Quiz: Smart Contracts - Digital Finance

Question 1

Which statement best describes a smart contract?

(A) An AI system that negotiates contract terms between two parties
(B) A self-executing program stored on a blockchain that runs when
(C) A database query that retrieves financial data from a centralized server
(D) A legal agreement signed electronically via DocuSign

Answer: (B) A smart contract is code deployed on a blockchain that automatically executes when its conditions are triggered, without intermediaries.

Question 2

What is the primary purpose of the Ethereum Virtual Machine (EVM)?

(A) To convert Solidity code into JavaScript for web browsers
(B) To provide a deterministic execution environment
(C) To mine new Ethereum tokens using Proof of Work
(D) To store user passwords and private keys securely

Answer: (B) The EVM executes smart contract bytecode identically on every node, ensuring deterministic and verifiable computation across the network.

Question 3

Why does Ethereum require users to pay gas fees?

(A) To fund the Ethereum Foundation's research budget
(B) To pay software developers who write smart contracts
(C) To compensate users who hold ETH in their wallets
(D) To prevent spam and infinite loops by making

Answer: (D) Gas fees prevent abuse (e.g., infinite loops) by requiring users to pay for every unit of computation. This also compensates validators for processing transactions.

Question 4

A deployed smart contract contains a bug. What can the developer do?

(A) Deploy a new corrected contract and migrate users
(B) Edit the contract code on-chain to fix the bug
(C) Contact Ethereum customer support to remove the contract
(D) Roll back the blockchain to before the contract was deployed

Answer: (A) Smart contracts are immutable once deployed. The original buggy contract cannot be modified or deleted. The developer must deploy a new version and convince users to migrate.

Question 5

Why do token standards like ERC-20 exist?

(A) To allow the Ethereum Foundation to control token supply
(B) To prevent new tokens from being created on Ethereum
(C) To guarantee that all tokens will increase in value
(D) To ensure interoperability so any wallet or exchange can

Answer: (D) Token standards define a common interface (function names, events) so that wallets, DEXs, and dApps can interact with any compliant token without custom integration.

Question 6

A simple ETH transfer costs 21,000 gas. If the gas price is 30 gwei and 1 ETH = $3,000, what is the transaction fee in USD?

(A) $18.90
(B) $0.63
(C) $1.89
(D) $6.30

Answer: (C) Fee = 21,000 × 30 gwei = 630,000 gwei = 0.00063 ETH. In USD: 0.00063 × $3,000 = $1.89.

Question 7

A company wants to tokenize 1,000 identical loyalty points. Which standard should it use?

(A) ERC-721, because each loyalty point is a unique asset
(B) ERC-20, because the points are interchangeable
(C) ERC-1155, because the company might add NFTs later
(D) No standard is needed — just use a database

Answer: (B) Identical, interchangeable loyalty points are fungible by definition. ERC-20 is the correct standard for fungible tokens.

Question 8

Under EIP-1559, the base fee is 20 gwei and you set a priority tip of 2 gwei. Your transaction uses 50,000 gas. How much ETH do you pay, and what happens to it?

(A) 0.0022 ETH: half burned, half to the validator
(B) 0.001 ETH: all burned
(C) 0.0011 ETH: all goes to the validator
(D) 0.0011 ETH: 0.001 ETH burned

Answer: (D) Total = 50,000 × (20 + 2) gwei = 1,100,000 gwei = 0.0011 ETH. Base fee portion (50,000 × 20 = 1,000,000 gwei = 0.001 ETH) is burned. Tip portion (50,000 × 2 = 100,000 gwei = 0.0001 ETH) goes to the validator.

Question 9

A DAO has 1,000,000 governance tokens. A proposal requires >50% of votes cast to pass. Only 80,000 tokens are used to vote: 50,000 vote YES, 30,000 vote NO. Does the proposal pass?

(A) Cannot be determined without knowing the gas price
(B) No — a quorum of at least 50% of total supply must participate
(C) No — 50,000 is only 5% of total supply
(D) Yes — 50,000 / 80,000 = 62.5% of votes cast exceeds 50%

Answer: (D) 50,000 / 80,000 = 62.5% of votes cast. Since the rule requires >50% of votes cast, the proposal passes. (Note: many DAOs also have quorum requirements, but the question only states a majority-of-votes-cast rule.)

Question 10

Ethereum Layer-1 charges $5.00 per transaction. An optimistic rollup batches 500 transactions into a single Layer-1 proof that costs $250. What is the per-transaction cost on the rollup?

(A) $0.50
(B) $2.50
(C) $5.00
(D) $0.05

Answer: (A) Per-transaction cost = $250 / 500 = $0.50. This is a 10× cost reduction compared to Layer-1.

Question 11

In the 2016 DAO hack, the attacker exploited a reentrancy vulnerability. What does this mean?

(A) The attacker called a withdrawal function repeatedly before
(B) The attacker guessed the contract's private key
(C) The attacker submitted more transactions than the network could handle
(D) The attacker modified the contract's source code after deployment

Answer: (A) Reentrancy occurs when a contract sends ETH before updating its internal state. The attacker's contract re-enters the withdrawal function before the balance is decremented, withdrawing the same funds multiple times.

Question 12

What is the key difference between optimistic rollups and ZK-rollups?

(A) ZK-rollups require a 7-day dispute window; optimistic rollups do not
(B) Optimistic rollups assume validity and use fraud proofs
(C) Optimistic rollups are faster and cheaper in all cases
(D) Optimistic rollups only work with ERC-20 tokens

Answer: (B) Optimistic rollups assume transactions are correct unless someone submits a fraud proof (7-day window). ZK-rollups generate a mathematical proof (ZK-SNARK/STARK) that guarantees correctness without a dispute period.

Question 13

Why are cross-chain bridges particularly attractive targets for attackers?

(A) Bridges are unregulated and therefore have no security measures
(B) Bridges use outdated encryption algorithms
(C) Bridges only operate on private blockchains
(D) Bridges hold large pools of locked assets and concentrate trust

Answer: (D) Bridges lock assets on one chain and mint wrapped tokens on another, creating large "honey pots." A flaw in the bridge's validator set or smart contract logic can drain the entire pool.

Question 14

In a sandwich attack, a searcher observes a pending large buy order on a DEX. What does the searcher do?

(A) Places a buy order before the victim (frontrun) and a sell order after the victim (backrun), capturing the price impact
(B) Reports the victim's transaction to regulators
(C) Shorts the token on a centralized exchange
(D) Cancels the victim's transaction by paying higher gas

Answer: (A) The searcher buys before the victim (pushing the price up), lets the victim's trade push it higher, then sells immediately after at the inflated price — profiting from the victim's price impact.

Question 15

A single wallet holds 51% of a DAO's governance tokens. What is the primary risk?

(A) The DAO will run out of gas for voting transactions
(B) The Ethereum Foundation will revoke the DAO's smart contract
(C) The majority holder can unilaterally pass any proposal
(D) Other token holders will automatically lose their tokens

Answer: (C) With >50% of tokens, the whale can pass any proposal alone, defeating the purpose of decentralized governance. This is the "plutocracy" problem inherent in token-weighted voting.

Question 16

Why do sidechains (e.g., Polygon PoS) offer weaker security guarantees than rollups?

(A) Sidechains use older programming languages
(B) Sidechains have their own validator set
(C) Sidechains cannot process ERC-20 tokens
(D) Sidechains are always slower than Layer-1

Answer: (B) Sidechains rely on their own consensus mechanism and validator set. If those validators collude or are compromised, funds can be stolen. Rollups post data and proofs to Ethereum Layer-1, inheriting its security.

Question 17

A startup considers using a smart contract instead of a traditional legal agreement for an escrow service. Which argument against smart contracts is most valid?

(A) Smart contracts require the Ethereum Foundation's approval
(B) Smart contracts are too expensive to deploy compared to hiring a lawyer
(C) Smart contracts cannot handle ambiguity, edge cases
(D) Smart contracts execute too slowly for financial transactions

Answer: (C) Smart contracts execute rigid "if-then" logic. Real-world agreements often involve ambiguity, force majeure, and disputes that require human judgment. A smart contract cannot say "it depends" — a court can.

Question 18

A DeFi protocol needs fast finality (under 10 minutes) and strong security guarantees. It handles high-value trades. Which Layer-2 solution is most appropriate?

(A) A sidechain (own validators, fast finality)
(B) An optimistic rollup (7-day fraud proof window)
(C) A ZK-rollup (cryptographic validity proof, no dispute window)
(D) A state channel (near-instant, but only for two-party interactions)

Answer: (C) ZK-rollups provide fast finality (minutes, not 7 days) with cryptographic proofs of correctness, and inherit Ethereum's security. For high-value trades, the stronger security guarantee makes ZK-rollups the best fit.

Question 19

You are designing a DAO governance system. Which mechanism best mitigates flash loan governance attacks?

(A) Allowing only the contract deployer to vote
(B) Reducing the total supply of governance tokens
(C) Requiring voters to hold tokens for a minimum
(D) Increasing the gas cost of voting transactions

Answer: (C) A time-lock or snapshot-based voting system requires voters to hold tokens before a snapshot block, preventing attackers from borrowing tokens via flash loan and voting in the same transaction.

Question 20

A team uses an LLM to audit their Solidity code. The LLM reports "no vulnerabilities found." How should the team proceed?

(A) Treat the LLM report as a useful first pass but commission
(B) Ignore the LLM report entirely — AI cannot understand code
(C) Deploy immediately — LLMs are more thorough than human auditors
(D) Deploy to a testnet only and never use real funds

Answer: (A) LLMs can catch common patterns but may miss novel attack vectors and can produce false negatives. A professional audit (and ideally formal verification) remains essential for any contract handling real value.