Suppose we have a smart contract that is able to exchange CT tokens for TT tokens and TT tokens for CT tokens.

The current market price of a CT token is 5 ETH and the current market price of a TT token is 10 ETH. The contract is written to always exchange at the rate of 2 CT tokens for 1 TT token and 1 TT token for 2 CT tokens.

To allow swaps, the contract is initially provide with 20 CT tokens and 10 TT tokens.

Note: This is not a constant product AMM.

Suppose the market price (in ETH) of TT tokens doubles. This contract will

Question

Suppose we have a smart contract that is able to exchange CT tokens for TT tokens and TT tokens for CT tokens.

The current market price of a CT token is 5 ETH and the current market price of a TT token is 10 ETH. The contract is written to always exchange at the rate of 2 CT tokens for 1 TT token and 1 TT token for 2 CT tokens.

To allow swaps, the contract is initially provide with 20 CT tokens and 10 TT tokens.

Note: This is not a constant product AMM.

Suppose the market price (in ETH) of TT tokens doubles. This contract will

BlackTom AI · Accepted Answer

Let’s parse the setup carefully. The contract can swap 2 CT tokens for 1 TT token, or 1 TT token for 2 CT tokens, i.e., a fixed pool ratio of CT:TT = 2:1. Initially, the contract holds 20 CT and 10 TT. Market prices are CT = 5 ETH and TT = 10 ETH, but the TT price then doubles to 20 ETH. This creates an arbitrage opportunity for anyone who can trade against the contract using the fixed 2 CT ⇄ 1 TT rate.

Option A: 'likely be emptied of all of its TT tokens.' This would imply the contract ends with TT = 0. If TT price doubles to 20 ETH while the contract still offers 2 CT for 1 TT, a trader can profit by exchanging CT for TT from the contract. For example, by spending 20 CT (worth 100 ETH) they can receive 10 TT from the contract (using the 2 CT → 1 TT rate). Those 10 TT are now worth 200 ETH on the market, so the trader would gain ~100 ETH in value. After such an arbitrage sequence, the contract’s TT balance would be depleted, left with 0 or near-zero TT, while CT would be exhausted or heavily reduced depending on the exact sequence of trades. So this option aligns with the expected outcome under the price disparity: the contract can be drained of TT while CT is consumed or depleted.

Option B: 'likely run out of gas.' Gas exhaustion is a generic risk in blockchain operations but is not the primary mechanical outcome of a price discrepancy in a fixed-rate swap contract. The described arbitrage is about token balances, not about computational complexity that would inherently cause gas exhaustion. Therefore, this is not the correct characterization of the expected outcome.

Option C: 'have to be deployed on the Bitcoin blockchain.' The scenario describes ETH-based tokens (CT and TT) and an Ethereum runtime, so deploying on Bitcoin makes no sense here. This option is factually incorrect given the context.

Option D: 'be reclaimed by the Ethereum run time.' The Ethereum runtime does not reclaim user-allocated token balances from a contract as a normal outcome of market fluctuations. Balances are controlled by users; the contract’s state changes due to arbitrage, not a runtime reclaim. This statement misrepresents how state changes occur in smart contracts during arbitrage.

Option E: 'likely be emptied of all of its CT tokens.' As TT's market price doubles, the fixed exchange rate makes CT relatively cheap in terms of the contract’s potential exchanges for TT. A trader can buy TT from the contract using CT at the favorable rate, draining the TT balance or, in another perspective, drain CT depending on which direction trades are executed. Since the contract starts with 20 CT and 10 TT, a price shift that favors TT relative to CT tends to push the contract toward consuming CT to acquire TT (or vice versa) until one side is depleted. In this particular configuration, the most straightforward and consistent outcome is the depletion of CT tokens in the contract after arbitrage activities, given the price distortion and the fixed rate. Thus, this option is consistent with the described dynamics.

In summary, evaluating the fixed 2:1 exchange against the new TT price of 20 ETH shows an arbitrage from CT to TT that would deplete the contract’s CT supply while leaving TT balances affected as well. Among the given choices, the outcome most aligned with the mechanics is that the contract would be emptied of its CT tokens.

46912 Quiz 2 Automatic Market Maker Examples

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