Chapter 35 Quiz: Evaluating Crypto Projects
Multiple Choice
1. According to the chapter, what is the most fundamental question in the 10-point evaluation framework?
A) Has the code been audited? B) What problem does it solve? C) What are the tokenomics? D) Who funded it?
Answer: B. Question 1 — "What problem does it solve?" — is the most fundamental because a project that does not solve any identifiable problem is unlikely to succeed regardless of its other qualities. A project that fails Question 1 cannot be redeemed by strong answers to later questions.
2. The "would a database work?" test evaluates which aspect of a crypto project?
A) Whether the project's token is a security under the Howey Test B) Whether the project genuinely needs blockchain technology or is using it as a marketing buzzword C) Whether the project's smart contracts are optimally coded D) Whether the project's team has database engineering experience
Answer: B. The "would a database work?" test is the core of Question 2 (blockchain necessity). It asks whether the project's use case requires the specific properties of a blockchain — decentralized consensus, immutability, censorship resistance — or whether a traditional database could provide the same functionality at lower cost and higher performance.
3. A token with 10% circulating supply and 90% locked supply is said to have:
A) A high Lindy effect B) Strong liquidity C) Significant supply overhang D) Decentralized distribution
Answer: C. Supply overhang refers to the large quantity of tokens that will eventually enter circulation. When 90% of the total supply is locked and will unlock over time, each unlock event creates sell pressure as new tokens enter the market. This supply overhang means that even if the project succeeds, the token's price faces persistent downward pressure from unlocking supply.
4. Which of the following is NOT a limitation of smart contract audits?
A) Auditors can miss critical vulnerabilities B) An audit does not cover code deployed after the audit date C) An audit does not evaluate the project's business model or team integrity D) An audit guarantees the code is free of all bugs
Answer: D. This is the answer because it is false — audits do NOT guarantee bug-free code. All of the other options (A, B, C) are genuine limitations of smart contract audits. The chapter emphasizes that audits reduce risk but do not eliminate it, and that many exploited projects had been audited before the exploit occurred.
5. The Lindy effect, as applied to crypto project evaluation, suggests that:
A) Newer projects are more likely to succeed because they use newer technology B) The longer a protocol has operated securely, the more likely it is to continue operating C) Projects named after historical concepts perform better D) Token value increases linearly with age
Answer: B. The Lindy effect is the observation that the longer something has survived, the longer it is likely to continue surviving. Applied to crypto, a protocol that has operated securely for five years with billions of dollars at stake has demonstrated real-world security and resilience that no whitepaper or audit can replicate.
6. A honeypot token contract is one that:
A) Offers unusually high staking rewards to attract liquidity B) Allows anyone to buy the token but prevents anyone except the deployer from selling C) Requires users to deposit ETH into a "honey jar" smart contract D) Automatically distributes tokens to early buyers
Answer: B. A honeypot is a token contract containing hidden logic that reverts sell transactions for all addresses except a whitelist controlled by the deployer. To the buyer, everything appears normal until they attempt to sell their tokens and discover that the transaction fails.
7. When evaluating governance, which scenario represents the highest degree of centralization?
A) Token-weighted voting with 15% voter participation B) A 5-of-9 multisig controlled by identified community members C) Admin keys held by a single team member with no timelock D) Governance proposals requiring a 10,000-token minimum to submit
Answer: C. Admin keys held by a single person with no timelock represent the highest centralization because one individual can make any change to the protocol instantly, with no oversight, delay, or community input. While all four options involve some degree of centralization, single-person admin keys with no timelock give one person unilateral and immediate power over the entire protocol.
8. What does "decentralization theater" refer to?
A) A conference where blockchain projects present their decentralization strategies B) The practice of claiming decentralization while maintaining centralized control over the protocol C) A governance model used by entertainment-industry tokens D) The process of gradually decentralizing a protocol from a centralized starting point
Answer: B. Decentralization theater is the practice of claiming to be decentralized while actually operating with centralized control. This can take many forms: a single company controlling all validators, holding admin keys that can unilaterally upgrade contracts, or running the only front-end. The key test is whether removing the founding team would cause the project to cease functioning.
9. In the assumption chain analysis (Question 10), if you assign an 80% probability to each of 8 independent assumptions, the compound probability of all being true is approximately:
A) 80% B) 64% C) 17% D) 6.4%
Answer: C. 0.8^8 = 0.168, or approximately 16.8%, which rounds to 17%. This calculation illustrates why most projects fail: even with optimistic individual assumption probabilities, the compound probability of all assumptions holding simultaneously is surprisingly low.
10. Which combination of red flags does the chapter identify as an "absolute deal-breaker"?
A) Forked code, low TVL, and chronic roadmap delays B) Anonymous team, unverified contracts, and unrealistic yields C) No audit, token concentration, and short vesting periods D) Hype marketing, paid influencers, and no working product
Answer: B. The chapter identifies the combination of anonymous team (#1), unverified contracts (#5), and unrealistic yields (#11) as the "classic rug pull signature" and states that a project displaying all three should be assumed to be a scam until proven otherwise.
11. Fully diluted valuation (FDV) is calculated using:
A) Circulating supply multiplied by current price B) Total supply multiplied by current price C) Staked supply multiplied by projected future price D) Locked supply multiplied by the price at which VCs purchased their tokens
Answer: B. FDV = total supply x current price. It represents the theoretical market cap if all tokens (including locked, unvested, and unminted tokens) were in circulation at the current price. The chapter emphasizes that FDV is the more relevant metric when evaluating whether a token is overvalued, because all locked tokens will eventually enter circulation.
12. The chapter identifies which of the following as the strongest evidence that a project works?
A) A detailed whitepaper with technical diagrams B) Multiple audits from top-tier security firms C) Years of secure operation with real value at stake D) Endorsement by well-known venture capital firms
Answer: C. Track record trumps all other forms of evidence. The chapter states: "Years of secure operation with real value at stake is the strongest evidence a project works. Whitepapers and roadmaps are promises, not proof." Audits, VC backing, and whitepapers are all forward-looking indicators; track record is backward-looking evidence of actual performance.
True/False
13. A project can pass the "would a database work?" test simply by putting its data on a blockchain.
Answer: False. Putting data on a blockchain does not make a blockchain necessary. The test asks whether the specific properties of a blockchain (decentralized consensus, censorship resistance, trustless operation) are required for the use case. Many projects put data on a blockchain without needing any of these properties, making the blockchain an expensive database with extra steps.
14. If a project's token has no function within the protocol — it is purely for governance that has not been activated — the token has genuine utility.
Answer: False. Inactive governance is not genuine utility. If the governance mechanism has never been used and there are no proposals, no votes, and no timeline for activation, the token's "governance utility" is theoretical, not actual. The chapter emphasizes that genuine token utility means the token is necessary for the protocol to function.
15. A "soft rug pull" involves the team directly stealing funds through contract manipulation.
Answer: False. A soft rug pull involves the team gradually abandoning the project after the initial hype phase — ceasing development, stopping communication, and letting the token's value decay to zero. A "hard rug pull" involves direct theft through contract manipulation. The distinction matters because soft rug pulls are harder to identify as intentional fraud.
16. The "pre-mortem" exercise asks you to imagine the project has succeeded and work backward to understand why.
Answer: False. The pre-mortem exercise asks you to imagine the project has failed and work backward to understand what went wrong. By imagining failure, you identify the most likely failure modes, which helps you assess whether the project has plans to address those risks.
Short Answer
17. Explain why the "show me the user" test is a more rigorous evaluation of a project's problem statement than simply reading the whitepaper's "Problem" section.
Answer: The "show me the user" test requires you to identify a specific person or organization that (a) has the stated problem today, (b) is actively seeking a solution, and (c) would switch from their current approach to this project's solution if it worked. This is more rigorous than reading a whitepaper because whitepapers can describe problems in abstract, theoretical terms that sound compelling but do not correspond to real demand. The whitepaper's "Problem" section is written by the team to justify their project; the "show me the user" test forces external validation. A problem that exists only in a whitepaper is not a real problem.
18. A project claims to have been "audited by CertiK." Describe the steps you would take to verify this claim and assess the audit's current relevance.
Answer: Step 1: Go to CertiK's official website and search for the project name in their public audit database. If the project is not listed, the claim is likely fraudulent. Step 2: If the audit exists, download the actual report and read the executive summary, scope section, and findings. Step 3: Check the audit date and compare it to the project's current deployed contract addresses. If the contracts have been upgraded since the audit, the audit may no longer cover the currently deployed code. Step 4: Review the findings, particularly any Critical or High severity issues, and check whether they were resolved or merely acknowledged. Step 5: Check whether the audited contract addresses match the contracts users actually interact with (the project may have audited one version but deployed a different one). Step 6: Assess CertiK's track record — have other projects they audited been exploited?
19. Explain the difference between market cap and fully diluted valuation. Why is FDV the more important metric when evaluating whether a token is overpriced?
Answer: Market cap equals circulating supply multiplied by the current price. FDV equals total supply multiplied by the current price. FDV is more important because all locked tokens (team allocations, VC allocations, ecosystem funds, mining rewards) will eventually enter circulation. When you buy a token, you are implicitly betting that the project can justify its FDV, not merely its current market cap. A token trading at a $1 billion market cap with a $10 billion FDV would need to grow its value tenfold just to maintain the current price once all tokens are unlocked. Evaluating based on market cap alone creates a false impression that the token is cheaper than it actually is relative to its total economic claim.
20. Name three things you can learn about a crypto project from a block explorer like Etherscan without needing to read any off-chain information.
Answer: (1) Whether the smart contract source code is verified (published and readable) or unverified (only bytecode visible, which prevents public inspection). (2) The token holder distribution — you can see how many wallets hold the token and what percentage of the total supply is concentrated in the top wallets, including whether the deployer retains a large share. (3) The transaction history — you can see actual usage patterns, including how frequently the contract is called, whether activity is organic or appears to be wash trading, and whether the deployer has been transferring tokens to multiple wallets (which may indicate preparation for a coordinated dump).