks, which makes rates lower

Answer: (B) A smart contract has no office, no staff, and no paperwork. The lecture shows that only 15% of a bank's interest charges go to profit -- the rest covers physical infrastructure. DeFi eliminates these costs.

Question 8

James saves 20,000 GBP in a high-street bank earning 0.5% interest while inflation runs at 2-3%. In DeFi, stablecoin lending pools offer 2-4% APR. What is the main trade-off James faces by moving to DeFi?

(A) DeFi deposits are insured by government deposit insurance up to $250,000
(B) DeFi yields are always lower than bank rates
(C) DeFi offers higher yields but has no deposit insurance
(D) James cannot access his DeFi deposits for at least one year

Answer: (C) DeFi wins on cost and yield but traditional banking wins on risk through deposit insurance and consumer protection. Stablecoins themselves can depeg under stress: in March 2023, USDC fell to ~$0.87 over 48 hours when $3.3B of Circle's reserves were stuck at the failing Silicon Valley Bank -- a reminder that "stable" is not "risk-free" once you leave the insured banking system. Source: Circle (March 2023)

Question 9

Priya borrowed $20,000 against 10 ETH at $3,000 each. Aave's liquidation threshold for ETH is 82.5%. At what ETH price does Priya's position get liquidated?

(A) $2,000
(B) $3,000
(C) $2,750
(D) $2,424

Answer: (D) Liquidation occurs when ETH price x 10 x 0.825 = $20,000. Solving: ETH price = $20,000 / (10 x 0.825) = $2,424. A 19.2% drop from $3,000 triggers liquidation.

Question 10

What is the "health factor" in a DeFi lending protocol, and what happens when it drops below 1?

(A) It measures network congestion; below 1 means transactions are delayed
(B) It measures the protocol's overall solvency; below 1 means the entire protocol shuts down
(C) It equals / Debt
(D) It is a credit score assigned to borrowers; below 1 means the borrower is blacklisted

Answer: (C) Health Factor = (Collateral x Liquidation Threshold) / Debt. When it falls below 1, the borrower's position is undercollateralised and anyone can liquidate it. Liquidator bots compete to perform this task and earn a 5% bonus on the seized collateral.

Question 11

On Black Thursday (March 12, 2020), ETH dropped 55% in 24 hours. MakerDAO's auction system cleared $8.3 million in collateral for bids of $0. What caused this outcome?

(A) Regulators froze all DeFi transactions during the crash
(B) A hacker exploited a vulnerability to steal the collateral
(C) Network congestion prevented competing bidders from submitting
(D) MakerDAO's smart contract had a deliberate feature allowing $0 bids

Answer: (C) The crash caused thousands of simultaneous liquidations. Ethereum gas fees spiked 10x, and competing liquidators' transactions failed. A single bidder won $8.3M in ETH for $0. The contract worked exactly as coded -- but no one anticipated that congestion would reduce the auction to one bidder.

Question 12

A liquidator bot repays part of a borrower's debt and receives the borrower's collateral at a 5% discount. Why do DeFi protocols incentivise third-party liquidators rather than performing liquidation themselves?

(A) Because decentralised protocols have no employees to execute liquidations
(B) Because DeFi protocols are legally prohibited from seizing user assets
(C) Because only centralised exchanges have the technology to liquidate positions
(D) Because protocols lack the funds to cover defaulted positions

Answer: (A) DeFi protocols are code with no staff. By offering a 5% bonus on seized collateral, they create an economic incentive for third-party bots to monitor positions 24/7 and liquidate undercollateralised loans instantly, keeping the protocol solvent.

Question 13

A flash loan allows someone to borrow $200 million with zero collateral. How is this possible?

(A) The borrower's identity is verified and they sign a legal agreement
(B) The protocol pools insurance funds to cover defaults
(C) Flash loans are limited to small amounts under $1,000
(D) The loan must be repaid within the same blockchain transaction

Answer: (D) Flash loans exploit the "atomic" nature of blockchain transactions. The borrow, use, and repayment must all occur in one transaction. If the repayment step fails, the blockchain rolls back the entire transaction -- the lender never loses funds.

Question 14

The Euler Finance attack (March 2023) drained $197 million in approximately 30 seconds. The attacker used a flash loan from Aave to borrow $30 million, then exploited a bug in Euler's "donate" function. What role did the flash loan play?

(A) It was irrelevant -- the attack would have worked without it
(B) It gave the attacker capital they never had
(C) It provided the attacker with a permanent source of funding
(D) It masked the attacker's identity from on-chain analysis

Answer: (B) Flash loans are legitimate tools (used for arbitrage and collateral swaps), but they amplify damage by giving attackers access to massive capital at near-zero cost. The Euler attack combined a flash loan (legitimate tool) with a code vulnerability (bug).

Question 15

The lecture states that flash loans "democratise access to large capital" because anyone who can write a smart contract can execute arbitrage. A student argues this is purely positive. Which counter-argument does the lecture present?

(A) Flash loans have also been used to manipulate prices and exploit vulnerable
(B) Arbitrage opportunities no longer exist in DeFi markets
(C) Flash loans are only available to institutional investors with KYC verification
(D) Flash loans always result in losses for the borrower

Answer: (A) The lecture explicitly notes "the dark side": flash loans have been used to manipulate prices and exploit vulnerable protocols. Cumulative DeFi losses from hacks and exploits exceeded $8 billion by early 2026 (Chainalysis 2025 Crypto Crime Report), with flash loans a common enabler in price-manipulation and oracle attacks. Source: Chainalysis (Feb 2026)

Question 16

An oracle is a service that feeds real-world price data to smart contracts. How can an attacker exploit a vulnerable oracle to steal funds from a lending protocol?

(A) By bribing a central bank to change the exchange rate
(B) By temporarily manipulating the price feed
(C) Oracle attacks are theoretically impossible because blockchain data is immutable
(D) By hacking the blockchain consensus mechanism to rewrite price history

Answer: (B) If an oracle reports that ETH is worth $6,000 when it is really $3,000, the protocol thinks the collateral is worth 2x its actual value and approves a larger loan. The attacker pockets the difference. Chainlink's time-weighted average price (TWAP) oracles reduce but do not eliminate this risk.

Question 17

The lecture describes an "inclusion paradox" in DeFi lending. What is it?

(A) DeFi is inclusive in theory but regulators in all countries have banned it
(B) DeFi includes too many users, causing network congestion
(C) DeFi promises permissionless access for anyone
(D) DeFi protocols actively exclude users from developing countries through IP-based restrictions

Answer: (C) Anyone with a crypto wallet can use DeFi 24/7 with no credit check. But overcollateralisation means you must already have crypto assets worth more than your loan. Maria (freelancer needing $5,000) is excluded because she lacks crypto collateral -- the very population DeFi claims to serve.

Question 18

Permissioned "institutional DeFi" pools (e.g. the permissioned markets on Aave, Compound Treasury, and Maple Finance) require KYC (Know Your Customer) checks before users can borrow or lend. A DeFi purist argues this "defeats the purpose of DeFi." Which best evaluates this claim?

(A) The purist raises a valid tension: institutional DeFi adds identity verification
(B) KYC is irrelevant because institutions already have their own compliance systems
(C) The purist is correct -- any form of KYC means the protocol is no longer DeFi
(D) The purist is wrong -- all DeFi protocols require KYC by law

Answer: (A) The lecture describes the boundary between DeFi and traditional finance as blurring. BlackRock's BUIDL tokenised money-market fund on Ethereum surpassed $2B AUM in 2025; JPMorgan's Onyx (rebranded Kinexys, Nov 2024) built pool-based tokenised-deposit rails; the US GENIUS Act (July 2025) gave federally-chartered stablecoin issuers a clear regime. The trend is bridges between systems, not replacement. Source: rwa.xyz (2025)

Question 19

The lecture compares bank lending costs (8-12% effective first year) with DeFi lending costs (2-4% APR). A critical thinker asks: "If DeFi is so much cheaper, why hasn't it replaced banks?" Which answer best addresses this question using the lecture's framework?

(A) DeFi is illegal everywhere, which prevents adoption
(B) DeFi wins on cost, speed
(C) Banks are cheaper than DeFi when all fees are included
(D) DeFi has already replaced banks in most countries

Answer: (B) The lecture presents this as the fundamental trade-off: lower costs and broader access come at the price of less protection. There is no free lunch. If Aave gets hacked, depositors have no FDIC insurance, no complaint hotline, and no legal recourse.

Question 20

Aave has roughly $20 billion in deposits (DeFiLlama, April 2026), supports 13+ blockchain networks and 150+ assets, yet charges only ~0.1% in protocol fees. The lecture describes Aave as having "zero employees needed" for its core lending function. If Aave has no employees running the lending, who governs the protocol?

(A) A traditional board of directors appointed by Stani Kulechov
(B) AAVE token holders who vote on protocol changes
(C) The Finnish government, because Aave was founded in Finland
(D) No one -- the protocol runs without any governance or updates

Answer: (B) Aave is governed by AAVE token holders who vote on protocol changes including risk parameters, supported assets, and fee structures. "Aave" means "ghost" in Finnish -- fitting for a protocol with no physical presence, no CEO, and no traditional board. MakerDAO went further along this path: in August 2024 the community approved a full rebrand to "Sky", with DAI migrating to USDS as the flagship stablecoin. Source: DeFiLlama (April 2026)