Chapter 27 Quiz
Multiple Choice
Question 1
When you purchase an NFT on Ethereum, what do you technically own on-chain?
A) A copy of the digital artwork stored in the smart contract B) A record in a smart contract mapping your wallet address to a token ID C) Intellectual property rights to the underlying asset D) A decentralized copy of the asset distributed across Ethereum nodes
Answer: B. An NFT is a record in a smart contract that associates a token ID with an owner address. The actual asset (image, video, etc.) almost never lives on-chain. Intellectual property rights depend on the project's terms of service, not the token itself.
Question 2
What does the tokenURI function in ERC-721 return?
A) The binary data of the NFT's image B) The wallet address of the current owner C) A URI pointing to a JSON metadata file describing the token D) The smart contract address where the NFT was created
Answer: C. tokenURI returns a URI (typically an IPFS hash or HTTP URL) that points to a JSON metadata file. This metadata file contains the name, description, image URL, and attributes of the NFT — creating a chain of indirection from blockchain to asset.
Question 3
Which of the following storage solutions provides the STRONGEST guarantee that an NFT's artwork will remain accessible indefinitely?
A) A centralized server operated by the NFT project's company B) IPFS with a single pinning node C) On-chain storage where the artwork is encoded directly in the smart contract D) A cloud provider like AWS S3
Answer: C. On-chain storage is the only truly permanent and decentralized option, as the data lives within the Ethereum state itself and persists as long as the network operates. It is prohibitively expensive for large files, but for small data (text, generative algorithms, small SVGs), it provides the strongest permanence guarantee. IPFS content can become unavailable if no nodes pin it. Centralized servers depend on the company's continued operation.
Question 4
What was the approximate peak-to-trough decline in monthly Ethereum NFT trading volume from January 2022 to late 2023?
A) 50% B) 75% C) Over 90% D) 99.9%
Answer: C. Monthly Ethereum NFT trading volume fell from approximately $4.8 billion in January 2022 to roughly $300-500 million by late 2023, representing a decline exceeding 90%. Individual collections experienced even more severe declines, with most PFP projects losing 95-99% of their peak values.
Question 5
What was the fundamental economic problem with Axie Infinity's SLP token?
A) The token had no utility within the game B) The Ronin Bridge hack destroyed all SLP tokens C) New SLP was generated continuously through gameplay, but demand depended on constant new player inflows D) The Philippine government banned SLP trading
Answer: C. SLP was continuously minted through gameplay at a rate of approximately 40 million tokens per day. Demand for SLP came primarily from breeding (which required new players buying Axies) and speculation. When new player growth slowed, supply overwhelmed demand, and SLP's price collapsed by over 99%. This is the fundamental unsustainability of P2E economics: player earnings must be funded by a growing player base.
Question 6
Why did NFT creator royalties largely collapse in 2022-2023?
A) The ERC-721 standard was updated to remove royalty support B) Ethereum gas fees made royalty payments prohibitively expensive C) Royalties were enforced by marketplace policy, not smart contract logic, and competitive pressure drove marketplaces to make them optional D) Governments banned royalty payments on blockchain transactions
Answer: C. ERC-721 has no built-in royalty enforcement mechanism. Royalties were honored voluntarily by marketplaces like OpenSea. When Blur launched with optional royalties and gained market share, OpenSea was forced to follow. The competitive dynamics of marketplace competition drove effective royalty rates to near zero for most collections.
Question 7
What percentage of NFT trading volume was estimated to be wash trading by multiple independent analyses?
A) 5-10% B) 15-25% C) 40-80% D) Less than 1%
Answer: C. Multiple independent analyses (Nansen, CryptoSlam, Dune Analytics) estimated that 40-80% of NFT trading volume was attributable to wash trading, depending on the time period and methodology. On marketplaces with token trading incentives (LooksRare, X2Y2), wash trading rates exceeded 95%.
Question 8
Which of the following NFT use cases is MOST dependent on speculative price appreciation for its value proposition?
A) Soulbound tokens for academic credentials B) Event ticketing with transfer restrictions C) A 10,000-item PFP collection with a "roadmap" promising future utility D) Music NFTs providing exclusive access to an artist's unreleased tracks
Answer: C. PFP collections with "roadmaps" are fundamentally dependent on the expectation that future developments will increase the token's value — a speculative dynamic. Credentials (A) derive value from verification utility. Ticketing (B) derives value from event access. Music NFTs (D) derive value from content access. None of these require price appreciation to function.
Question 9
What is a "soulbound token" (SBT)?
A) An NFT that can only be sold on decentralized exchanges B) A non-transferable NFT permanently bound to a wallet, used for identity and credentials C) An NFT that burns (is destroyed) after a set period D) An NFT that is linked to a physical asset through an NFC chip
Answer: B. Soulbound tokens, proposed by Vitalik Buterin and co-authors in 2022, are non-transferable NFTs that remain permanently in the wallet they were issued to. Because they cannot be bought or sold, they are suitable for representing achievements, credentials, and identity claims that should not be purchasable.
Question 10
ERC-1155 differs from ERC-721 primarily in that:
A) ERC-1155 supports royalty enforcement while ERC-721 does not B) ERC-1155 can manage both fungible and non-fungible tokens in a single contract and supports batch transfers C) ERC-1155 stores token metadata on-chain while ERC-721 uses external URIs D) ERC-1155 is specific to gaming assets while ERC-721 is for art
Answer: B. ERC-1155 is a multi-token standard that can handle both fungible tokens (like in-game currency) and non-fungible tokens (like unique items) in a single contract. It supports batch operations, making it significantly more gas-efficient for managing large numbers of tokens — transferring 100 items in one transaction rather than 100 separate transactions.
True or False
Question 11
The Bored Ape Yacht Club granted holders full commercial rights to the artwork associated with their NFTs.
Answer: True. BAYC was notable for granting holders full commercial licensing rights, allowing them to create derivative products, restaurants, media projects, and other commercial ventures using their specific ape image. This was an exception — most NFT projects retained all IP rights for the creator.
Question 12
IPFS guarantees that NFT content will be available permanently as long as the IPFS network exists.
Answer: False. IPFS is a content-addressed file system where content is only available if at least one node is actively pinning (hosting) it. If all pinning nodes go offline, the content becomes unretrievable even though the IPFS hash still exists. Persistent storage requires paid pinning services or additional infrastructure like Filecoin.
Question 13
The ERC-2981 standard enforces royalty payments at the smart contract level, ensuring creators always receive their specified royalty percentage.
Answer: False. ERC-2981 is an informational standard — it allows smart contracts to signal their desired royalty percentage, but it cannot force marketplaces or buyers to actually pay the royalty. Enforcement depends on marketplace compliance, which proved unreliable when competitive pressure drove marketplaces to make royalties optional.
Question 14
The Ronin Bridge hack that affected Axie Infinity was discovered by Sky Mavis within hours of occurring.
Answer: False. The hack occurred on March 23, 2022, but Sky Mavis did not discover the exploit for approximately six days, until a user attempted to withdraw 5,000 ETH and the system failed to process it. The delayed detection highlighted significant security monitoring gaps in the Ronin sidechain infrastructure.
Question 15
Reddit's "Collectible Avatars" were one of the most successful NFT consumer onboarding events, creating over 3 million wallets.
Answer: True. Reddit issued NFT avatars on Polygon while deliberately avoiding the term "NFT" in its consumer-facing marketing, instead calling them "Collectible Avatars." This approach — embedding NFT technology without requiring users to understand or care about blockchain — generated over 3 million wallet creations.
Short Answer
Question 16
Explain the "storage trilemma" for NFTs. What three properties are in tension, and why can't all three be fully satisfied simultaneously?
Model Answer: The NFT storage trilemma involves cost, permanence, and decentralization. On-chain storage is permanent and decentralized but extremely expensive (a high-resolution image might cost thousands of dollars to store on Ethereum). IPFS offers decentralization at low cost but lacks permanence guarantees without ongoing maintenance. Centralized servers are cheap and reliable while the operator exists, but sacrifice both decentralization and long-term permanence. Arweave attempts to balance all three with one-time permanent storage payments, but depends on its own network's long-term viability. Each option forces a compromise.
Question 17
Why were NFT marketplaces economically incentivized to tolerate wash trading rather than aggressively combat it?
Model Answer: Marketplaces benefited from wash trading in several ways. Higher apparent volume attracted more genuine users to the platform. Higher reported prices increased absolute fee revenue on the genuine trades that did occur. Marketplace valuations (OpenSea was valued at $13.3 billion) were partially justified by volume metrics inflated by wash trading. Aggressively filtering wash trades would have reduced reported volume by 50% or more — a difficult story to tell investors and users. On pseudonymous blockchains, enforcement was also technically difficult, providing plausible cover for inaction.
Question 18
Describe the "greater fool" dynamic as it applied to the NFT PFP market. Why is this dynamic inherently unstable?
Model Answer: PFP NFTs generated no cash flow — no dividends, interest, rent, or revenue. The only way to profit from holding one was to sell it to someone else at a higher price (a "greater fool"). This created a reflexive cycle: rising prices attracted media attention and new buyers, which drove prices higher. But this cycle requires an ever-expanding pool of new entrants willing to pay escalating prices. When external factors (rising interest rates, crypto crashes) reduced the inflow of new capital, sellers outnumbered buyers, prices fell, media coverage turned negative, and the cycle reversed. The dynamic is inherently unstable because no amount of "community" or "utility" changes the fundamental math: without cash flow, returns require finding buyers at higher prices indefinitely.
Question 19
Compare the NFT bubble to the dot-com bubble in terms of: (a) the genuine technological innovation, (b) the speculative excess, and (c) what survived.
Model Answer: (a) The genuine innovation of the dot-com era was the internet and web-based services; for NFTs, it was the ability to create verifiable, transferable unique digital tokens. (b) The dot-com bubble saw companies valued at billions with no revenue; the NFT bubble saw JPEGs valued at millions with no cash flow. Both featured celebrity endorsement, mainstream FOMO, and metrics disconnected from fundamentals. (c) The dot-com crash destroyed most companies but Amazon, Google, and e-commerce survived and thrived; the NFT crash destroyed most collections but digital credentials, ticketing, and creator tools survived. In both cases, the underlying technology persisted and matured, even as the speculative layer collapsed.
Question 20
A play-to-earn game advertises that players can earn $20/day by playing. Explain, in economic terms, where that $20 must come from and why this model is likely unsustainable.
Model Answer: The $20/day must come from one of three sources: (1) new players paying to enter the game (buying NFTs, tokens, or game access), (2) speculators buying the game's tokens hoping for price appreciation, or (3) external revenue (advertising, sponsorships, or the game company subsidizing earnings). Sources 1 and 2 require constant growth in new participants — the same dynamic as a Ponzi scheme. Source 3 is theoretically sustainable but $20/day per player is an enormous subsidy (more than Netflix, Spotify, or any subscription service earns per user). If 100,000 players earn $20/day, that requires $2 million/day in external revenue — an implausible advertising or sponsorship figure for a game. The model is unsustainable because the earnings promise exceeds any plausible source of value creation within the game economy itself.